Why our fund is as strong as ever

In light of some recent negative headlines about private credit, I want to share a complete perspective and address the concerns we’ve heard from some investors.

The most important thing to convey is that the Wealthsimple Private Credit Fund — along with the vast majority of private credit portfolios — continues to perform as expected. We continue to meet the 9% yield we have targeted since the fund’s inception, and our annualized total return — which includes both the yield and changes in the value of the fund’s underlying loans — over that period is currently at 8.4%. That number is well within the expected range.

Here is some context around the situation and its limited effects on our fund, along with answers to some questions you might have.

What happened?

Most of the news centers on a small group of borrowers that have gone through some form of restructuring, forcing lenders to mark down their loans as losses.
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​First Brands, the company getting a majority of the media attention, is a U.S. auto parts manufacturer that filed for bankruptcy in September after allegedly misrepresenting its financial statements. Its loans were not private credit loans, but something called broadly syndicated loans (BSLs). These large loans are arranged by a bank or asset manager and sold to multiple investors, including some private credit funds.
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​Tricolor, a subprime auto lender that also filed for bankruptcy in September, is similarly accused of fraud and plans to liquidate. It defaulted on a standard line of credit, not a private credit loan.
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​Three other companies — Renovo, Broadband Telecom, and Bridgevoice — did have private credit loans, and all three are now in default.

Does Wealthsimple Private Credit have exposure to any of these companies?

Through a BSL investment, the fund holds about 2.2% of its overall assets in a First Brands loan, which is a very small position. It has no exposure to the other four companies.

What type of impact does that position have on the fund?

The impact is minimal, given the relatively small size of the investment. Over the month of September, our fund was down 1.8%. The fund paid its September distribution to investors and operated as usual, with no interruptions. While it’s not guaranteed, we expect to recover some of those losses during First Brands’s restructuring process, further reducing the effect on our investors.

What is the overall health of Wealthsimple Private Credit?

The overall health is strong. The borrowers in our portfolio continue to report healthy revenue and EBITDA growth. Our loans are secured by collateral, structured with strong covenants, and have lower leverage than the average loan in the private credit market. In terms of performance, the fund rose 0.4% in October, bringing total returns since inception in June 2023 to 21.5%, or 8.4% annualized.

How big of a deal is the issue with these five companies?

Between Canadian and U.S. funds, thousands of borrowers are funded by private credit, so the companies currently in the news represent a very, very small percentage of the market.

Just as important, while their issues are unfortunate, they are not unexpected. Both private credit and BSLs inherently involve risk, including defaults and broad swings in the value of loans as the economy and underlying health of each borrower change. On average, 2.5% of borrowers default, even in good times. That number jumps during downturns — most notably in 2008, when it reached 11%.

But that risk is reflected in the yields. That’s why, over 10- to 15-year periods, private credit funds typically deliver higher distributions and total returns than publicly traded investments with similar risks.

What is the difference between private credit and BSL?

The primary structural difference is that BSL borrowers tend to be larger companies with greater negotiating power, which often results in fewer protections for lenders. Both have similar levels of risk.

Many private credit funds, including Wealthsimple Private Credit, invest in BSLs because they allow the fund to maintain liquidity for investors without significantly impacting returns. BSL yields are typically lower than those of private credit loans, but they provide a higher yield than most other loans investors will find on public markets. This makes BSLs an effective way to add liquidity to a private credit portfolio without significantly affecting the overall yield.

What is being done to protect investors against similar defaults in the future?

Our fund manager, Sagard, has a thorough vetting process for our traditional private credit loans, which make up 77% of our portfolio. Sagard has enhanced its procedures so that all syndicated holdings are now subject to the same due diligence as the loans we originate. They’ve also added a system of ongoing monitoring. After reviewing all current positions in the fund, including BSLs, Sagard found no signs of potential fraud and believes no further action is required.

We hope this gives you a clearer understanding of the market as a whole and the strength of your investment with us. Thanks for your continued trust.

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^{Returns shown include all applicable fund management fees and performance fees, but excludes Wealthsimple's standard management fees for its advisory services. Past performance does not guarantee future results. Private credit involves risks including, but not limited to, credit risk, liquidity risk, leverage risk and value fluctuation. See here for more information.}