Portfolio diversification with a history of high returns

Private credit refers to loans and credit investments typically made by non-bank lenders directly to companies or asset owners, rather than through public markets. These investments are usually privately negotiated, illiquid, and tailored to the specific needs of borrowers. This allows lenders to structure terms that prioritize income generation and protect against losses.

Private credit commonly includes senior secured loans to middle-market companies, asset-backed lending, structured credit, and specialty finance strategies, like royalty or infrastructure lending. Investors are rewarded for committing capital for long periods with reduced liquidity, in exchange for contractual cash flows, generally with floating-rate interest, and stronger protections.

The Wealthsimple Private Credit Fund employs a multi-strategy, multi-manager approach designed to provide diversified exposure across a broad range of private credit loans and structures. This diversification helps mitigate concentration risk, ensuring that if a particular credit strategy or manager underperforms, the remainder of the portfolio remains resilient and performance is less impacted. The fund partners with established managers with long track records, disciplined underwriting, and diverse approaches across the private credit spectrum, with the goal of delivering consistent income and robust risk-adjusted returns.

The portfolio is built around 3 managers with complementary strategies:

Cliffwater Cliffwater lends to middle-market businesses backed by private equity sponsors like Blackstone or KKR. It focuses on diversification, capital preservation, and consistent income, often through enhanced lending strategies including music and pharmaceutical royalties. Cliffwater is both an alternative asset manager and investment advisor. That combination is what makes them exceptional: the company’s advisory business has direct influence over the investment of $80 billion, which opens a lot of otherwise closed doors when it’s time for Cliffwater to invest its own private asset funds. The company’s Core Fund has outperformed several of the largest and most respected credit funds, and their Enhanced Strategy Fund has outperformed the Core Fund. We’ll be investing in both.

Dawson Partners Founded by alumni of the CPP and Ontario Teachers’ Pension Plan, Dawson specializes in something called portfolio financing. Instead of lending to companies, Dawson primarily provides liquidity to private equity investors who use their portfolios as collateral. Why we chose them: Dawson’s strategy is different from traditional private credit investing, making it highly diversifying in our fund. Their approach aims to protect client capital and builds in possible upside that you don’t get in traditional private credit loans (which simply pay lenders a certain amount of interest). Typically, as an underlying portfolio generates income, Dawson receives all of the money coming in until it hits a predetermined minimum, then a portion of any income beyond that.

Sagard Sagard’s credit strategy, launched in 2017, is led by its Chief Investment Officer, a former head of CPPIB’s global credit business. The Sagard Credit leadership team has collaborated for over 15 years, combining deep institutional expertise with a disciplined, cohesive investment approach. Sagard targets lending to companies valued between $50 million and $1 billion that are independent of traditional private equity sponsors, an underserved segment with lower competition. This focus allows Sagard to generate attractive risk-adjusted returns, partner with conservatively levered businesses, and secure robust protections for lenders. Their portfolio companies typically demonstrate niche market leadership, pricing power, recession resilience, and strong alignment between management and ownership.

By allocating these managers and strategies, the fund provides diversified exposure across corporate lending, enhanced and structured credit, and private-market financing solutions. The approach is designed to create a balanced private credit portfolio that delivers steady distribution, lower volatility compared with public credit markets, and attractive long-term risk-adjusted returns. Looking ahead, the fund intends to expand its manager base and incorporate additional strategies, further enhancing diversification and strengthening its ability to generate consistent performance across market cycles.

Private credit returns come from two main sources: distributions, which refers to each investor’s share of loan payments, and changes in the value of the underlying loans and investments. While distributions are generally stable as long as borrowers continue to make scheduled payments, the value of the underlying loans is influenced by broader market conditions and company-specific developments, making it more volatile. As a result, overall returns can fluctuate due to changes in loan valuations, even when distributions remain stable.

