InFocus: Alternative Investment Solutions

Innovative Alternative Income Strategies

Innovative Alternative Income Strategies

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With yield becoming so hard to find, innovative alternative income strategies have emerged which seek income in less conventional places.

One such strategy focuses on asset-backed loans, which sees a manager raise money that is then used to provide loans to qualified mid-sized Canadian companies who do not necessarily meet bank covenants for a traditional loan. The loans are guaranteed by company assets, and provided at a slight premium to bank loans, which represents higher return potential to investors in the fund.

According to David Sharpe, president and chief operating officer at Bridging Finance Inc., sub-advisor on the Sprott Bridging Income Fund, the volatility in this strategy tends to be low but the returns are above average.

He said: “Private debt loans are fully collateralized using a forced liquidation value as opposed to a perceived market value - meaning if you had to successfully sell the asset tomorrow, what would you get for it in the market on a quick sale?‎

“Having the collateral and cash flow behind loans greatly helps in ensuring that you can get out of loans without suffering losses. We are providing loans to companies with healthy balance sheets and strong cash flow as a bridge lending vehicle with shorter durations and always with well-defined exits, usually to a Tier-One bank.”

Another innovative alternative income strategy employed by the Sprott Bridging Income Fund revolves around receivables factoring, in which a manager raises money that is then used to buy blue-chip receivables from mid-sized Canadian companies with high cash flow requirements. The receivables are purchased at a discount from the payee, and the full receivable is held by the fund until collected at 90-120 days.

Sharpe believes this discount can represent a significant return to investors in the fund.

“With factoring, we are buying receivables of well-established companies,” he said. “The advantage of this type of factoring is that we can easily assess the credit worthiness of ‎the company whose receivable we are purchasing.”

According to Sharpe, Canada is behind the US in terms of adopting these strategies, and it’s time for Canadian financial advisors to embrace their advantages.

“To produce the robust, consistent yield in our funds, we have to work hard to ensure we are vigorously underwriting and monitoring the loan book every day,” he said. “One of the risks in the strategy is that you do not get the valuation of the collateral correct. To mitigate this risk, we use third-party valuation firms with strong experience in the sector we are looking to lend in, and we have robust monitoring and internal controls.

“Sprott is definitely leading the way in Canada and it is a central focus of the company to produce consistent yield for investors.”

For a look at seven ways an alternative fixed income strategy can outperform, download the thought paper at

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Sprott Asset Management is a Toronto-based asset management company that is dedicated to being the most innovative fund company in Canada. Through our diversified offering of mutual funds, hedge funds, physical bullion funds and specialty products, we give financial advisors unique investment solutions that can help them to differentiate their businesses and add significant value to their clients’ portfolios.