Pension funds enter into market previously dominated by banks
Six of the biggest pension funds in Canada have started to expand into private credit, which was previously dominated by banks, as reported in an article by Reuters.
The funds that have stated their intentions to increase their exposure to private credit were 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).
With banks facing higher capital requirements, some of them were forced to back away from lending. Michael Wissell, chief investment officer at HOOPP said that it was a good time to commit capital into private credit as the price gap was seen to closing and return prices were very tight to the equity while bearing lower risk.
Andrew Edgell, senior managing director and global head of credit investments at CPP Investments, said that with the quick expansion of private credit, the fund expected to nearly double its overall credit book within the next five years.
Private credit offered higher returns in contrast to traditional fixed-income products and had better downside protection than equities, making it popular among pension schemes and insurers.
Meanwhile, regulators have raised their concerns regarding the rapid growth of the private credit sector as the increase in borrowing costs and economic weakness may lead to greater risks when it comes to businesses defaulting.
The Financial Stability board found that the overall non-bank finance sector was worth $218 trillion, accounting for nearly half of the financial assets globally.
