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March 19, 2024 | Liquidity Crunch Spreads as Investors Try to Exit

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

Saturday’s Report on Business included an insightful investigative report on private debt funds that became all-the-rage during the 2009-2022 low-rate era. See The risks of Bay Street’s hottest funds: Investors often fly blind, and billions of dollars are now trapped:

The 2008-09 global financial crisis was a major catalyst for the sector’s growth. Before the crash, there were plenty of other ways to find yield, such as bonds and income trusts. But after 2008, central banks cut interest rates to near zero and kept them there for years. To adjust, retail investors – and baby boomers in particular – went hunting for higher-yielding securities.

It wasn’t until 2015, though, that private debt really took off, driven by two additional forces.

Around this time, low-cost ETFs had become quite popular, so investors were demanding more from money managers who wanted to charge high fees. For many fund companies, the answer was adding a suite of “alternative investment” funds that specialized in sectors such as infrastructure assets, private equity and private debt, which used to be reserved for big institutions.

…With the money pouring in, private debt managers had the potential to make big profits. Unlike mutual funds or ETFs that charge a fixed percentage as an annual management fee, many private debt funds copied the hedge fund model that exploded in popularity the decade prior and took an annual management fee – usually 1.5 to 2 percent, some of which went to investment advisers who put their clients in these funds – as well as an annual incentive fee, usually worth 20 percent of profit above a certain threshold.

Assets under management in this opaque-high-fee sector exploded globally as lenders loosened credit standards to make more loans.



Financial strain has spread as central banks embarked on the most aggressive rate-tightening cycle in over 40 years. Lenders allowed borrowers to ‘extend and pretend’, adding interest to loan balances. At the same time, cash redemption requests from fund investors have exploded:

Over the past two years, redemption requests have exceeded …limits at multiple Canadian funds, and the rush to exit has been so strong that they’ve had to halt or limit redemptions.

Funds that invest in illiquid assets but promise liquidity to unitholders were always a lie.  Investors are learning this the hard way, once more.

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March 19th, 2024

Posted In: Juggling Dynamite

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