Next Edge Private Debt Fund

Transcription

1 Annual Financial Statements 2015 As at and for the period ended December 31st, 2015

2 Annual financial statements Table of contents Management s responsibility for financial reporting... 2 Independent auditors report... 3 Statement of financial position... 4 Statement of comprehensive income... 6 Statement of changes in net assets attributable to holders of redeemable units... 7 Statement of cash flows... 9 Schedule of investments Notes to the financial statements General information

3 Management s responsibility for financial reporting Next Edge Capital Corp. (the Manager ) is responsible for the accompanying financial statements and all the information in this report. These financial statements have been approved by the Board of Directors of Next Edge Capital Corp., as Manager and Trustee. The financial statements have been prepared in accordance with International Accounting Standard and, where appropriate, reflect management s judgment and best estimates. Management has established systems of internal control that provide assurance that assets are safeguarded from loss or unauthorized use and produce reliable accounting records for the preparation of financial information. The systems of internal controls meet management s responsibilities for the integrity of the financial statements. The Manager recognizes its responsibility to conduct the Fund s affairs in the best interest of its unitholders. Respectfully, Toreigh N. Stuart Chief Executive Officer David Scobie Chief Operating Officer Next Edge Capital Corp. March 30,

4 INDEPENDENT AUDITORS REPORT To the unitholders of Next Edge Private Debt Fund (the Fund ) We have audited the accompanying financial statements of the Fund, which comprise the statement of financial position as at, and the statements of comprehensive income, changes in net assets attributable to holders of redeemable units and cash flows for the period from January 2, 2015 to December 31, 2015, and a summary of significant accounting policies and other explanatory information. Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as at, and its financial performance and its cash flows for the period from January 2, 2015 to in accordance with International Financial Reporting Standards. Toronto, Canada March 30,

5 Statement of financial position 2015 As at December 31, Note CAD ASSETS Current assets Subscriptions receivable 3,855,695 Other receivables 1,884,840 Investments Investment in Underlying Fund 4,7,8 22,873,786 28,614,321 LIABILITIES Current liabilities Cash overdraft 61,175 Accrued liabilities 124,831 Start Up Costs payable 437,896 Management fees payable 14 11,359 Distributions payable 428,777 1,064,038 Net assets attributable to holders of redeemable units 27,550,283 Net assets attributable to holders of redeemable units per class 11 Class A 1 695,925 Class F 2 1,532,780 Class G 3 866,853 Class H 3 10,855,325 Class J 4 13,599,400 27,550,283 Number of redeemable units outstanding per class Class A 1 69,347 Class F 2 151,367 Class G 3 86,223 Class H 3 1,073,298 Class J 4 1,374,645 The accompanying notes are an integral part of these financial statements 4

6 Statement of financial position (continued) 2015 As at December 31, Note CAD Net assets attributable to holders of redeemable units per unit Class A Class F Class G Class H Class J The first issuance of Class A units was on June 19, The first issuance of Class F units was on May 25, The first issuance of Class G and Class H units was on March 18, The first issuance of Class J units was on September 30, Approved by Next Edge Capital Corp. Toreigh N. Stuart Chief Executive Officer David Scobie Chief Operating Officer The accompanying notes are an integral part of these financial statements 5

7 Statement of comprehensive income 2015 For the period ended January 2 to December 31, Note CAD Income Distributions from Underlying Fund 8 936,519 Interest income for distribution purposes 8 24,602 Foreign currency gain on cash and other net assets 94,323 Net change in unrealized appreciation in fair value of investments 8 (117,437) Total income (net) 938,007 Expenses 13 Management fees 14 28,483 General operating expenses 118,281 Unitholder reporting costs 486 Audit fees 21,083 Legal fees 1,592 Harmonized sales tax 69,529 Start Up Costs , ,972 Less: Expenses absorbed by the Manager 13 (22,587) Total expenses 604,385 Increase in net assets attributable to holders of redeemable units 333,622 Increase in net assets attributable to holders of redeemable units per class Class A 1 1,279 Class F 2 30,397 Class G 3 13,699 Class H 3 242,344 Class J 4 45, ,622 Average number of units outstanding Class A 1 30,701 Class F 2 101,349 Class G 3 61,558 Class H 3 804,545 Class J 4 1,007,940 Increase in net assets attributable to holders of redeemable units per unit Class A Class F Class G Class H Class J The first issuance of Class A units was on June 19, The first issuance of Class F units was on May 25, The first issuance of Class G and Class H units was on March 18, The first issuance of Class J units was on September 30, The accompanying notes are an integral part of these financial statements 6

