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Third Quarter Veritable Investment Update Thumbnail

Third Quarter Veritable Investment Update

In this update, we will review how our private debt allocations have contributed to stability and return during a time where bonds have failed in their role of preserving capital.

Let's start in financial markets where both public equity and debt fell during the third quarter. Stocks were down 2% and bonds were down 4%. Inflation is a key contributor of stock and bond prices moving in the same direction. Earlier this year, resilient consumer demand and labour markets, spurred strong equity returns. However, as a result of this resiliency, investors are now pricing that high interest rates may stay with us for longer than previously expected. The 10-year Canadian bond now yields over 4%, a level not seen since 2007. While the higher income may help going forward, transitioning to higher yields causes the value of bonds to fall. Canadian Bonds have returned a negative 15% since the end of 2020. Against this difficult market backdrop, the veritable portfolios have avoided these recent headwinds with our private market, real asset, and diversifiers providing stability against volatile public markets.

To highlight the stability our investment strategy has built to provide, we can look at the private debt asset class used in our portfolio. Private debt consists of loans that are not financed by banks or traded on an exchange. Businesses may use the money to expand or to manage cash flow or developers may use a loan fund a real estate project. In all cases, loans are backed by significant collateral of an operating business or a hard asset like land or a building.

Here are three attributes that make private debt attractive as part of a diversified portfolio.

First, our loans are usually at the top of the capital stack, meaning we’re first in line to get the principal of our loan paid back. Similar to other loans, we collect interest along the way and get our money back at the end. If borrowers don’t pay as promised, we and the other lenders may take ownership of the company. That’s not the situation we’d prefer, but it provides significant motivation to the borrower to honor the loan contract.

Next, loan terms are directly negotiated by our investment partners and the borrower. This establishes a close working relationship between the two. The risk of a bad outcome, not getting the principal back in full, is mitigated with transparency and control. We have the contractual right to monitor how their business is performing and to affect any necessary changes to protect our capital.

And finally, these are floating rate loans. Like a variable rate mortgage you may be familiar with, a floating rate loan transfers the risk associated with interest rates from the investor to the borrower. As investors, we receive a coupon payment that reflects the updated cost of money – whether that’s up or down – as well as a premium that reflects the risk of the borrower. This has been especially important over the last few years as interest rates raced higher. Floating rate loans don’t fall in price due to higher interest rates; they benefit as the coupon increases accordingly. So, during the time that the fixed rate Canadian bond Universe has returned that negative 15%, the floating rate Private Debt loans in the Veritable Portfolios are up a positive 13%.

Here are two examples from our portfolio.

Excel Fitness

One recent loan we’ve made is into Excel Fitness, the largest franchisee of Planet Fitness health clubs. Planet Fitness is the leading US brand in high value, low price gyms. It offers basic memberships for only $10 per month and has 5 times the locations of its nearest competitor. Excel Fitness operates over 130 Planet Fitness locations across Texas and the Southeast United States. Earlier this year, Excel was purchased by a new owner that is investing heavily in the business. Excel benefits from people making health a priority as well as the significant movement of Americans into the Southeastern part of the country. These trends are helping Excel grow memberships at their gyms by 7% per year. Through our investment partners at Hamilton Lane, we have loaned Excel the capital to help OPEN  - 40 new locations. The loan is currently yielding over 11% per year. Excel's strong existing business produces more than enough cash flow to support the loan. 


Additionally, we’ve extended a second loan that benefits from that same regional population growth as well as an increasing trend towards renting single family homes. Through our investment partners at Trez Capital, we’ve made a loan to NexMetro Development, one of the largest developers of build-to-rent luxury homes, for a new development near the Dallas Fort Worth area; in a town that has tripled in size over the past 10 years. The pitch here is ‘rents like an apartment… lives like a home’. Today private real estate lending benefits from high interest rates and regulatory pressures on the regional banks that would traditionally make these types of loans. With increased demand for homes, and lower supply of financing, it is the most attractive time in decades to be a lender into these markets. Our loan here loan yields 11%, almost double what similar loan would have paid two years ago, and today's loans are backed with even greater collateral, all this lowers the risk while increasing the reward.

It’s loans like these that make private debt an important piece of our Veritable portfolio.

They are part of our diversified asset mix and help to make the journey to your financial goals a comfortable one.


Douglas Schein 

Chief Investment Officer for Veritable Wealth Advisory, 

Portfolio Manager Veritable Investment Management