The overall asset class typically offers 2-5% higher returns than institutional bonds and other types of public credit.*

*From March 2007 to September 2022, private credit returned 8.9% annualized while U.S. Corporate Bonds returned 4.1% annualized (see chart above). **Data compiled by J.P. Morgan Asset Management (p11). Sources: Cliffwater Direct Lending Index; NCREIF Property Index (U.S. real estate only); MSCI Global Quarterly Infrastructure Asset Index. All data represent the period from 12/31/2011 to 12/31/2021.

Yes, but investors are typically rewarded for taking on that additional risk. Private credit is considered riskier than investment-grade public bonds predominantly because of four factors:

1. Illiquidity: Unlike publicly traded bonds, privately originated loans are difficult to sell, limiting the liquidity of the overall fund.

2. Default risk: The risk that some borrowers may be unable to repay their loans is higher than for investment-grade bonds.

3. Leverage: Funds may borrow money to invest in an attempt to amplify returns, but this also comes with the risk of amplified losses.

4. Less transparency: Unlike public markets, where bond prices and related information are readily available and publicly disclosed, privately originated loans often have more limited information transparency, as borrowers may prefer not to disclose their financial details publicly. In addition, because these loans are not traded on a public market, they are not priced on a daily basis. Instead, third-party valuation firms typically assess their value monthly.

On top of Wealthsimple’s standard managed account fees for its advisory services, you will be charged an asset management fee of 1.25%. If the fund returns more than 5%, a 15% performance fee applies to those returns. Our promoted targeted yield of 9% is net of the asset management fees and performance fees, but does not take into account Wealthsimple's standard management fees for its advisory services.

Management fees are designed to cover the costs of diligence and sourcing to find attractive credit opportunities and to structure the terms of those loans to manage risk aggressively. Historically, private credit has provided competitive returns even net of management fees, though past performance may not be repeated and is not an indicator of future performance.

The fund generally targets floating rate loans so that the interest paid by borrowers automatically adjusts as interest rates rise (and fall).

However higher inflation comes with additional risk to repayment. For that reason the investment will manage the risk of inflation through credit selection. The investment has sectoral tilts that can handle a stagflation scenario, and the credit management team assesses the fixed and variable costs of each borrower to understand the potential impact of stagflation.

There is a minimum investment of $10,000. Additionally, private credit is available exclusively to clients who have liquid assets of held with Wealthsimple or across other financial institutions and have otherwise met the suitability requirements as determined by our portfolio management team.

You can allocate a maximum of 20% of your managed investing portfolio to alternative investments, including both private credit and private equity.

Private credit is a diversifying asset, so can be added and increase expected risk-adjusted returns. Our portfolio managers will review your profile to find an initial commitment that works for you and your goals. Factors that will determine your recommended contribution include the value of your total investments, your risk tolerance, and your investment time horizon.

You’ll be given the opportunity to make a redemption (a withdrawal from the fund) every quarter. You’ll be able to indicate you want to redeem (pull some or all of your money out) at any point by sixty days before the end of the quarter, and the redemption will happen at the next quarterly opportunity, with cash available 30 days after the end of the quarter. In the event that many investors want redemptions at the same time, some may need to wait until the following quarter or quarters. In addition, the fund manager has the discretion to suspend withdrawals.

Private credit typically delivers higher returns than publicly traded risky debt, like high-yield bonds, because investors are compensated for illiquidity, complexity, and control — not simply for taking greater default risk. These loans are locked up for several years and cannot be readily traded, so lenders earn a meaningful liquidity premium.

Private credit investors also negotiate bespoke structures with stronger covenants, senior secured positions, and direct access to management, which can enhance recoveries and improve risk-adjusted returns. By contrast, public high-yield markets are highly competitive, marked to market daily, and influenced by investor flows and forced selling, all of which tend to negatively affect the returns of publicly traded high-yield bonds. Borrowers in private markets are therefore willing to pay more for speed, certainty of execution, and structural flexibility, allowing private credit investors to earn higher yields even while lending higher in the capital structure.