8 Statement of changes in net assets attributable to holders of redeemable units For the period January 2 to December 31, 2015 CAD Class A 1 Beginning of period - Increase in net assets attributable to holders of redeemable units from operations 1,279 Proceeds from issuance of units 701,001 Reinvestment of distributions to holders of redeemable units 7,159 Distributions to holders of redeemable units (13,514) Consideration paid for redemption of units - End of period 695,925 Class F 2 Beginning of period - Increase in net assets attributable to holders of redeemable units from operations 30,397 Proceeds from issuance of units 1,507,249 Reinvestment of distributions to holders of redeemable units 23,372 Distributions to holders of redeemable units (28,238) Consideration paid for redemption of units - End of period 1,532,780 Class G 3 Beginning of period - Increase in net assets attributable to holders of redeemable units from operations 13,699 Proceeds from issuance of units 1,010,277 Reinvestment of distributions to holders of redeemable units 10,581 Distributions to holders of redeemable units (15,079) Consideration paid for redemption of units (152,625) End of period 866,853 Class H 3 Beginning of period Increase in net assets attributable to holders of redeemable units from operations 242,344 Proceeds from issuance of units 10,827,641 Reinvestment of distributions to holders of redeemable units - Distributions to holders of redeemable units (214,660) Consideration paid for redemption of units - End of period 10,855, The first issuance of Class A units was on June 19, The first issuance of Class F units was on May 25, The first issuance of Class G and Class H units was on March 18, The accompanying notes are an integral part of these financial statements 7

9 Statement of changes in net assets attributable to holders of redeemable units (continued) 2015 For the period January 2 to December 31, CAD Class J 4 Beginning of period - Increase in net assets attributable to holders of redeemable units from operations 45,903 Proceeds from issuance of units 13,751,895 Reinvestment of distributions to holders of redeemable units 3,374 Distributions to holders of redeemable units (201,772) Consideration paid for redemption of units - End of period 13,599, The first issuance of Class J units was on September 30, The accompanying notes are an integral part of these financial statements 8

10 Statement of cash flows For the period January 2 to December 31, 2015 CAD Cash flows from operating activities Increase in net assets attributable to holders of redeemable units 333,622 Adjustments to reconcile increase (decrease) in net assets attributable to holders to net cash from operating activities Proceeds from sale of investments 982,849 Purchase of investments (23,974,072) Foreign currency gain on cash and other net assets (94,323) Change in unrealized appreciation of investments 117,437 Non-cash distributions from underlying funds reinvested - Increase in other receivable (1,884,840) Increase in other payable and accrued liabilities 574,086 Net cash used by operating activities (23,945,241) Cash flows from financing activities Proceeds from redeemable units issued 23,942,368 Amount paid on redemption of redeemable units (152,625) Net cash flows generated by financing activities 23,789,743 Foreign currency gain on cash and other net assets 94,323 Net decrease in cash (155,498) Cash, beginning of period - Cash (Overdraft), end of period (61,175) Interest received 24,602 The accompanying notes are an integral part of these financial statements 9

11 Schedule of investments As at Average Cost Fair Value % of Total Security Currency No. of Shares (CAD) (CAD) Investments Next Edge Commercial Trust - Class A Shares 2,265,005 22,991,223 22,873, See Schedule 'A' Total Investment in Underlying Fund 22,991,223 22,873,786 Other assets net of liabilities 4,676, Total net assets attributable to holders of redeemable shares 27,550, Schedule A Portfolio holdings of Next Edge Commercial Trust Next Edge Private Debt LP 2,265,005 22,991,223 22,873, See Schedule 'B' Total Investment in Underlying Fund 22,873, Schedule B Portfolio holdings of Next Edge Private Debt LP Private Debt Investments and Loans NELI Financial Inc. demand loan USD USD 6,025,395 7,922,292 8,337, NELI Financial Inc. demand loan CAD CAD 5,658,969 5,658,969 5,658, NELI International Inc. demand loan USD 930,623 1,139,515 1,287, ,720,777 15,284, Foreign Exchange Forward Contracts (217,345) (0.9) See Schedule 'C' Total Investment in Underlying Fund 15,067, Other assets net of liabilities 7,806, Total net assets attributable to holders of redeemable shares 22,873, Schedule C Foreign Exchange Forward Contracts Purchased Currency Sold Currency Forward Rate Maturity Date Fair Value ($) CAD $9,235,458 USD $7,328, January 11, 2016 (217,345) The accompanying notes are an integral part of these financial statements 10

