… and what we expect next. ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ LETTER FROM BEN Chief Investment Officer Here’s how our alternative investment funds did last quarter Hi there, If you’ve been following the monthly updates in our app, you already know the general direction our funds are heading in. But this email is meant to provide you with more details. If there’s anything you’re not seeing that you’d like to (whether it’s here or in the app), please let us know in the feedback form at the bottom of this email. We'll go into the strategy and current outlook for each fund in a minute, but in case you don't want to read all of that, here is a high-level summary of our third-quarter performance.1 Wealthsimple Private Equity returned 0.3% in the third quarter. Between the fund's launch in January 2024 and the end of Q3, total returns were 28% (It's up 31% as of October 31). That’s due to revaluation of portfolios purchased at discounts and some positive early performance from our investments. Wealthsimple Private Credit continued to receive its expected interest payments and returned 2.6% in the third quarter. That brings its total returns between its inception in June 2023 and the end of Q3 to 15.1%,2 for an annualized return of 11.1%. (Annualized returns are up to 11.2% as of October 31.) Private Credit Strategy: Wealthsimple Private Credit invests primarily in senior-secured floating-rate loans (this means that we are first in line to get paid back) to medium-size companies. The fund is managed by Sagard’s Private Credit team, which has more than 125 years of collective experience investing in credit across different market cycles. It shares in the same private deals as Sagard’s institutional clients, meaning you are investing alongside public and corporate pension plans, asset managers, and banks. Sagard looks for borrowers with market leadership in their niche, pricing power, recession resilience, and management/owner alignment. Their focus is on the non-sponsored middle market — companies worth between $50 million and $1 billion that are not controlled by traditional private equity owners. That space is less competitive, enabling Sagard to lend at attractive rates to borrowers who are not too heavily leveraged, and to get those borrowers to agree to certain covenants to protect the investment. Performance: Total returns since inception (the overall increase in the value of the fund) are at 15.1%,2 or 11.1% annualized, which is on the higher end of our expectations. The fund is currently issuing regular distributions at a 9% annualized yield.3 Year-to-date returns are 7.6%, which mainly reflects borrowers making regular interest payments. Portfolio: For a chart showing Wealthsimple Private Credit’s largest positions, click here. Outlook: The Sagard team is originating new loans at approximately 5% to 7% above the cash rate. With cash rates projected to offer positive real returns (returns above inflation rates), that means that the fund prospectively has attractive real returns that are competitive with world stocks, which have historically yielded 4% to 5% over cash. Even though cash rates have been decreasing, they are expected to continue to offer positive real returns, and the average spreads paid by private credit borrowers is expected to increase. We believe that the team’s focus on the founder-led and public companies continues to support performance. The credit spreads available in the market remain high, in contrast with public high-yield bonds and private equity–backed private credit. This is because origination is simply more difficult in the non-sponsored space, so there is less pricing pressure on deals. Of course, we will only realize those returns if the underwriting is strong and the fund's principal and interest are paid back. Thus far, the fund’s credit quality is promising and better than the industry as a whole: while 1.6% of private borrowers are not meeting their loan payment obligations, all of ours are. And where 8% of all borrowers are paying for their interest by adding more debt, all of our loans are paid for in cash. Historically, private credit has been a resilient asset class. As the economic cycle continues, however, we are starting to see performance dispersion among credit funds based on their approach to underwriting and risk management. We expect this to continue. Private Equity Strategy: Wealthsimple Private Equity is managed by LGT Capital Partners, an institutional asset manager with 25 years of experience and a record of superior returns. We are investing alongside LGT’s shareholders, which means LGT is highly incentivized to manage for returns rather than simply gathering assets to collect more in fees. The fund consists primarily of direct investments in companies alongside other private equity funds and investments in secondaries — funds that have already deployed their investments. Co-investing reduces overall fees, and investing in secondaries allows the portfolio to be highly diversified since those investments provide immediate access to a broader spectrum of companies. Performance: Total returns to date were 28%.1 This is primarily due to the revaluation of assets initially acquired at discounts, mostly from institutional holders of private equity portfolios, as well as strong early performance from a few companies. Portfolio: For a chart showing notable investments by Wealthsimple Private Equity, click here. You can also find a list of direct and secondary positions in the fund. Outlook: Across the industry, private equity managers are optimistic that the combination of a new Trump term and expected lower interest rates will lead to more transactions. This comes after the Biden administration’s aggressive approach to antitrust regulation and the high cost of debt financing from high cash interest rates put a lot of deals on pause. As I mentioned before, private credit markets that are focused on financing private equity–backed transactions have very low credit spreads relative to the cash interest rate. While this is something to avoid in our private credit fund, it makes being an equity investor more attractive. It’s also indicative of a relatively strong outlook for private equity–backed companies in the eyes of credit investors, who have a good track record of anticipating economic trouble. Investors are also finding success in corporate carve-outs — non-core or undermanaged business lines in a larger company. The Wealthsimple fund has invested in several carve-outs. The team remains focused on finding proprietary opportunities, both through extensive existing manager relationships and by finding emerging, high-potential managers who may deliver outsize returns. Deal activity remains focused on the small- and mid-size corporate buyout markets, and with smaller- and mid-size managers where returns may be higher. Finally, a number of you have written to us asking about the timing of performance updates, distribution dates, and subscription/redemption timelines. You can find the list of dates here. Thanks so much for investing with us. If you have any questions, please get in touch. All the best, Ben Reeves Chief Investment Officer What did you think? Choosing one of the following ratings will shape the content you see from us in the future. You'll also get the chance to share more detailed feedback after clicking. Interested Not interested Wealthsimple, 80 Spadina Ave Suite 400 Toronto, ON, M5V 2J4 Refer a Friend Privacy Policy Replies to this email address are not monitored. Have questions? Visit our Help Centre or submit a request to our Client Support team. Information shown is current as of September 30, 2024. Number of holdings and information provided are subject to change over time. 1 Returns shown include all applicable fund management fees and performance fees, but exclude Wealthsimple’s standard management fees for its advisory services. Past performance does not guarantee future results. 2 Between the fund’s inception in June 2023 and the end of September 2023, the management and performance fees were waived to facilitate certain portfolio investments. In the absence of these temporary waivers, performance figures would be lower. 3 Annualized distribution yield based on $0.077/share, divided by a starting NAV of $10.24, and multiplied by 12. To calculate this rate, we take a partial-year distribution and convert it to a full-year amount as if it were paid in each period. We then divide this annualized amount by the fund’s value at the start of the period. Distributions are not guaranteed. Past performance does not guarantee future results. The content of this message is confidential. If you have received it by mistake, please inform us by email reply and then delete the message. Do not copy, forward, or in any way reveal the contents of this message to anyone. 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