The TD Emerald Private Debt Pooled Fund Trust and the TD Emerald Long Private Debt Pooled Fund Trust (the TD Private Debt Pooled Funds) recently celebrated their 5-year anniversaries.

To mark the anniversary, TD Asset Management Inc. (TDAM) has just published an in-depth special report about these two funds called TD Private Debt Funds: A Half-Decade of Consistent Income Generation.

The TD Private Debt Funds aim to deliver yield enhancement through their investment-grade credit quality exposure to private debt, while also providing strong diversification to a traditional Canadian corporate bond allocation.

The assets under management for these Funds have surpassed $4.1 billion1 and closed almost 100 different transactions since their inception in 2016. The Funds have 68 clients, including pensions, insurance companies, endowments and high-net-worth/family offices.

Uniqueness premium

Since their creation, the Funds have managed to provide additional income over their benchmarks (see full report for more details about this). This is thanks to the Funds' ability to earn additional yield, what TDAM calls a "uniqueness premium", or more commonly referred to in the industry as an "illiquidity premium", from private issuers. The investment grade private debt market consistently offers incremental income over public bonds of similar duration and quality.

Careful portfolio construction

The TD Private Debt Funds have been carefully constructed to minimize credit risk and optimize diversification, while ensuring that income generation objectives are achieved.

As buy-and-hold investors, we have a strict due diligence process and maintain disciplined credit risk oversight. Assessing credit risk is key to our process - when undertaking longer-term transactions, we have a bias towards higher credit quality.

TD Private Debt Funds are also strategically constructed to complement a traditional Canadian corporate bond exposure, where a narrow group of issuers and sectors comprise the bulk of index credit exposure. Within the TD Private Debt Funds, each non-Canadian dollar bond is converted into a domestic issue, eliminating the foreign exchange and interest rate exposures associated with each cash flow. The result is predictable Canadian dollar cash flows for the entire term of the underlying investment.

Commitment to ESG

TDAM is committed to including Environmental, Social and Governance (ESG) factors in its credit analysis.

Every public and private investment-grade issuer on our Credit-Committee-approved list receives an internal credit rating. Every issuer is also ascribed a risk score for each of the ESG factors that aggregate into a TDAM ESG Risk Score.

For example, whenever a transaction is secured by real property, one of the considerations is that soil conditions must meet all relevant environmental laws. If contaminants are present and exceed the regulatory limits, TDAM will not advance loan proceeds unless the owner cleans up the site. The property must also be resilient to the projected long-term impacts of climate change: shifting flood plains, drought conditions, declining fossil fuel reliance, etc.

The same logic applies to social and governance factors: we do not want to be tied to a borrower that has little regard for labour laws or engages in anti-competitive practices.

Innovation

The TD Private Debt Funds were originally created to address the income and duration needs of pension and insurance clients, but initially there was no mechanism to extract cash flows from the Funds other than selling units.

In February 2021, TDAM launched the Cash Flow Series, which closely replicates the cash generating experience of holding the underlying bonds. Through automatic quarterly repayments of principal and interest, the Cash Flow Series brings significant cash flow distributions to clients, effectively providing a natural downward rebalance over time for mature plans.

Solutions for the future

We expect that the TD Private Debt Funds will continue to diversify and deliver incremental income without increasing the level of risk of current fixed income allocations.

We are looking forward to continuing to create innovative solutions to help meet our clients' evolving investment needs.

For more details about the TD Private Debt Funds, read the full report.