12 Notes to the financial statements 1. FUND INFORMATION Next Edge Private Debt Fund (the Fund ) is an open-ended investment trust which had been formed and organized on January 2, 2015 under the laws of the Province of Ontario pursuant to a trust agreement (the Trust Agreement ), as may be amended and restated from time to time. The Fund s investment activities are managed by Next Edge Capital Corp. (the Manager ). The address of the Fund s registered office is 1 Toronto Street, Unit 200, Toronto, Ontario. An unlimited number of classes of transferable units (the units ) may be established by the Fund. There are six classes of units (individually a Class or collectively, the Classes ) offered - Class A, Class F, Class G, Class H, Class I, and Class J. All classes of units were offered originally via an Offering Memorandum dated February 25, The first issuances of Class A, F, G & H, and J units were on June 19, 2015, May 25, 2015, March 18, 2015, and September 30, 2015 respectively. The Fund began investing according to its mandate on March 18, Units are offered continuously for sale in the relevant offering jurisdictions at their Class Net Asset Value ( Net Asset Value or NAV) per Unit determined as of the most recent Valuation Date (as defined below), pursuant to exemptions from the requirements of applicable securities legislation. The investment objective of the Fund is to achieve consistent risk-adjusted returns with minimal volatility and low correlation to most traditional asset classes. The Fund achieves its investment objective by investing all, or substantially all, of its assets into units of the Next Edge Commercial Trust (the Sub Trust or the Underlying Fund ), an unincorporated open-ended limited purpose trust established under the laws of the Province of Ontario. The Manager is the trustee of the Underlying Fund. The Fund is the sole investor in the Underlying Fund. The Underlying Fund in turn invests all, or substantially all, of its assets into units of the Next Edge Private Debt LP (the Partnership ), a limited partnership formed under the laws of Ontario by filing a Declaration of Limited Partnership under the Limited Partnerships Act (Ontario). The sole limited partner of the Partnership is the Underlying Fund. The Partnership primarily allocates capital to a number of specialist loan originators and managers of credit pools ( Credit Managers ), to take advantage of opportunities in the private debt markets. Strategies that may be used include trade finance, consumer finance, invoice factoring, supply chain financing, syndicated loans, regulatory capital, mezzanine debt, structured credit and asset-based lending. The Partnership invests in both senior and subordinated debt subject to the advice and recommendations of its Credit Managers with the intent of building a portfolio, either directly or indirectly, of private income generating securities (the Underlying Assets ). The Schedule of investments of the Fund is as at. The Statement of financial position of the Fund is as at, and the Statement of comprehensive income, Statement of changes in net assets attributable to holders of redeemable units and Statement of cash flows are for the period from January 2 to December 31, These financial statements were approved for issuance by the Manager on March 30, BASIS OF PREPARATION AND ADOPTION OF IFRS These financial statements have been prepared in compliance with International Accounting Standard as issued by the International Accounting Standards Board ( IASB ). The financial statements have been prepared on a going concern basis using the historical-cost convention. However, the Fund is an investment entity and primarily all financial assets and financial liabilities are measured at fair value in accordance with IFRS. Accordingly, the Fund s accounting policies for measuring the fair value of investments and derivatives are consistent with those used in measuring the Net Asset Value for transactions with unitholders. 11

13 Notes to the financial statements (continued) In applying IFRS, management may make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses during the reporting periods. Actual results may differ from such estimates. The financial statements have been presented in Canadian dollars, which is the Fund s functional currency. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Financial instruments The Fund recognizes financial instruments at fair value upon initial recognition, plus transaction costs in the case of financial instruments measured at amortized cost. Regular way purchases and sales of financial assets are recognized at their trade date. The Fund s Investment in the Underlying Fund is designated as fair value through profit or loss upon initial recognition and is measured at fair value through profit or loss ( FVTPL ). The Fund s obligation for net assets attributable to holders of redeemable units is presented at the redemption amount. All other financial assets and liabilities are measured at amortized cost. Under this method, financial assets and liabilities reflect the amount required to be received or paid, discounted, when appropriate, at the contract s effective interest rate. Fair value and subsequent measurement of financial instruments Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of financial assets and liabilities traded in active markets are based on quoted market prices at the close of trading on the reporting date. The Fund uses the last traded market price for both financial assets and financial liabilities where the last traded price falls within that day s bid-ask spread. In circumstances where the last traded price is not within the bid-ask spread, the Manager determines the point within the bid-ask spread that is most representative of fair value based on the specific facts and circumstances. The Fund s policy is to recognize transfers into and out of the fair value hierarchy levels as of the date of the event or change in circumstances giving rise to the transfer. The fair value of financial assets and liabilities that are not traded in an active market, including the Underlying Fund, are determined using valuation techniques as follows: Measurement of Investment in Underlying Fund: The fair value of the Investment in the Underlying Fund is valued at the Net Asset Value reported by the Underlying Fund s valuation agent, which is equivalent to the proceeds that the Fund would receive upon redemption of any Underlying Fund units. Impairment of financial assets At each reporting date, the Fund assesses whether there is objective evidence that a financial asset at amortized cost is impaired. If such evidence exists, the Fund recognizes an impairment loss as the difference between the amortized cost of the financial asset and the present value of the estimated future cash flows, discounted using the instrument s original effective interest rate. Impairment losses on financial assets at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized. Net assets attributable to holders of redeemable units Net assets attributable to holders of redeemable units are classified as financial liabilities and are redeemable at the unitholder s option at prices based on the Fund s Net Asset Value ( Net Asset Value or NAV ) per unit at the time of redemption. The amounts are continuously measured at their redemption value. 12

