Excerpt from article:
Canada’s major financial institutions are defending their private credit exposure, as sentiment sours around U.S. firms like Blue Owl amid intensified scrutiny from regulators and skeptics.
Canadian pension funds and life insurers, by one estimate, hold over $180 billion in private credit—an industry that offers loans to small businesses, bypassing banks and public markets. It’s showing no signs of slowing down. Yet retail investors are pulling money out of U.S. private credit funds like Blue Owl, Carlyle and KKR, as competition from AI companies hammers the valuations of software companies, which are heavy users of private credit.
Canada’s exposure is small compared to the US$3 trillion global market, so the current market turmoil isn’t existential, but it’s also not a “non-event,” said Stephen Johnston, director at Omnigence Asset Management.
Johnston said pensions and insurers are being “unreasonably optimistic” in assuming their private credit investments are not sitting on losses, adding that stress might first show up in “bigger write-offs” and potentially “material” losses.
“If discounts on book values keep going up,” said Johnston, “it’s saying something very fundamental about the state of the U.S. economy, and that will have consequences for the United States [and] for Canada.”
However, he noted that Canada’s private lending is focused on multi-tenant real estate rather than struggling software companies. Canadian private credit managers oversee between $20 to $30 billion, compared with the U.S. market of US$1.5 trillion, CIBC estimated in November.
The Canadian market remains concentrated among institutional players, making it difficult for alternative lenders to “break in,” Johnston said. Canadian investors, he added, have also generally been more conservative than their U.S. counterparts when it comes to riskier forms of lending.
Canadian regulators are alert to the underlying troubles in the sector. In its annual risk report released last week, the Office of the Superintendent of Financial Institutions named exposure to private credit and other non-bank financial firms as one of the top risks to the Canadian financial system, though superintendent Peter Routledge has previously expressed confidence in its resilience. “A risk can be material and growing without being system‑threatening,” spokesperson Cory Harding said in an email.
Canada didn’t experience the same private credit boom that followed tighter U.S. bank regulations after the 2008 financial crisis. Still, “the [private credit] alarm bells were going off in Canada before the U.S.,” said Liam O’Sullivan, principal and co-head of client and product solutions at asset management firm RPIA. He pointed to Bridging Finance’s collapse in 2021, redemption requests at Romspen in 2022 and, more recently, Toronto-based Cortland pausing redemptions due to an “overweight single-name concentration.”
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