At Elevate Wealth, private debt investments have been a core holding in client portfolios for over a decade. They have helped provide more consistent returns with less volatility. However, the ability to deliver a more diversified solution for clients was greatly improved when an allocation of the Q Wealth Enhanced Private Debt/Equity Fund was added to client portfolios. Here is a more detailed look at what we mean by private debt.
The Q Wealth Enhanced Private Debt/Equity Fund (Series Q) is a core position in the Q Wealth Select Low Volatility Yield Fund. It offers a diversified portfolio of private debt investments across real estate, infrastructure, and business lending sectors, spanning Canada, the U.S., and international markets. The Fund's primary focus is on senior secured loans with favorable loan-to-value ratios and robust cash coverage. Its investment objective is to achieve consistent, risk-adjusted returns with minimal volatility and low correlation to traditional asset classes. This is achieved through the selection of external managers with specialized expertise in various lending areas, under the scrutiny of Q Wealth's due diligence team
Private Debt as an Investment:
Private debt, or private credit, is an alternative fixed-income asset class that has grown in popularity, especially among Canada's leading pension managers. Q Wealth's Fund makes this asset class accessible to all its investors, offering a convenient diversification tool. Bruce Flatt of Brookfield Asset Management notes that the global market for private debt has exceeded $1 trillion and continues to grow. Private debt's defensive nature and lower volatility compared to public fixed-income investments make it an attractive alternative, especially with the inclusion of short-term floating rate loans that mitigate interest rate and credit risks.
Sector Exposures in the Fund:
The Fund's diversified investments span various sectors, including:
- Residential Mortgages: Investments in groups of mortgages and home equity loans managed by Mortgage Investment Corporations (MICs), offering lower risk through collateral-backed lending.
- Commercial Mortgages: Loans for income-producing real estate used for business purposes, secured against commercial properties.
- Real Estate Development Mortgages: Financing for construction projects with higher yields due to longer durations and additional cost risks.
- Infrastructure Lending: Investments in transportation, communication, sewage, water, and school systems, often supported by government investments.
- Corporate and Business Lending: Capital for business operations, mergers, and acquisitions, offering strong income returns and reduced portfolio risk through diversification.
Challenges in Private Market Lending and Q Wealth's Solutions:
- Illiquidity: Unlike public bonds, private loans lack a public market for daily liquidity, leading to higher yields as compensation for the illiquidity. An example is condo development lending, where lenders only recover their principal after project completion. Q Wealth provides daily liquidity to clients while harvesting the illiquidity premium.
- Lack of Diversification: Private loans vary, covering real estate, infrastructure, business development, and more. These investments are typically designed for large institutional investors, limiting access for average investors. Q Wealth's fund of funds approach offers significant diversification and expertise, enhancing accessibility for individual investors.
- Accessibility: By pooling resources, Q Wealth makes private debt investing more affordable and accessible, similar to practices of top pension managers. This democratizes the asset class, providing better access and lower costs.
Benefits of Diversification:
Diversifying investments across various loans and sectors minimizes risk. Pooling investments in a geographically diverse portfolio ensures that even if a portion of the portfolio defaults, the overall impact remains minimal. This strategy limits potential downside, even in rare market events, providing a balanced risk-return profile.
Appeal of Private Debt:
With historically low interest rates, private debt has gained popularity as an alternative to traditional fixed-income assets, offering higher yields. As inflation concerns rise, private credit remains attractive due to the potential for higher returns and its uncorrelated return profile with conventional assets. By incorporating private debt, investors can achieve a well-diversified portfolio with optimal returns for the level of risk taken.
Michael Holden
Portfolio Manager
Q Wealth Partners