14 Notes to the financial statements (continued) The NAV measured as at the close of business on the last Business Day (any day, other than a Saturday or a Sunday, or a day on which commercial banks in Toronto remain closed) of each month, or on any other day as the Manager determines (a Valuation Date ), will be obtained by the Valuation Agent by taking the then fair value of the assets of the Fund less the aggregate amount of its liabilities excluding those attributable to holders of redeemable units. The NAV per unit of any class of units of the Fund for a Valuation Date will be obtained by dividing the then fair value of the assets of the Fund less the aggregate amount of its liabilities (excluding those attributable to holders of redeemable units) in each case attributable to that class of units, by the total number of units of the class outstanding at the time the calculation is made on the Valuation Date and adjusting the result to a maximum of four decimal places ( NAV per Unit ). The NAV and the NAV per Unit, as at the relevant Valuation Date, is calculated by the Valuation Agent on or about the fifth Business Day following the relevant Valuation Date. For each Fund unit sold, the Fund receives an amount equal to the next NAV determined, on the date of the transaction. Units are redeemable at the option of the unitholders at their NAV per Unit on the redemption date. For each unit redeemed, the number of issued and outstanding units is reduced and the net assets attributable to holders of redeemable units is reduced by the related NAV on the date of redemption. The calculation of the value of net assets attributable to holders of redeemable units ( Net Assets ) for financial statement purposes in accordance with IFRS is consistent with the calculation of NAV for transactional purposes except for the treatment of Start Up Costs (see Note 11), which are amortized over time for valuation purposes but are expensed as incurred for financial statement purposes. Investment transactions and income recognition Investment transactions are accounted for as of the trade date. Income and expenses are recorded on an accrual basis. Interest income is recorded as it is earned. Realized gains and losses from security transactions are calculated using the average cost basis. The period-over-period change in the difference between fair value and the average cost is shown as the net change in unrealized appreciation (depreciation) of investments. Transactions costs such as brokerage commissions incurred in the purchase and sale of securities by the Fund are charged to net income in the period. Functional and presentation currency The Fund s functional and presentation currency is the Canadian dollar ( CAD ), which is the currency of the primary economic environment in which it operates. The Fund s performance is evaluated and its liquidity is managed in CAD. Therefore, the CAD is considered as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions. The Fund s subscriptions and redemptions are denominated in CAD. Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates that transactions occur. Foreign currency assets and liabilities denominated in a foreign currency are translated into the functional currency using the exchange rate prevailing at the measurement date. Foreign exchange gains (losses) relating to cash, receivables and payables are presented as Foreign exchange gain (loss) on cash and other net assets and those relating to financial instruments classified as held for trading and FVTPL are presented within Net realized gain (loss) on investments and Net change in unrealized appreciation (depreciation) on investments in the Statement of Comprehensive Income. 13

15 Notes to the financial statements (continued) Cash Cash is comprised of deposits with financial institutions. Increase (decrease) in net assets attributable to holders of redeemable units per unit The increase (decrease) in net assets attributable to holders of redeemable units per unit is calculated by dividing the increase (decrease) in net assets attributable to holders of redeemable units of the class by the weighted average number of units outstanding of the class during the period. Income and expense allocation The realized and unrealized gains or losses, income, and expenses (other than class-specific operating expenses and management fees) of the Fund are allocated on each Valuation Date to the redeemable participating unitholders in proportion to the respective prior day s net asset value, which includes redeemable participating unitholder trade(s) dated for that day, of each class at the date on which the allocation is made. Class-specific operating expenses and management fees do not require allocation. All operating expenses are paid by the Manager and are collected from the Fund on a recoverable basis. Taxation The Fund intends to qualify as a mutual fund trust under the Income Tax Act (Canada). All of the Fund s net income for tax purposes and sufficient net capital gains realized in any period are required to be distributed to unitholders such that no income tax is payable by the Fund. As a result, the Fund does not record income taxes. Since the Fund does not record income taxes, the tax benefit of capital and non-capital losses has not been reflected in the Statements of financial position as a deferred income tax asset. See Note 12 Income Taxes. 4. DISCLOSURE OF INVESTMENT PORTFOLIO OF THE UNDERLYING FUND The Fund obtains exposure to the Underlying Assets through its investment in the Underlying Fund. The Underlying Fund invests all, or substantially all, of its assets into the Partnership, which invests in the Underlying Assets. The return to the Fund, and consequently to unitholders, will depend on the performance of the Underlying Fund and the Partnership, which, in turn, will be based on the performance of the Underlying Assets. As at, the Fund held 2,265,005 of the Class A units of the Underlying Fund, representing 100% of the issued units of the Underlying Fund. As at, the Underlying Fund held 2,265,005 of the Class B units of the Partnership, representing 100% of the issued limited partnership units of the Partnership. 5. STANDARDS ISSUED BUT NOT YET EFFECTIVE Standards issued but not yet effective up to the date of issuance of the Fund s financial statements are listed below. The Fund will adopt any applicable standards when they become effective. IFRS 9, Financial Instruments - Classification and Measurement In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments, bringing together the classification and measurement, impairment and hedge accounting phases of the IASB s project to replace IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 introduces a logical, single classification and 14

