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Posted by Purpose Investments on Nov 6th, 2019

A Canadian First in Private Debt: Fight Uncertainty with Purpose Specialty Lending Trust

With the S&P 500 at near all-time highs and Treasury yields at fresh lows, the outlook in fixed income and equity markets is as uncertain as ever. When uneasiness lingers, investors have historically  relied on yield to help stabilize a portfolio’s returns and provide a steady stream of income. In the current environment, that seems nearly  impossible without dramatically increasing portfolio risk.

This problem is particularly difficult in the fixed income allocation of a balanced portfolio. Right now in public bond markets, higher-risk credit and volatile long-duration instruments seem to be the only way to achieve your goals.

To solve this, investors need to look outside of their traditional investment scope and into alternative investment strategies, such as inflation-linked commodities, hedge funds and private markets. These asset classes are less correlated to typical market forces, helping to  insulate your portfolio from broad market events and generate a return from alternative sources, like yields harvested from privately negotiated loans in private debt funds.

Private debt is not a new idea with institutional investors, including major pension funds. But with a near US$1-trillion in assets  globally, it’s still considered an emerging asset class in the privates  space. In other words, many investors are currently missing the opportunity.

When it comes to an innovative private-market approach that focuses on a stable yield using difficult-to-access managers typically reserved for institutional investors, we’ve got the answer: Purpose Specialty Lending Trust.

This global multi-manager private debt fund is the first of its kind in Canada. It helps investors address uncertainty in a few unique ways:

1. Low Correlations to Public Markets

Purpose Speciality Lending Trust allocates to managers who directly originate private loans to companies interacting in a wide variety of  markets. These could be loans to help a company make an acquisition, strategically expand into a new market or even finance a new trade route  between two distant nations. These loans are private, typically between two parties and they aren’t traded on the public market, shielding them  from standard market forces.

Chart depicting uncorrelated returns from liquidity premiums

2. Alternative Yield Not Directly Linked to Interest Rates

The interest generated from the underlying loans is typically fixed  at an agreed-upon rate when the loan is drafted between the two parties.  This means the interest received is set over the duration of the loan  and the principal payback is contingent on the borrower’s ability to pay  back its debt. Unlike traditional corporate bonds, these loans are not  directly impacted by daily interest rate movements.

3. Best-in-class Managers From Across the Globe

Diversified from around the world, Purpose Speciality Lending Trust  allocates to specialist managers across the entire private debt  spectrum. Unlike other private debt products that typically focus on one  segment of the lending market in one or two countries, the fund  combines lending to areas such as supply chain financing, direct lending  in lower and middle markets, distressed lending and specialty financing  to SMEs (small-medium enterprises). Typically, countries that the  fund’s managers do business in include, but aren’t limited to, England,  Singapore, Hong Kong, the United States and, in niche scenarios, Canada.

Globally recognized private debt managers. Monroe Capital, Oaktree, ONEX, Victory Park Capital, Trans asia private capital, Brookfield, Beechbrook capital, Neuberger Berman.

The Bottom Line

In a time when generating yield is difficult without also taking on  inherently more risk, Purpose Speciality Lending Trust gives investors a  one-of-a-kind opportunity to generate a stable yield uncorrelated to  the broader market. It’s a unique tool to help guard against uncertainty  for any portfolio. Private debt is popular among pensions and major  institutions precisely because of its highly specialized  characteristics. We think individual investors should capitalize on the  benefits of the asset class, too. That’s why we built Purpose Speciality Lending Trust.

Josh Bubar is a Product Manager at Purpose Investments

Looking for another solution for a higher yield? Call and ask us about our limited capacity Mezzanine private debt fund.

All data sourced from Bloomberg unless otherwise noted.

The model was constructed using historic pricing data of Canadian and U.S. equities from Bloomberg. Private Debt is represented by the Cliffwater Direct Lending Index USD, Equity exposure is represented per instance as 50% S&P/TSX Composite Index CAD and 50% S&P 500 USD. Fixed Income exposure is represented as 50% Barclays US Aggregate Bond Index USD and 50% FTSE TMX Canadian Universe Bond Index CAD. All returns are represented in their respective instruments native currency, and are not currency hedged. Portfolio’s constructed were not rebalanced., and returns do not account for transaction costs, withholding tax or other expenses. Past performance is not indicative of future returns. To be used for illustrative purposes only.

The content of this document is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is not, and under no circumstances is it to be construed as, an offering memorandum, prospectus, advertisement or public offering of securities. No securities commission or similar regulatory authority has reviewed this document and any representation to the contrary is an offence. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.

Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Fund mentioned in this story