Next Edge Private Debt – Commentary – March 2022
Mar 31st, 2022
Next Edge Private Debt – Commentary – March 2022
March 31, 2022
The Next Edge Private Debt Fund (the “Fund”) returns ranged between 0.40% (Class A Units) and 0.49% (Class F1 Units) in March. The Fund’s underlying portfolio (the “Portfolio”) has exposure to 194 factoring, asset-based, specialty finance, or similar type loans: in all, 186 unique clients with transactions in 29 states and 6 provinces. Presently, the geographic weighting of the Portfolio is approximately 43% to the US and 57% to Canada. Of these positions, 127 are factoring positions or facilities, 47 are asset-based loans (“ABL”) and 6 are asset-based lender finance loans.
Performance was lower than normal in March due to the realization of a one-time general reserve of a fixed percentage rate on the pool of assets associated with the BMO Financial Group credit facility described below. This general reserve is consistent with the one that encompasses the assets in the Fund’s other credit facility with CIBC and is not associated with the write-down or impairment of any particular loan which comprises the pool of assets associated with the BMO Financial Group credit facility. These general reserves adjust as AUM fluctuates in these funding pools to maintain the ongoing fixed percentage rate associated with the general reserves.
It has been an incredibly busy past 6+ months for the collective teams involved in the Fund at both Next Edge Capital and the Garrington Group. In addition to closing and financing the largest value amount of loan volume over that period historically, the team also had to deal with our annual Fund audit, which was vastly more scrutinizing than in prior years, along with many months of diligence that resulted in the closing and recent press release announcement of a second credit facility on the Fund with another major global bank, BMO Financial Group (“BMO”), for USD $50 million. The full press release can be viewed here.
With regards to the surge in transaction financing, this reiterates our ability to see and finance vast amounts of quality transactions at attractive yields. Cash levels in the Fund are very low, which has caused us to slow down origination activities to some degree (although the pipeline is still very large) because of lower net inflows into the Fund, although still overall positive. We are actively seeking new capital to take advantage of the opportunities that we are seeing in addition to being able to “start the engine” on the origination side. The existing and new credit facilities aid vastly in this regard.
We are pleased to announce the closing of a revolving credit facility (the “BMO Facility”) for USD $50 million with BMO and NELI Canada II LP, a special purpose funding vehicle utilized by the Next Edge Private Debt Fund and Next Edge Private Debt Fund (USD) (the “Funds”). The BMO Facility will assist in the liquidity management of and allow for expansion of the Funds’ portfolio of lender finance, equipment finance, and specialty finance loans; and strategically augment the Funds’ other existing credit facility with CIBC that assists in the liquidity management of factoring and asset-based loans.
A major challenge when managing funds that provide lending capital is to manage cash by matching investor inflows to loan funding outflows. A significant benefit of this revolving BMO Facility will be to allow for a reduction in unutilized cash and allow for greater liquidity flexibility in the Funds, which Next Edge Capital believes will in-turn benefit all stakeholders, from fund investors to borrower clients.
Lastly, as per an annual ritual, we have recently completed our annual audit of the Fund with Ernst & Young, LLP, the long-time auditors of our Fund business. Normally, this would not be something that would get brought up in discussion with investors. However, considering the scrutiny the private lending industry in Canada has received over the past year (in addition to some questions and concerns as to audits of “other” private lending funds), we felt it was worthy to mention. 2021 year-end audit was vastly more in-depth and scrutinizing than in previous years, for obvious reasons. For example, all loans in the portfolio $2MM and above were reviewed, in addition to a significant amount of those below that level; as opposed to where in other years there would have been a random sampling of these (a typical process for all audits). This has represented a major time commitment from our team over many months. However, if this is one step in the right direction towards bringing confidence back to the private lending business in Canada, we are all for it.
We welcome and appreciate any referrals, both from the investor side or for small to medium-sized businesses that may require lending capital in the $1MM – $30MM+ range. We do find that more and more financing referrals are coming from our investor clients and readership base, which we welcome with open arms. In many cases, if we can’t be of help ourselves, we can make some introductions to others that might be able to assist in the journey of meeting their financing needs. Please reach out with any questions, concerns, or if we can be of help in any way.