16 Notes to the financial statements (continued) measurement approach for financial assets that reflects the business model in which they are managed and their cash flow characteristics. Built upon this is a forward-looking expected credit loss model that will result in more timely recognition of loan losses and is a single model that is applicable to all financial instruments subject to impairment accounting. In addition, IFRS 9 also removes the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value, such that gains caused by the deterioration of an entity s own credit risk on such liabilities are no longer recognised in profit or loss. IFRS 9 also includes an improved hedge accounting model to better link the economics of risk management with its accounting treatment. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early adoption permitted. In addition, the entity s own credit changes can be early applied in isolation without otherwise changing the accounting for financial instruments. The Manager is in the process of assessing the impact of IFRS SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS The preparation of financial statements requires management to use judgment in applying its accounting policies and to make estimates and assumptions about the future. The following discusses the most significant accounting judgments and estimates that the Fund has made in preparing the financial statements: Assessment as investment entity Entities that meet the definition of an investment entity within IFRS 10, Consolidated financial statements, are required to measure their subsidiaries at fair value through profit or loss rather than consolidate them. The criteria which define an investment entity are, as follows: an entity that obtains funds from one or more investors for the purpose of providing those investors with investment services; an entity that commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation, investment income or both; and an entity that measures and evaluates the performance of substantially all of its investments on a fair value basis. The Fund reports to its investors via monthly investor information, and to its management, via internal management reports, on a fair value basis. All investments are reported at fair value to the extent allowed by IFRS in the Fund s financial statements. The Fund has a clearly documented exit strategy for all of its investments. The Manager has also concluded that the Fund meets the additional characteristics of an investment entity, in that it has more than one underlying investment; the underlying investments are predominantly in the form private debt securities, loans, and derivatives; it has more than one investor, and its investors are not related parties. These conclusions will be reassessed on an annual basis, if any of these criteria or characteristics changes. 7. FINANCIAL INSTRUMENTS RISK OF THE UNDERLYING FUND As at, the portfolio of the Fund is composed of an investment in the Underlying Fund. The table below presents financial instruments measured at fair value in the statement of financial position in accordance with the fair value hierarchy. The hierarchy groups financial assets and liabilities into three levels based on the significance of inputs used in measuring the fair value of the financial assets and liabilities. The fair value hierarchy has the following levels: Level 1 inputs are unadjusted quoted prices of identical instruments in active markets. Level 2 inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. 15

17 Notes to the financial statements (continued) Level 3 one or more significant inputs used in a valuation technique are unobservable in determining fair values of the instruments. As at, the financial instruments measured at fair value in the statement of financial position are grouped into the fair value hierarchy as follows: Level 1 Level 2 Level 3 Total CAD CAD CAD CAD Investment in Underlying Fund ,873,786 22,873,786 All fair value measurements above are recurring. The carrying values of cash, subscriptions receivable, interest receivable, payable for investments purchased, redemptions payable, distributions payable, accrued liabilities and the Fund s obligation for net assets attributable to holders of redeemable units are measured at amortized cost. Fair values are classified as Level 1 when the related security or derivative is actively traded and a quoted price is available. If an instrument classified as Level 1 subsequently ceases to be actively traded, it is transferred out of Level 1. In such cases, instruments are reclassified into Level 2, unless the measurement of its fair value requires the use of significant unobservable inputs, in which case it is classified as Level 3. The Fund s investment in the Underlying Fund is valued at the Net Asset Value per unit reported by the Underlying Fund s valuation agent. This measure approximately represents the fair value of the investment. The inputs that are significant to valuation of a majority of the Underlying Fund s portfolio are unobservable and therefore the Fund s investment in the Underlying Fund has been classified as Level 3. The following table presents the movement in Level 3 for the period: Investment in Underlying Fund Beginning balance, September 25, Purchases 22,991,223 Net change in unrealized gains (losses) (117,437) Ending balance, 22,873,786 Quantitative information regarding the unobservable inputs for Level 3 positions is given below: Fair Value at 31 Description December 2015 Valuation technique Unobservable input Range Investment in Underlying Fund 22,873,786 Net asset value N/A N/A The Investment in Underlying Fund is valued based on the net assets as calculated at the balance sheet date. No adjustments have been deemed necessary to the NAV. The credit risk of the Underlying Assets is generally not observable. The NAV is sensitive to movements in interest rates and to the credit risk of the Underlying Assets due to the Underlying Fund s underlying investments in loans. If the price of the Investment in Underlying Fund held at period end had increased / decreased by 5 percent, it would have resulted in an increase / decrease in the total value of the Investment in Underlying Fund of $1,143,689 which would affect the net change in unrealized appreciation in fair value of investments within the Statement of Comprehensive Income. 8. FINANCIAL INSTRUMENTS BY CATEGORY The Fund s Investment in Underlying Fund is designated as fair value through profit or loss upon initial recognition and are measured at fair value through profit or loss ( FVTPL ). The Fund s derivative assets and derivative liabilities, 16

