A number of Canadian pension funds have been pouring money into private credit as a means of generating higher returns, increasing diversification in their portfolios and as a way to hedge against inflation.
Indeed, Alberta Investment Management Corp., Edmonton, announced the opening of a new office in New York on Feb. 13 as part of the pension fund's strategy to increase its activities in the private credit space.
The office opened with an initial team of six people, with plans to grow in the coming years, a spokesperson said.
"We have a significant client mandate to grow our private credit portfolio, and having a team based in Manhattan will also help us accelerate our efforts in this key asset class," said Evan Siddall, CEO of AIMCo, in a Feb. 13 release.
AIMCo, which has about C$164 billion ($121.8 billion) of total assets, is one of a handful of Canada-based pension funds seeking to increase their allocation to private credit. The growth comes even as many investors acknowledge there are illiquidity risks as well as less transparency when compared with public fixed income.
AIMCo has been building its private debt and loan portfolio since 2010 and now has close to C$7 billion allocated to the asset class, said Peter Shen, managing director-private debt and loan at AIMCo.
"The allocation to private credit has been increasing given the attractive risk-adjusted return, the inflation hedge due to floating-rate products and the asset class diversification for the total portfolio," London-based Shen said. "AIMCo's New York office will accelerate the continued growth of this asset class."
AIMCo's private debt and loan portfolio, which includes private credit, generated a 6.2% net return for the year 2022, outperforming the benchmark by 6.3 percentage points. As a whole, AIMCo returned -3.4% in 2022.
Among other Canadian pension funds, private credit performance has varied in recent years.
For example, for the year ended March 31, the private debt portfolio of British Columbia Investment Management, Victoria, returned 4.6% (above the 3.5% return for the total portfolio). Meanwhile, the total credit portfolio of Canada Pension Plan Investment Board, Toronto (which included private credit assets) returned 6% for the year ended March 31, and 3.4% annualized for the five-year period. For calendar 2022, the global credit segment of Investment Management Corp. of Ontario, Toronto (which included private credit) sank 7.7%, but that still outperformed the whole portfolio, which dropped 8.1%.
Andrew Edgell, senior managing director and global head of credit investments at Canada Pension Plan Investment Board, said "private credit is growing rapidly in both corporate credit and asset-backed finance and for issuers it's a viable alternative to syndicated transactions."
Edgell noted that his firm expects its global credit portfolio to "almost double from C$62 billion to approximately C$115 billion in the next five years."
CPPIB's assets totaled C$576 billion as of Sept. 30.
A spokesperson for Investment Management Corp. said that in 2023, IMCO increased its allocation to private credit to 46% of the total global credit portfolio as of the end of the third quarter, up from 37% at the start of the year. As of Dec. 31, 2022, global credit represented 9% of the total portfolio.
IMCO managed C$73.3 billion in assets as of Dec. 31, 2022.
In a blog post issued in the third quarter of 2023, Jennifer Hartviksen, managing director, head of global credit at IMCO, explained that "our decision to shift from predominantly passive public credit towards private credit and different segments within private markets — including middle market loans, infrastructure, capital solutions, and real estate — is an ongoing evolution of our strategy."
Hartviksen also observed that private credit can mean different things to different investors, and its popularity has soared recently for both cyclical and secular reasons.
"Currently, given the interest rate and business cycle, public market capacity is reduced — pushing borrowers to the private credit market," she said. "On a secular basis there has been an ongoing shift towards private markets. As banks retrench for regulatory reasons, borrowers seek more bespoke financing solutions than available in traditional public market segments."
In addition, she said that private credit assets tend to be less volatile because they are not subject to the same inflows and outflows as public credit.
Daniel Garant, executive vice president and global head, public markets at British Columbia Investment Management, said BCI's private credit program commenced in 2018 and has grown in size to C$15 billion as of Dec. 31. In fiscal year 2023 — which ended March 31 — BCI deployed C$4.7 billion into private credit, the highest amount since the program's inception.
"BCI continues to increase investments in private credit across sectors and strategies, in Canada, the U.S., Europe, and most recently, Asia-Pacific," Garant added. "We are also pursuing differentiated investment strategies in the space. The prospect of achieving equity-like returns through a fixed-income instrument is particularly attractive to our investment strategy."
Garant cited, for example, that in late 2023, BCI announced an anchor investment in a deal between Centerbridge Partners and Wells Fargo that focuses on direct lending, an important alternative financing source to non-sponsor North American middle-market companies.
"We also see an opportunity in large-scale, cross-asset-class investments, where our private debt group participates in a separate underwriting process to diversify our exposure across the capital structure," Garant added. "This was the case with BCI's investment in Maxar Technologies, a global space technology and intelligence company, a deal that included our private equity and private debt groups."
BCI reported total net assets under management of C$215 billion as of March 31.
Patrick Carlevato, managing director and head of the OCIO platform at SEI Investments Co., said pension funds have been increasing investments in private credit to diversify their portfolios beyond traditional asset classes and to create an opportunity to achieve uncorrelated returns, reducing overall portfolio risk.
"With interest rates at historic lows, pension funds are seeking alternative sources of income to meet their long-term liabilities," he added. "The illiquidity premium associated with private credit can contribute to enhanced returns."
Private credit also opens opportunities for investments into asset-backed finance, including collateralized loan obligations, which allow for risk customization through structured credit, enabling investors to align exposure with their risk-reward preferences, Carlevato said.
Karin Anderson, director-North America credit manager research at Willis Towers Watson, said that institutional investors, including pension funds in both the U.S. and Canada, have been increasing their investments in private credit since the global financial crisis, primarily for its higher yield.
"For many years private credit helped fill the yield void in the public fixed-income markets, and given higher rates and attractive spreads, it still offers attractive yields today" she said.
According to Goldman Sachs Asset Management, the size of the private credit market has mushroomed sevenfold since the global financial crisis to about $1.9 trillion at present as private credit has outperformed public debt.
An October report by Coalition Greenwich, "Wealth and Asset Managers Focus on Private Credit," predicted the market will surge to $2.7 trillion by 2026.
Andrew Krei, co-CIO of Barrett Upton Capital Partners, an alternative investment firm, said one of the clear benefits of private credit has been the potential for higher returns.
"Over the last decade, private credit has provided a material yield advantage over most fixed-income asset classes, including 3%-4% over syndicated high yield and leveraged loans," he said. "Because the assets aren't marked daily, the returns are even more attractive when viewed through a risk-adjusted lens. At the same time, defaults across the asset class have been relatively benign, and lower than high-yield instruments."
Barrett Upton is an alternative investment platform that launched in September. Barrett was founded as an affiliate of Crescent Grove Advisors, a registered investment adviser with over $4 billion in AUM.
But there are some risks associated with private credit, WTW's Anderson noted, namely transparency and illiquidity. "Private credit is less liquid than comparable public debt," she said.
Krei said that the downside of this asset class is that the underlying fundamentals of many direct loans are often weaker than those commonly found in public debt markets.
"Private credit borrowers tend to be smaller companies that have less diversified business models, less pricing power and fewer levers to pull when navigating a slowing economy," he added. "Credit characteristics also tend to be weaker than what is seen across the syndicated landscape. Private debt deals tend to feature top-heavy capital structures that result in higher leverage points and lower interest coverage — often in line with low single-B, high CCC-rated issuers seen in public markets," he said.