Fund Performance
IMPORTANT NOTES
1. The Next Edge Private Debt Fund (the ‘Fund’) returns are net of all fees and expenses associated with Class A1 Units, Class F1 Units, Class G Units, and Class H Units charged from June 1, 2015 (trading start date). The Next Edge Private Debt Fund (the ‘Fund’) returns are net of all fees and expenses associated with Class J Units charged from October 1, 2015 (trading start date). The Next Edge Private Debt Fund (the ‘Fund’) returns are net of all fees and expenses associated with Class A Units, and Class F Units charged from April 1, 2017 (trading start date). The Next Edge Private Debt Fund (the ‘Fund’) returns are net of all fees and expenses associated with Class K Units and Class L Units charged from March 1, 2019 (trading start date). Returns for 2022 are unaudited. Therefore, performance statistics containing 2022 figures shown in this material are subject to final confirmation. The historical annualized rates of return for the Next Edge Private Debt Fund Class A1 Units as of March 31, 2022 are 1 yr 5.17%, 3 yr 6.22%, 5 yr 6.85%, 10 yr N/A, and CARR 6.96%; for Class F1 Units are 1 yr 6.33%, 3 yr 7.39%, 5 yr 8.11%, 10 yr N/A, and CARR 8.26%; for Class G Units are 1 yr 5.48%, 3 yr 6.54%, 5 yr 7.26%, 10 yr N/A, and CARR 7.34%; for Class H Units are 1 yr 6.91%, 3 yr 7.97%, 5 yr 8.70%, 10 yr N/A, and CARR 8.78%; for Class J Units are 1 yr 6.50%, 3 yr 7.57%, 5 yr 8.29%, 10 yr N/A, and CARR 8.44%; for Class K Units are 1 yr 5.72%, 3 yr 6.77%, 5 yr N/A, 10 yr N/A, and CARR 6.86%; for Class L Units are 1 yr 6.91%, 3 yr 7.84%, 5 yr N/A, 10 yr N/A, and CARR 7.94%; for Class A Units are 1 yr 5.15%, 3 yr 6.20%, 5 yr 6.78%, 10 yr N/A, and CARR 6.78%; for Class F Units are 1 yr 6.33%, 3 yr 7.04%, 5 yr 7.65%, 10 yr N/A, and CARR 7.65%.
2. Distribution – adjusted return
*Part Year
Capitalized terms not defined in this document are defined as set forth in the Offering Memorandum of the Fund (the ‘OM’). There is no guarantee of trading performance and past or projected performance is not indicative of future results.
Next Edge Capital Corp. is the manager and trustee of the Fund (the ‘Manager’). The investment objective of the Fund is to achieve consistent risk-adjusted returns with minimal volatility and low correlation to most traditional asset classes. The Fund intends to achieve its investment objective by investing all, or substantially all, of its net assets in the Next Edge Private Debt LP (the ‘Partnership’) through the Next Edge Commercial Trust (the ‘Sub Trust’). To achieve its investment objective the Partnership will primarily allocate capital to a number of specialist loan originators and managers of credit pools (‘Credit Advisors’), to take advantage of opportunities in the private debt markets. Strategies that may be used include trade finance, consumer finance, invoice factoring, supply chain financing, syndicated loans, regulatory capital, mezzanine debt, structured credit and asset-based lending. The Partnership will invest in both senior and subordinated debt subject to the advice and recommendations of their Credit Advisors with the intent of building a portfolio, either directly or indirectly, of private income generating securities. Note to Investment Professionals: The information in the Monthly Report is being provided to current investors in the Fund and is being provided to their registered dealers for informational purposes only.
This is not a sales literature and cannot be used as such. The Fund is not a trust company and does not carry on business as a trust company and, accordingly, the Fund is not registered under the trust company legislation of any jurisdiction. Units of the Fund are not ‘deposits’ within the meaning of the Canada Deposit Insurance Corporation Act (Canada) are not insured under provisions of that Act or any other legislation.
No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. These securities have not been and will not be registered under the United States Securities Act of 1933, as amended, or any state securities laws and may not be offered or sold in the United States or to U.S. persons except pursuant to an exemption from the registration requirements of those laws. The information provided herein is for information purposes only and does not constitute a solicitation, public offering, advice or recommendations to buy or sell interests in the Fund, the Portfolio, Units or any other Next Edge Product. Please refer to the Fund’s Offering Memorandum for more information on the Fund as any information in this Report is qualified in its entirety by the disclosure therein.
Opinions expressed are those of the author as of the date of their publication, are subject to change and may not reflect the opinion of all members of the Company. Some statements contained in this material concerning goals, strategies, outlook or other non-historical matters may be “forward-looking statements” and are based on current indicators and expectations at the date of their publication. We undertake no obligation to update or revise them. Forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those implied in the statements.