18 Notes to the financial statements (continued) including forward foreign exchange contracts, if any, are classified as held for trading ( HFT ) and are measured at fair value through profit or loss. All other financial assets and liabilities are measured at amortized cost. The following table presents the carrying amounts of the Fund s financial instruments by category as at December 31, 2015: Financial assets classified as held for trading $ Financial assets designated at FVTPL $ Financial assets at amortized cost $ Total $ Assets Financial assets at fair value through profit or loss - 22,873,786-22,873,786 Subscriptions receivable - - 3,855,695 3,855,695 Other receivable - - 1,884,840 1,884,840 Total - 22,873,786 5,740,535 28,614,321 Liabilities Financial liabilities classified as held for trading $ Financial liabilities designated at FVTPL $ Financial liabilities at amortized cost $ Total $ Cash overdraft ,175 61,175 Accrued expenses , ,831 Start Up Costs payable , ,896 Management fees payable ,359 11,359 Distributions payable , ,777 Total - - 1,064,038 1,064,038 The following table presents the net gains on investments and derivatives by category for the period ended December 31, 2015: Financial assets classified as held for trading $ Financial assets designated at FVTPL $ Total $ Distributions from Underlying Fund - 936, ,519 Interest for distribution purposes - 24,602 24,602 Change in unrealized appreciation on investments - (117,437) (117,437) Total - 843, , UNDERLYING FUND AND PARTNERSHIP RISK The Fund s investment in the Underlying Fund exposes it to the risks of the Underlying Fund and the Partnership. The Underlying Fund s sole purpose and function is to own units of the Partnership and all, or substantially all of the assets of the Underlying Fund are invested in units of the Partnership. The Partnership s investments are managed by the Manager and the Credit Managers. The Partnership s investment activities expose it to the various types of risk which are associated with the financial instruments and markets in which it invests, which are generally private debt securities. The most important types of financial risks to which the Partnership is exposed to are credit risk, interest rate risk, and foreign currency risk. The 17

19 Notes to the financial statements (continued) Partnership is also exposed to liquidity risk. The Manager manages these risks on an aggregate basis along with the risks associated with its investing activities as part of its overall risk management policies. The Manager and the Credit Managers have implemented policies and procedures to manage risks associated with the Underlying Fund, the Partnership, and the Underlying Assets. All investments result in a risk of loss of capital. Credit risk of the Partnership The Partnership is exposed to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Underlying Assets consist entirely of private debt securities, and are subject to credit risk. The Partnership s policy to manage credit risk is to ensure that the Underlying Assets are regularly monitored and that established credit policies and procedures by the Credit Advisors are adhered to. These policies and procedures include, but are not limited to, the usage of credit checks (on end debtors as well as the parties from which receivables are purchased from in the case of factoring receivables), usage of reserves on advances on factored receivables, credit insurance, general security agreements, personal guarantees, verification and notification in the case of factored receivables, financial reviews, tax searches, background checks, and ongoing monitoring. Foreign currency risk of the Partnership The Partnership invests in financial instruments denominated in currencies other than CAD. These investments result in currency risk, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Partnership uses foreign exchange forward contracts to hedge its foreign currency exposure. The table below indicates the foreign currencies to which the Partnership had significant exposure as at December 31, 2015 in CAD terms. Exposure Currency Monetary Non-monetary Foreign forward Total United States Dollar 9,186,929 - (10,140,893) (953,964) % of net assets attributable to holders of redeemable units 40.2% - (44.3%) (4.1%) The table below illustrates the potential impact on the net assets attributable to holders of redeemable units of the Fund if CAD had strengthened or weakened by 5% in relation to each of the other currencies, with all other variables held constant. Impact on net assets attributable to holders of redeemable units Currency Monetary Non-monetary Foreign forward Total United States Dollar 459,346 - (507,045) (47,699) % of net assets attributable to holders of redeemable units 2.0% - (2.2%) (0.2%) Interest rate risk of the Partnership Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Partnership holds private securities with negotiated interest rates that expose the Partnership to interest rate risk. The Partnership also holds a limited amount of cash subject to variable interest rates which exposes the Partnership to cash flow interest rate risk. 18

