Opening
In April 2020, as North American real estate markets seized up and uncertainty gripped the economy, Romspen Investment Corporation—one of Canada's largest and most respected Mortgage Investment Corporations—suspended redemptions on its mortgage investment fund. For hundreds of Canadian investors who had grown accustomed to quarterly liquidity in what they believed was a semi-liquid alternative investment, the suspension arrived like a cold shock. This moment revealed a critical truth about private lending vehicles that many investors had overlooked: the ability to redeem your capital when you want it isn't guaranteed, regardless of track record or pedigree. For Canadian MIC investors, the Romspen situation became a defining lesson about the difference between marketed liquidity and actual liquidity in stress environments.
What Happened
Romspen's suspension in April 2020 wasn't a default or fraud—it was a deliberate circuit breaker. With approximately $3 billion in assets under management, Romspen was one of Canada's most established mortgage investment platforms, primarily focused on commercial real estate lending: construction loans, land development, and bridge financing. When pandemic lockdowns hit, real estate transactions froze. Property valuations became impossible to determine with confidence. Borrowers who had seemed credit-worthy weeks earlier now faced uncertain revenue streams. The fund's managers faced a difficult choice: continue allowing redemptions at potentially inflated net asset values (NAVs), or suspend them to protect remaining unitholders from losses incurred by departing investors.
Romspen chose suspension. The fund's managers cited "unprecedented market conditions" and cited the need to protect the interests of all unitholders. Specifically, they noted that forced asset sales in a frozen market would lock in losses that wouldn't otherwise materialize if the underlying mortgages performed through the crisis. On the surface, this was a prudent risk management decision. But for investors who suddenly found their capital inaccessible—investors who had been told their MIC holdings were relatively liquid, redeemable quarterly—the suspension felt like a betrayal of an implicit promise.
The pandemic created a cascade of stress across Canadian commercial real estate. Construction projects halted. Retail tenants closed permanently. Office valuations remained uncertain for months. Borrowers requested forbearance. The fund's portfolio, which had generated consistent 7-8% distributions for years, now faced real risks. Romspen wasn't unique in freezing redemptions—other MICs followed—but Romspen's scale and reputation made it the watershed moment that forced the entire Canadian investor community to reckon with the liquidity illusion at the heart of these structures.
Why It Matters
The Romspen suspension exposed a structural mismatch that defines open-ended private lending vehicles: investors expect quarterly liquidity, but the underlying assets—commercial mortgages—can't be liquidated quickly without severe haircuts. This is the illiquidity illusion. When markets are calm and borrowers are performing, this mismatch is invisible. Distributions flow predictably. The NAV remains stable. Investors treat their MIC holdings as quasi-cash. But when stress arrives, the illusion evaporates.
Here's the critical insight: a strong historical track record does not eliminate structural risk. Romspen had generated solid returns for years. Its management team was experienced and respected. But none of that changed the fundamental economics of the underlying portfolio—mortgages on commercial real estate that cannot be sold instantly. When the pandemic froze the real estate market, Romspen's managers faced a choice between two forms of harm: allow redemptions and force asset sales (crystallizing losses immediately), or suspend redemptions and protect the portfolio (but trapping investor capital). They chose the latter. Was it the right call? Arguably yes, if you believe the underlying mortgages would eventually perform. But it illustrates a core principle: in stress, the gate comes down, and investors lose the liquidity they had counted on.
This matters for Canadian MIC investors specifically because private lending has become an increasingly important part of the alternative investment landscape. These vehicles offer yields unavailable in public markets. They provide geographic and sector diversification. But they come with a hidden cost: you must accept the possibility that your quarterly redemption option can be suspended at management's discretion. The Romspen case also illustrates that even well-capitalized, professionally managed funds cannot protect investors from macro shocks. The pandemic wasn't Romspen's fault—it was an exogenous crisis. But exogenous crises are precisely when liquidity matters most, and that's when redemptions often get suspended.
There's a secondary lesson here about distributions. Many investors conflated "consistent 7-8% distributions" with "safe 7-8% returns." But distributions and returns are different. A fund can distribute capital and NAV simultaneously, creating the appearance of steady returns while the underlying value erodes. Romspen wasn't accused of this—but the suspension forced investors to actually calculate true returns including the cost of being locked in during a crisis. That's a non-zero expense.
What to Do
If you hold MICs or other open-ended private lending vehicles, now is the time to review your portfolio with a stress-test lens. Start by understanding the redemption terms in your fund's prospectus or offering documents. What exactly does "quarterly liquidity" mean? Can the manager suspend redemptions unilaterally? Under what conditions? How long can a suspension last? Many Canadian investors own MICs without having actually read these terms. The Romspen case should motivate you to do so now.
Next, understand NAV methodology. How is the underlying portfolio valued? Are mortgages marked to market monthly, quarterly, or annually? Are valuations based on appraisals, cash flow models, or third-party assessments? Conservative valuation methodologies are better—they're less likely to require sudden downward revaluations in a crisis. Aggressive methodologies feel better when markets are calm, but they tend to create uglier surprises when stress arrives.
Ask yourself and your advisor: what percentage of your portfolio is in vehicles with redemption gates? If it's material—say, more than 10-15%—do you understand the consequences of simultaneous suspensions across multiple vehicles? During the 2020 crisis, some investors owned three or four MICs, all of which suspended redemptions at roughly the same time. Suddenly, 30-40% of their alternative allocation became illiquid. They hadn't intended that concentration; it had crept up over time through quarterly reinvestment. Don't let that be you.
Finally, have a conversation with your fund manager—even if you don't currently own their product. Ask explicitly: in what scenarios would you suspend redemptions? What percentage of the portfolio would need to be under stress before gates come down? How would you communicate this to investors? A transparent manager should be able to answer these questions. If they can't or won't, that's a red flag.
Closing
The Romspen suspension of April 2020 wasn't a disaster—the fund ultimately resumed redemptions as the crisis stabilized. But it was a reckoning. For Canadian MIC investors, it crystallized an important truth: liquidity in private markets is conditional. It exists until it doesn't. The strongest protection is not to assume it will always be there, but to understand the terms under which it can be suspended, to size your positions accordingly, and to stress-test your portfolio for the moment when gates come down.
Alts Insider provides educational content for Canadian accredited investors. This is not investment advice. Always consult qualified professionals before making investment decisions.