Institutional investors will continue to invest in private credit as the market grows in 2024, according to one expert.
Indeed, private credit opportunities are on the rise, since companies are struggling to obtain financing through traditional methods, says Arif Bhalwani, chief executive officer and managing director at Third Eye Capital.
“A lot of these banks are just inclined to seek liquidation as the most straightforward way to mitigate the risk and that’s where we see a significant gap and a major compelling opportunity. For pensions, there’s an opportunity . . . where they can earn a financial return but they can know that their money is being used to instigate some kind of change to businesses that really account for the [gross domestic product] of Canada.”
Read: Private debt helping institutional investors meet their goals in 2023
It’s an established norm now for pension plan sponsors to take private credit seriously as an asset class due to the benefits it brings to a portfolio, he adds, citing its diversification benefits and its positive performance when other asset classes like bonds are struggling.
Institutional investors are increasingly turning to strategies that can be trusted to mitigate risk amid a difficult and uncertain landscape primarily with the role of rising interest rates, says Bhalwani, noting rates are adding a downward pressure on the valuations of all pension fund investments.
“We’re seeing pensions become a lot more discerning in the emphasis around tangible distributions and cash-based outcomes.”
While private debt has largely been dismissed, that thought process is now changing, he says. He points to the U.S. investment market as an example where private debt has a more significant and widespread use. “There’s this cultural perception in Canada that leads to bank financing being the standard route.”
Read: Investments in global private credit surpassed US$1.3T in 2022: survey