Canadian Pension Giants Navigate Towards Private Credit Expansion, Departing from Traditional Banking Landscape

Six major Canadian pension funds, collectively managing C$1.3 trillion in assets, are embarking on a substantial expansion into private credit, a domain historically dominated by traditional banks. Notable entities such as Canada Pension Plan (CPP) Investments, Ontario Teachers' Pension Plan (OTPP), and others have expressed their intent to boost exposure to private credit, involving tailored loans to companies underwritten by non-banking institutions. CPP Investments, with a portfolio of C$576 billion, plans to double its credit portfolio to approximately C$115 billion, with private credit playing a pivotal role in this strategic expansion. Other pension funds, including OTPP and OPTrust, see opportunities to fill the voids left by banks, and the move reflects a broader global trend as financial institutions grapple with higher capital requirements, prompting a retreat from certain lending activities.

Private credit has gained favor among pension schemes and insurers due to its potential for higher returns compared to traditional fixed-income products, coupled with better downside protection than equities. The surge in interest from Canadian pension funds aligns with a global shift toward private credit, with Preqin forecasting that global assets under management in this space will reach $2.8 trillion by 2028, up from $1.5 trillion in 2022. Despite the attractiveness of private credit, regulators have expressed concerns about the rapid growth of this sector, particularly in the context of an emerging "shadow banking" industry. Rising borrowing costs and economic uncertainties heighten the risks of business defaults, underscoring the need for careful oversight as pension funds increasingly allocate capital to this alternative asset class.

Source: Reuters