Canada's top pension funds pile into private credit as banks retreat

Six of Canada's largest pension funds, collectively managing C$1.3 trillion ($965.47 billion), told Reuters they intend to increase exposure to private credit, typically tailored loans to companies underwritten by non-bank lenders. The funds are Canada Pension Plan (CPP) Investments, Ontario Teachers' Pension Plan (OTPP), Ontario Municipal Employees Retirement System (OMERS), OPTrust, Healthcare of Ontario Pension Plan (HOOPP) and British Columbia Investment Management Corporation (BCI). The shift comes as banks, squeezed by higher capital requirements, retreat from some lending.

CPP Investments, which manages C$576 billion, will double its overall credit portfolio to around C$115 billion, according to Andrew Edgell, who oversees the portfolio. Of its C$62 billion credit book, CPP Investments manages most in-house. OTPP and OPTrust said they saw opportunities to fill gaps left by banks, and OPTrust expects growth in private credit in Europe, including Britain. OMERS said it had seen opportunities across credit markets, including private credit, that it had not seen "in many years."

HOOPP chief investment officer Michael Wissell said it is "an attractive time in the economic cycle to commit capital to private credit," noting that private credit returns are priced tightly to equity but with lower risk. More than half of HOOPP's exposure is with external partners, but the pension is increasing its direct private credit investments. BCI's private debt program grew 11% over six months to more than C$15 billion as of Dec. 31, 2023. OPTrust, which increased its credit exposure from 10% of assets in 2022 last year, said its credit investments are primarily handled by external managers; David Ross, managing director of its capital markets group, said he was confident those partners can navigate the market.

Private credit has gained appeal among pensions and insurers for offering higher returns than traditional fixed income and typically better downside protection than equities. Preqin predicts assets under management will reach $2.8 trillion globally by 2028 from $1.5 trillion in 2022. Nick Jansa, OTPP's executive managing director for Europe, the Middle East and Africa, said the structural shift from banks to private lenders continues.

Regulators have raised concerns about the sector's rapid growth as part of a 'shadow banking' industry, particularly as higher borrowing costs and economic weakness raise the risk of corporate defaults. The Financial Stability Board estimates the overall non-bank finance sector is worth $218 trillion and accounts for nearly half of global financial assets.