Canada’s Largest Pension Funds Expand into Private Credit

Four of Canada's largest pension funds, managing nearly C$1 trillion in assets, are making a significant move into private credit, challenging the traditional dominance of banks in this area. Learn more about CPP Investments, OTPP, Omers, and OPTrust's plans to increase their exposure to private credit.

Four of Canada's largest pension funds, managing nearly C$1 trillion in assets, have announced a significant expansion into private credit, a move that marks a departure from the traditional dominance of banks in this area. Canada Pension Plan (CPP) Investments, Ontario Teachers' Pension Plan (OTPP), Ontario Municipal Employees Retirement System (Omers), and OPTrust have all expressed their intention to increase their exposure to private credit, which typically involves tailored loans to companies underwritten by non-banks.

Canada's Largest Pension Funds Expand into Private Credit

CPP Investments, which oversees C$576 billion, has revealed plans to double its overall credit portfolio to approximately C$115 billion. The fund manages the majority of its C$62 billion credit book in-house. This shift comes as banks globally face pressure from higher capital requirements, leading to a retreat from certain lending activities. Private credit has gained traction among pension schemes and insurers due to its potential for higher returns compared to traditional fixed-income products, as well as better downside protection than equities.

Once considered a niche asset class, private credit is expected to see a substantial increase in assets under management, with data provider Preqin predicting a rise to $2.8 trillion globally by 2028 from $1.5 trillion in 2022. However, regulators have raised concerns about the rapid growth of this sector, particularly as it contributes to the expansion of the 'shadow banking' industry. The recent spike in borrowing costs and economic weakness have heightened the risks of businesses defaulting.

The non-bank finance sector, which includes private credit, is estimated to be worth $218 trillion and accounts for nearly half of financial assets globally, according to the Financial Stability Board. OPTrust, which significantly increased its credit exposure from 10% of its assets in 2022, has stated that its credit investments are primarily managed by external managers.

The move by Canada's major pension funds to expand into private credit reflects a broader trend in the financial industry, as non-bank lending continues to gain prominence. While this shift offers the potential for higher returns, it also raises concerns about the risks associated with the rapid growth of the 'shadow banking' industry.