Private credit as an asset class

A recent ACC & With Intelligence survey of more than 220 U.S. institutional investors beyond current quotas related to stock valuation and inflation, high return expectations, low bond yields, and access to new ones. Raising concerns, it turns out that 40% will add to private credit Opportunity and target allocation compliance. In particular, 57% of US pensioners who responded will allocate to private credit this year, followed by 50% of wealth managers who responded. CPP Investments, IMCO and many others are actively investing in private credit on behalf of Canadians and local public sector employees.

Private credit bridges an important gap by providing essential funding for the real economy and Canadian businesses. Canada is a leader in banking, but there are many small businesses that prefer to rely on unconventional lenders and work with lenders. These borrowers benefit from additional access to capital, flexible repayment schedules, increased structural or contract flexibility, and the special expertise or partnerships provided by the lender. The simplifications and regulatory scrutiny imposed on traditional banking business models mean that it may not be feasible for banks to lend to a particular business on realistic terms. The reason for this is not necessarily that the company’s credit risk is bad, but that it is inconsistent with the bank’s risk tolerance and current exposure.

Private credit is an essential lifeline for traditional businesses, especially in difficult market environments such as those experienced in pandemics. According to industry data provider PitchBook, more than US $ 17 billion in private debt has been granted in more than 324 transactions in Canada since January 2021 and more than US $ 5.4 billion from Canadian investment managers in more than 83 local transactions. Private debt has been granted. ..

In the United States, United Kingdom and Europe, governments are actively encouraging lending to traditional businesses through traditional means. The New Long-Term Assets Fund (UK) and the recently reformed European Long-Term Investment Fund (EU) give private investors more access to private credits and access to new sources of funding for UK and EU businesses. increase. The US retail private credit market, primarily represented by business development companies, is currently growing at US $ 163 billion and has already provided US companies with significant funding to support their global competitiveness.

Here in Canada as well, we’ve seen the structure of more retail-friendly private credit funds launched by traditional asset managers and boutiques. This is a kind of product innovation and asset allocation flexibility that Canadian investors need and deserve, especially in a volatile, high inflation and yield-constrained market environment. This attractive risk-return profile can be accompanied by a illiquidity premium that investors must understand and accept when considering quota adjustments. Regular liquidity is a positive feature of some funds, but investors ensure fair treatment of all investor stocks during times of stress and unusual market conditions, and the underlying flow of funds. It should be noted that the fund may further limit redemption in order to balance the investment.

Investors need to be prepared and have the means to ask detailed questions when considering an investment. AIMA and CCA provide members and investors with extensive resources on private credit due diligence, including questions that individual investors can ask fund managers when considering an investment. Questions include, but are not limited to, the following topics: How are insider loan repayment terms usually structured? What is the process of credit bureau and due diligence for investment managers? What kind of representations, guarantees, and contracts does the borrower need to submit and what guarantees do they need? How are these aspects controlled? What is the investment manager’s policy and performance regarding impairment / distress loans or non-performing loans? Who are the fund’s independent outsourcing service providers (auditors, custodians, legal advisors, etc.)? What risk management framework is in place (eg, independent reporting lines, operational risk management policies and procedures, conflicts of interest, etc.)? How liquid is the fund and is it consistent with the liquidity of the underlying asset? There are many more resources (for more resources, visit AIMA.org and lendingforgrowth.org).

When considering Canadian investment and retirement goals, it is imperative that investors continue to have access to the benefits of this valuable asset class and the strategies that make it up. For Canadian companies, the need may be even more serious as they are trying to recover beyond the background of an ongoing pandemic. Without the option of private credit, investors and business owners would be in a more difficult situation. We are fully confident in the future of the private credit industry and, on the basis of its success, will continue to strive to support strong market practices at all levels.