Canadian pension funds, insurers seeking private debt face shrinking pool of lower-risk firms
Canadian pension funds and insurers are facing a shrinking universe of higher-quality private debt investments to lift returns in a low-yield world, as the coronavirus pandemic has crushed many businesses, while banks maintain lending to better ones.
The tightening supply of this high-yielding credit comes as many Canadian institutional investors have been accelerating their exposure to the private debt.
Private credit is issued primarily by closely held companies, offering a premium over corporate bonds due to fewer disclosures and less liquidity. It is dominated by institutions and high-net-worth individuals.
They offer about 10% yield compared with some 5% generated by Canadian high-yield corporate bonds, according to Deloitte.
That has encouraged institutions including Caisse de dépôt et placement du Québec (CDPQ) and Sun Life Financial to increase their private debt allocations, while fund managers like Ninepoint Partners have seen increased investor demand. But the pandemic-induced repeated lockdowns have slammed smaller and privately-held business more than their larger rivals, limiting their need and ability to raise debt capital.
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