"Make sure that the investments that are being made sort of make sense relative to what kind of liquidity you are being told that you have access to”
– Ninepoint CEO John Wilson pontificating on BNN in happier times
Yesterday, Ninepoint announced the suspension of redemptions in the Ninepoint-Third Eye Private Credit Fund and the Ninepoint Alternative Income Fund. Ninepoint blames “tensions in the investment community from the fallout of Bridging Finance”. This apparently caused a sharp increase in redemption requests. Ninepoint says requests placed before February 1st will be paid out, but provides no timeline for remaining investors.
I have also heard that banks have taken measures to restrict their advisors from investing in certain Ninepoint debt funds. You probably already know that I am no fan of Ninepoint funds. You can read some of my previous work here:
https://opmwire.com/tag/private-debt-funds/
You can read there about Ninepoint’s most recent debacle, their Trade Finance fund.
And on Third Eye specifically, you can read: The Ninepoint Third Eye Capital fund: initiating with a rating of PoS.
I think the people who are trying to get their money out of Third Eye are doing the right thing. I wanted to title that Third Eye piece “Take your money and run”, but I was advised not to by certain moderate factions. Despite my restraint, I gather Ninepoint and Third Eye blame my writing behind the scenes.
That post highlighted many material deals of dubious credit quality. Those deals have some similarities to the factors that contributed to the significant losses in the Bridging Finance funds. Those factors were identified in a report by PwC.
Third Eye shifted some stuff around late last year in their other funds (that don’t involve Ninepoint). The most notable move was to transition one of their funds into a new structure. This new structure involves a “first-loss protection” feature, whereby Third Eye management puts up $23 million of their own money as a first-loss cushion. This means that in the event of a loss, management’s money absorbs some of the initial loss. I don’t believe there’s a single self-respecting brand name money manager who would offer a “first-loss” deal to their clients. I think Warren Buffett might have offered that when he was launching his first hedge fund out of his bedroom in Omaha. But for a known manager to resort to this today is a desperation move. Third Eye also waived some management and performance fees on that new structure. CEO Arif Bhalwani refers disparagingly to the “fee drag normally associated with private debt funds”. It’s the biggest transformation since Saint-Paul converted to Christianity. Call me churlish, but I don’t see Third Eye turning into a charity. An established manager does not need to resort to these measures.
In January, Ninepoint-Third Eye added some language to their fund’s offering memorandum to enable them to pay fees to third parties, including related entities, who help them borrow money or find buyers for assets of the fund. Why would a debt fund need to borrow money?
As part of the news yesterday, Ninepoint provides various motherhood statements about how the redemption move is not related to the quality of the portfolio. They even say that the funds are “well positioned to continue to generate strong risk-adjusted returns”. Reality looks different: their willingness to defer borrower payments has not changed. For example, on January 4, 2022, they waived a $50m payment from Pieridae Energy, one of their biggest borrowers. Pieridae is considered a sh*tco on fintweet. It’s an oil and gas company that doesn't even own their main assets, since Pieridae recently withdrew the application for a licence transfer of the wells acquired with TEC’s financing back in 2019.
Here’s a Ninepoint quote from when they were parting ways with the notorious Bridging Finance, made in Co-CEOs John Wilson and James Fox’s names:
“We are pleased with the consistent positive monthly performance that Bridging Finance has provided unitholders since we partnered with them five years ago. It is great to see Bridging’s investment team and capabilities evolve over the years. Given they now have other investment products, this transaction is a natural evolution to both of our businesses. We wish them continued success”
The Globe, in its big article on Bridging Finance, hints at the possible hypocrisy of this statement:
Ninepoint, meanwhile, also allegedly got a glimpse of some questionable behaviour when it was bought out of the co-management contract in 2018. There’s nothing to suggest Ninepoint was aware of the full extent of Bridging’s behaviour. But rather than tell its clients – or perhaps even a watchdog – about what it had uncovered, it accepted the buyout without disclosing the backstory to those it helped bring into Bridging’s flagship fund.
This was a case of a Globe journalist courageously biting the hand that feeds them:
Rather than accept bromides, clients should ask co-CEOs John Wilson and James Fox how much money they have in the Third Eye fund or other Ninepoint funds. I wish them the best in their future endeavours.