20 Notes to the financial statements (continued) Liquidity risk of the Partnership Liquidity risk is the risk that the Partnership will encounter difficulty in meeting obligations associated with financial liabilities. Partnership LP unit redemption requests are the main liquidity risk for the Partnership. The Partnership s LP units are redeemable at the Manager s instruction on a monthly basis. Partnership LP units may be redeemed subject to the Manager providing written notice no later than 16:00 (Eastern Standard Time) one business day prior to the dealing day upon which the redemption is required to be effected. The Partnership is therefore potentially exposed to monthly redemptions. The Partnership s sole LP unitholder is the Subtrust, which is managed by the Manager. The Partnership invests in revolving facilities that can be recalled upon the Partnership s request, with the underlying security of the facilities consisting generally of factored receivables with turnover commensurate with general trade receivables (60 to 90 days). The Partnership also enters into foreign currency forward contracts that are no longer than one month in duration. The Manager monitors the Partnership s liquidity position on a daily basis. The table below analyzes the Partnership s financial liabilities into relevant maturity groupings based on the remaining period to the contractual maturity date. The amounts in the table are the contractual undiscounted cash flows. Financial liabilities On demand < 3 months Total Distributions Payable (936,519) - (936,519) Derivative liabilities (217,345) - (217,345) 10. OTHER RISK FACTORS In addition to the risks exposed that the Fund is exposed to via its investment in the Underlying Fund as disclosed above, the Fund is also subject to liquidity risk, currency risk, and interest rate risk. Liquidity Risk of the Fund Liquidity risk for the Fund is the possibility that the Fund will not be able to liquidate its investment in the Underlying Fund in order to settle unit redemption requests from unitholders. While unitholders may redeem their units, under conditions where the Underlying Fund restricts or suspends redemptions to the Fund, then the unitholder redemptions may be temporarily restricted or suspended. The table below analyzes the Fund s financial liabilities into relevant maturity groupings based on the remaining period to the contractual maturity date. The amounts in the table are the contractual undiscounted cash flows. Financial liabilities On demand < 3 months > 3 months Total Cash overdraft 61, ,175 Accrued liabilities - 124, ,831 Management fees payable - 11,359-11,359 Start Up Costs payable - 437, ,896 Distributions payable 428, ,777 19

21 Notes to the financial statements (continued) Currency risk The Fund holds some of its cash in US dollars. This results in currency risk, which is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Partnership enters into foreign exchange forward contracts to reduce the Partnership and the Fund s foreign currency exposure. The table below indicates the foreign currencies to which the Fund had significant exposure at in CAD terms. The table also illustrates the potential impact on the net assets attributable to holders of redeemable units of the Fund if CAD had strengthened or weakened by 5% in relation to each of the other currencies, with all other variables held constant. Exposure Impact on net assets attributable to holders of redeemable units Nonmonetary Non- Currency Monetary Total Monetary monetary Total United States Dollar 948, ,321 47,416-47,416 % of net assets attributable to holders of redeemable units 3.4% - 3.4% 0.2% - 0.2% Interest Rate Risk on Cash The Fund holds cash subject to variable interest rates which exposes the Fund to cash flow interest rate risk. 11. REDEEMABLE UNITS As at and for the period ended, the Fund offered six classes of redeemable units: Class A units, Class F units, Class G units, Class H units, Class I units and Class J units. Units were available for purchase on both an upfront selling commission basis and a fee based account basis, and all provide regular distributions. The Class of units selected affected both the fees that were payable by an investor, the management fee payable by the Fund, and the compensation that a dealer received in respect of the sale of units. All of the Classes had the same investment objective, strategy and restrictions but differed in respect of one or more features, such as the management fee, sales commission, and service commission. The NAV per Unit of each class would not necessarily be the same as a result of the different fees, and expenses allocable to each class of units. The Fund and the Manager did not charge a fee or commission when investors purchase units of the Fund. An authorized broker, dealer or advisor may charge investors an upfront selling commission of up to 3.00% at the time of purchase of Class A, Class G, Class I units, or Class J units, which would have reduced the amount of money invested in the Class A, Class G, Class I, or Class J units of the Fund. The number of units issued, redeemed or cancelled during the period ended for each respective Class is summarized in the following tables. For the period ended Class A 1 Balance, Beginning - Units issued for cash 68,646 Reinvested 701 Balance, Ending 69,347 20

