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(Bloomberg) — British Columbia Investment Management Corp. expects rising defaults in coming months that will flush out “tourist investors” from the $1.7 trillion private credit market.
“Some of these tourist investors expect private debt to be a bit like it was for the last five years, which is high single-digit or low double-digit returns with not a lot of risk or very few defaults,” Executive Vice President Daniel Garant, who’s also global head of public markets, said in an interview. “That’s a bit of an artificial environment, so we think we’re going to go back to something which is more normal.”
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The pension fund, which manages C$215 billion ($156 billion) of net assets, is joining a growing chorus of those urging caution on the burgeoning private-credit industry. While the market flourished last year as banks reined in lending, many executives contend tougher times may be ahead.
Last week, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he expects problems to emerge in private credit, warning “there could be hell to pay.” Canadian investment manager Ninepoint Partners temporarily suspended cash distributions in three of its private credit funds amid a liquidity crunch.
“What we expect to see in months to come — we don’t know exactly when — but we expect defaults to go up,” Garant said.
Higher for Longer
The US economy remains strong, which may not justify five or more rate cuts this year, according to Garant, who wasn’t surprised to see a scenario of “higher for longer” interest rates.
While the Bank of Canada and European Central Bank cut interest rates this week, the latter stopped short of indicating more cuts. And the Federal Reserve likely won’t start easing until later this year — if it cuts at all in 2024 — especially after a Bureau of Labor Statistics report on Friday showed that US job growth and wages accelerated in May.
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Dealmaking has plunged in the past two years amid higher borrowing costs and a persistent price gap between buyers and sellers. Private equity firms “will have to work harder on portfolio companies to generate returns,” Garant said.
The deal drought has also put pressure on private debt.
“You have fewer deals getting financed and a lot of money flowing in,” Garant said.
BCI’s strongest year in deployment since launching the private debt portfolio was in 2022 because credit spreads “were very good,” he said. While the pension fund is still allocating to the asset class, he added, it’s being more selective because of the flow of capital.
The Victoria, British Columbia-based fund had C$13.5 billion invested in private debt — 6.3% of its total assets — as of the fiscal year ended March 2023.
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