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Debt Constructed:
Private Debt in Canada
Introduction to the Dynamics of Private Debt in Canada
Private debt, often referred to as private credit, is a form of corporate finance that is provided primarily by non-bank institutions and involves direct lending to companies. This form of debt is typically held and managed by specialised asset management firms and is not traded on a public exchange, offering an alternative form of borrowing for companies that either do not have access to, or choose not to seek, funding from traditional banking channels. It has become a good alternative for investors looking for better returns, especially during times when interest rates are considered low.
Private debt has emerged as a compelling asset class, exhibiting a growth story that has its roots in the Global Financial Crisis of 2008. As traditional banks retreated from direct lending in the wake of stricter regulations, non-bank lenders seized the opportunity to step in, bridging the gap between demand and supply for corporate financing - this change created the rapidly growing private debt market.
Private debt is characterized by its tailored nature and contractual complexity. It allows for more flexible and negotiable loan terms, a benefit for borrowers that may need customized repayment schedules or covenants. This often results in higher yield for lenders due to the illiquidity and complexity premium associated with these loans. As private debt instruments are not publicly traded, they are also less susceptible to market volatility and provide lenders with better control over their portfolio composition.
The private debt universe is diverse, comprising various forms of financing, each with their distinct risk and return profile:
Source: Preqin
Over the last decade, the scale and scope of the private debt market have expanded significantly, making it an essential component of the financial system. This expansion prompts an examination of its role and impact, particularly within the context of the Canadian economy.
In the following section titled, "The Role of Private Debt in the Canadian Economy," we delve deeper into the role private debt plays as a catalyst for economic growth, its implications for businesses, and its increasing relevance as an asset class for Canadian institutional investors. This discussion provides a holistic understanding of the critical part private debt plays within Canada's financial ecosystem and its potential trajectory into the future.
Private Debt
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