22 Notes to the financial statements (continued) For the period ended Class F 2 Balance, Beginning Units issued for cash 149,097 Reinvested 2,270 Balance, Ending 151,367 Class G 3 Balance, Beginning Units issued for cash 100,187 Reinvested 1,036 Units redeemed (15,000) Balance, Ending 86,223 Class H 3 Balance, Beginning - Units issued for cash 1,073,298 Balance, Ending 1,073,298 Class J 4 Balance, Beginning - Units issued for cash 1,374,309 Reinvested 336 Balance, Ending 1,374, The first issuance of Class A units was on June 19, The first issuance of Class F units was on May 25, The first issuance of Class G and Class H units was on March 18, The first issuance of Class J units was on September 30, Capital Management As a result of the ability to issue and redeem redeemable units, the capital of the Fund can vary depending on the demand for redemptions from and subscriptions to the Fund. The Fund is not subject to externally imposed capital requirements and has no restrictions on the issue and redemptions of redeemable units other than those set out in the Offering Memorandum. The Fund s objectives for managing capital are: To invest the capital in investments meeting the description, risk exposure and expected return indicated in the Offering Memorandum; To achieve consistent returns while safeguarding capital by obtaining exposure to the Underlying Assets by investing in the Underlying Fund as indicated in the Offering Memorandum and Note 4 above To maintain sufficient liquidity to meet the expenses of the Fund, and to meet redemption requests as they arise; and To maintain sufficient size to make the operation of the Fund cost-efficient. 21

23 Notes to the financial statements (continued) Reconciliation of valuation to net asset value There is a difference between the NAV as per the financial statements and the NAV for subscription and redemption purposes (valuation purposes), calculated in accordance with the Offering Memorandum. Start Up Costs must be expensed as incurred under IFRS. The valuation for the purposes of redemption of units is calculated by amortizing the Start Up Costs over the first four years of trading of the Fund. Class A Class F Class G Class H Class J Net asset value per financial statements 695,925 1,532, ,853 10,855,325 13,599,400 Redeemable participating units per financial statements 69, ,367 86,223 1,073,298 1,374,645 Net asset value per unit per financial statements Net asset value per financial statements 695,925 1,532, ,853 10,855,325 13,599,400 Less Capital Stock adjustment January 4 (18,159) (104,772) (110,580) - (3,666,669) Add unamortized Start Up Costs 12,299 25,878 13, , ,154 Net asset value per valuation 690,064 1,453, ,996 11,052,042 10,112,886 Redeemable participating units per financial statements 69, ,367 86,223 1,073,298 1,374,645 Less Capital Stock adjustment January 4 (1,778) (10,175) (10,828) - (365,785) Redeemable participating units per valuation 67, ,192 75,395 1,073,298 1,008,860 Net asset value per unit per valuation INCOME TAXES It is generally assumed that the Fund will qualify at all times as a mutual fund trust within the meaning of the Income Tax Act (Canada) (the Tax Act ) and that the Fund will validly elect under the Tax Act to be a mutual fund trust from the date it was established. The Fund will be subject to tax in each taxation year under Part I of the Tax Act on the amount of its income for the year, including net realized taxable capital gains, less the portion thereof that it claims in respect of amounts paid or payable to unitholders (whether in cash or in units) in the year. An amount will be considered to be payable to a unitholder in a taxation year if it is paid in the year by the Fund or the unitholder is entitled in that year to enforce payment of the amount. The Fund intends to make sufficient distributions in each year of its net income and net capital gains for tax purposes, thereby permitting the Fund to deduct sufficient amounts so that the Fund will generally not be liable in such year for non-refundable income tax under Part I of the Tax Act. The Fund will be entitled for each taxation year throughout which it is a mutual fund trust for purposes of the Tax Act to reduce (receive a refund in respect of) its liability, if any, for tax on its net realized capital gains by an amount determined under the Tax Act based on the redemptions of units during the year (the Capital Gains Refund ). The Capital Gains Refund in a particular taxation year may not completely offset the tax liability of the Fund for such taxation year which may arise upon the disposition of securities included in the Investment in Underlying Fund in connection with the redemption of units. If the Fund does have income for tax purposes which is in excess of any distributions paid or made payable to unitholders during the year and the net realized capital gains of the Fund, the tax on which would be recovered by the Fund in the year by reason of the capital gains refund provisions of the Tax Act, in order to ensure that the Fund will 22