Private credit in Canada – Did the “Golden Age” of private credit miss Canada?

Private credit volumes reached $1.5 trillion globally at the beginning of 2024 (vs. $1.0 trillion in 2020) and are projected to grow to $2.8 trillion by 2028. The US market makes up ~$1.0 trillion of volume, with the European (including the UK) market accounting for most of the remainder. Private credit has clearly become ubiquitous in the US market and is recognized as an increasingly attractive alternative to traditional US bank debt in the mid-market segment and Term Loan B (TLB)/high-yield bond market within the large cap space.

However, private credit in the Canadian market remains nascent and many of the private credit firms that have formed in Canada have pointed their origination efforts firmly towards the US market given the greater scale of opportunities available.

The obvious question to contemplate is why the Canadian market has not evolved or developed in the same way as that of the United States or Europe. Unique to the Canadian lending landscape is the dynamic of the “Big Six” domestic banks accounting for 80-90% of the lending market. These banks are very well-capitalized, have aligned themselves to balance sheet growth as a key performance metric and are relationship driven. Therefore, the typical Canadian borrower (especially sponsor-backed), can generally operate quite well within the confines of the traditional Canadian loan market. In both the United States and Europe, private credit growth is attributable to regulatory changes and banking sector consolidation that has yet to materialize to the same extent in Canada.

The opportunity for private credit in the Canadian context will likely not be the same as the United States, where it has evolved as the clear alternative to traditional bank debt. However, we expect that the asset class will at least be a largely complementary solution to existing banking relationships in the near-term.

Where private credit in Canada will excel as an alternative term debt provider is in specific situations and at points in time such as:

• Management buyouts;
• Growth capital;
• Facilitating succession;
• Private equity acquisitions;
• M&A or business roll-up strategies;
• Challenged situations; and
• Where there is a flight of capital from certain industries (e.g. oil and gas).

Private credit in Canada is evolving as a complementary product to the Canadian banks rather than a direct competitor/alternative, and often occupies a segment best termed as “bank market adjacent.” Essentially, private credit is able to provide a solution at a particular stage in a company’s development that provides the necessary flexibility vs. traditional bank appetite/offering. The goal for all parties involved is for that company to eventually grow to a stage that calls for traditional bank debt.

Although the markets are different, the key advantages of private credit seen in the United States and Europe hold just as true in the Canadian context. These borrower preferences, as outlined below, are advantages that many borrowers in the United States and Europe are comfortable paying a premium for:

• Speed/certainty of execution,
• Nimble, innovative, and customized solutions,
• Unburdened by “market convention” on terms & conditions or leverage profile, with the focus instead being on the overall credit – serviceability and sustainability of business performance, and
• Highly experienced teams with a depth of knowledge through the cycles.

Relationships will always be a key consideration for entrepreneurs/CFOs/CEOs and the perceived risk of moving your lending relationship away from a traditional bank. Questioning lender reaction through a period of underperformance or a situation requiring flexibility are legitimate concerns when entering new relationships. However, many of the Canadian private credit firms are just as relationship-driven as the Canadian banks – another key difference between the Canadian and US/European market evolution. These firms are in the process of carving out a lending niche in a bank-dominated market and, in addition, many of them are financially supported by large Canadian entities who place high value in reputation and relationships within the Canadian market.

In conclusion, private credit in Canada has not reached the levels of growth or relative scale realized in the United States or Europe. Despite the differences in respective banking environments, private credit does serve a purpose in supporting Canadian businesses/entrepreneurs and the asset class will continue to develop and grow in Canada as banking dynamics and borrower preferences evolve.

For further information or to discuss financing for your next opportunity, call the team at MidStar Capital.