Why Ninepoint sold its stake in the Bridging Income Fund

In the Fall of 2018, Ninepoint Partners sold their interest in the Bridging Income Fund (BIF). That transaction is one of the focuses of an OSC investigation that placed Bridging Finance in receivership. After inquiries from the OSC, the buyer and the seller offered different explanations about the rationale behind the transaction. But neither of them mentioned the mouth-watering price of the deal or BIF’s portfolio quality.

According to a press release, a year and a half earlier, in April 2017, John Wilson and James Fox led a management buyout of the diversified Canadian assets of Sprott Asset Management. Using financing from a qualified third party, the team guided by Wilson and Fox acquired interests in 38 funds with $3 billion in AUM, including the interest in BIF. They paid $46.3 million to Sprott. The company that assumed the portfolio management of the funds was later rebranded as Ninepoint Partners.

David Sharpe, Bridging’s CEO, explained to the OSC that “Ninepoint was under financial pressure from lenders and approached Bridging looking to sell the Management Interest [Ninepoint’s interest in the BIF].” On the other hand, John Wilson, co-CEO of Ninepoint, said to the OSC that they “threatened Bridging with litigation over concerns it had with transactions in the Bridging Income Fund accounts,” then Bridging offered to purchase Ninepoint’s interest in BIF.

According to the OSC, emails and letters between Ninepoint and Bridging show an escalating dispute. Ninepoint suggested that Bridging “acted contrary to the Management Agreement, fiduciary and other obligations to the BIF.” Bridging responded, accusing Ninepoint of “making defamatory statements and harassing.” In May 2018, Mr. Wilson suggested to Mr. Sharpe the purchase of Ninepoint’s interest in BIF to avoid litigation.

Under Ninepoint’s management supervision, BIF delivered more than 50 straight months without a loss. During that time, they advanced more than $25 million to entities controlled by Sean McCoshen, $80 million to Bondfield and more than $100 million to Hygea Holdings, possibly making the latter a significant holding of the fund. The OSC investigation also points to some undisclosed payments that Mr. Sharpe received during that period.

According to court documents in September 2017, Natasha Sharpe “sent a letter to the Hygea Entities advising them of multiple payments defaults.” The letter shows the financial difficulty of the borrower that should have lead to impairments according to IFRS 9. Even though the managers could observe signs of increased credit risk, in some loans, BIF’s NAV showed no signs of deterioration. The portfolio had higher credit risks than marketed.

Ninepoint’s interest in BIF entitled them to 50% of management fees and 40% of an incentive fee. According to the OSC allegations, just 18 months after buying Sprott’s funds, Ninepoint Partners sold their participation in the BIF. The OSC said, that Bridging acquired Ninepoint’s interest in BIF by agreeing to pay $45 million to Ninepoint.

Even though details of the transaction have not been disclosed – like AUM and revenues – we can imply the valuation multiples based on public information and commonly used metrics. When comparing the trade between Sprott and Ninepoint and then between Ninepoint and Bridging, we can observe a material difference in the multiples applied.

The price offered by Bridging Finance provided a unique opportunity to Ninepoint. By offloading their stake in BIF, which was signaling trouble while defying economic laws, Ninepoint received proceeds to offset more than 95% of the financing obtained for the Sprott acquisition. That might explain why Ninepoint sold their stake in BIF.

However, according to the OSC, most of the funds used to pay Ninepoint came from investors. If the OSC allegations are confirmed, Bridging’s receiver will probably scrutinize the deal between Ninepoint and Bridging to verify an arm’s length transaction, given the multiples discrepancy between the comparable transactions.

By paying such a high premium, Bridging Finance had no margin of safety; they had no room for mistakes. But instead of conducting their business prudently, they began to enter into riskier and more concentrated investments, like extending more than $140 million to MJardin and increasing their exposure to McCoshen to $200 million. The pressure to keep making the numbers escalated, pushing them towards collapse.

Ninepoint got a great deal by selling their interest in BIF. As a result, they realized a significant profit while avoiding an in-house crisis. But they seem to fail to extend their concerns to investors who trusted their brand. Ninepoint will continue to operate in the turbulent waters of private debt. If consistent with his criteria, Mr. Wilson might soon be facing negotiations involving some of the other funds they oversee.

Disclaimer: This article is not investment advice and represents the opinion of the author.