Private Credit

Introduction

This guide describes private credit: lending by funds and other non-bank lenders, negotiated privately rather than issued as bonds that trade on a market. It covers the main strategies, the capital structure, how the income arises, and the vehicles that hold the loans, including the mortgage investment corporation. It then sets out the risks, four Canadian cases in which investors lost money or could not redeem, the disclosure securities law requires of some mortgage funds, and the questions diligence practice puts to a lender or an offering.

What private credit is

Private credit is lending outside the traditional banking system. The lender is a fund, a pooled vehicle or another non-bank institution, and each loan's terms are negotiated with the borrower. An investor in a private credit fund is, in effect, lending through the fund: the fund advances capital, borrowers pay interest and repay principal, and the fund passes the income on.

Compared with a traded bond, a private loan is negotiated rather than standardized, illiquid before maturity, managed through a direct relationship with the borrower, and usually secured. Security improves the lender's position in a default; what it recovers depends on what the assets fetch and what ranks ahead of it.

Why it grew

After the 2008 financial crisis, banks faced higher capital requirements against their loans and became more cautious lenders. Borrowers that could not obtain bank financing, or not quickly enough, turned to non-bank lenders at higher rates. Private credit filled that gap and has grown from a niche strategy into a large global asset class. The funds and their managers are subject to securities law when they raise money from investors; the lending itself sits outside the capital and prudential rules that apply to banks.

The capital stack

Every private credit strategy is defined partly by where its loan sits in the borrower's capital structure: the order in which claims are paid if the borrower fails.

Senior secured debt, usually a first-lien loan, is paid first from the assets that secure it.
Mezzanine or subordinated debt is paid after the senior lenders.
Equity is paid last, from whatever remains.

The further down the stack, the larger the loss in a default, and the higher the rate lenders charge to carry that position. The first worked example below shows how a fall in a property's value reaches each layer in turn.

The main strategies

Direct lending. Loans made directly to companies, commonly mid-sized businesses, many owned by private equity funds. The loans are usually senior secured and carry covenants: financial tests the borrower must keep meeting, such as a maximum ratio of debt to earnings. A breach lets the lender renegotiate or act before the borrower's position deteriorates further. Of the private credit strategies, direct lending is the closest to the corporate lending banks used to do.

Mezzanine debt. Lending below the senior lenders and above equity, at a higher rate. Some loans carry warrants, letting the lender share in the company's value, and some pay part of the interest in kind, added to the loan balance rather than paid in cash. It is common in buyouts, between senior debt and the private equity fund's equity.

Distressed debt. Buying the debt of companies in financial difficulty at a discount, where the return depends on recovering more than the price paid through a recovery or a restructuring.

Real estate debt. Construction and development loans, bridge loans and mortgages on residential and commercial buildings. In Canada, much of the private real estate lending open to individual investors is held through mortgage investment corporations and other mortgage funds.

Specialty finance. Lending against specific assets or cash flows: inventory, receivables, equipment, invoices bought at a discount (factoring), or a share of future revenue (royalty financing). Each requires specialized expertise to underwrite and value.

How the income arises

The defining feature of private credit is income. In private equity, returns arrive mainly when investments are sold. In private credit, the borrower pays interest throughout the loan, and funds commonly pass it on monthly or quarterly. Four things set what reaches investors.

The rate on each loan. Many corporate loans are floating-rate: a spread over a reference rate, reset periodically. Canadian loans commonly reference the Canadian Overnight Repo Rate Average (CORRA) or a lender's prime rate; US loans commonly reference the Secured Overnight Financing Rate (SOFR). The interest due rises and falls with the reference rate. Many private mortgages, including many held by MICs, carry fixed rates for short terms instead, so their income changes as loans mature and are renewed or replaced.

Fees charged to borrowers. Lenders commonly charge origination, commitment, renewal or exit fees. Whether these go to the fund or are kept by the manager is set by the fund's documents, and practice varies.

Losses. Income is reduced by loans that stop paying and by the shortfall when a defaulted loan is resolved for less than is owed.

Costs and leverage. Management fees and expenses are deducted before distributions; some funds also charge a performance fee or carried interest above a hurdle. Funds that borrow to lend more increase income when loans perform and losses when they do not.

Private credit yields are commonly compared with government bond yields. The difference, the spread, pays the lender for credit risk and illiquidity, and changes with rates, credit conditions and the borrowers' riskiness.

How private credit is held

The vehicle determines how money gets in and out, and in several Canadian cases it has mattered as much as the loans.

Closed-end funds. Usually a limited partnership with a fixed term. Investors commit capital, the manager calls it as loans are made, and capital is returned as loans repay. There is no redemption right, so the fund's loans and its investors' capital have matching horizons.

Open-ended funds. Also called evergreen funds, these accept new money continuously and allow periodic redemptions, commonly monthly or quarterly, on notice. Many MICs and Canadian mortgage funds take this form. Redemptions are met from cash, loan repayments and new subscriptions. The structure carries a liquidity mismatch: investors can ask for their money on a schedule of weeks or months, while loans repay over months or years. When repayments slow and redemption requests rise together, the fund cannot pay in full. Fund documents commonly allow the manager to limit, defer or suspend redemptions, which protects remaining investors from forced sales of loans at a discount and leaves those who asked to redeem waiting.

Mortgage investment corporations

A mortgage investment corporation (MIC) is a Canadian structure defined in section 130.1 of the Income Tax Act. Investors buy shares, the MIC makes mortgage loans, and the interest flows back to shareholders. To qualify in a year, a corporation must meet conditions that include: it is a Canadian corporation whose only undertaking is investing its funds, and it does not manage or develop real property; it has at least 20 shareholders, with limits on how much any one shareholder and related persons may hold; at least 50% of the cost of its property is residential mortgages, certain deposits and cash; its real property holdings are limited; and its borrowing is capped as a multiple of its equity (Income Tax Act, s. 130.1(6), current to September 30, 2026, Justice Laws).

A qualifying MIC can deduct the dividends it pays, so in practice it distributes virtually all its income and the tax falls on the shareholders. Returns arrive mainly as regular distributions rather than as growth in share value.

Borrowers use MICs for self-employment income that is hard to document, unconventional properties, bridge financing, or timelines shorter than a bank can meet, and pay higher rates than a bank charges. MICs differ widely, and the strategy determines much of the risk:

First or second mortgages. A second mortgage sits behind the first, earns a higher rate, and absorbs a fall in the property's value before the first mortgage does.
Residential or commercial, within the requirement that at least half the MIC's property, by cost, be residential mortgages, certain deposits or cash.
Construction, development and land. The security is worth less until the project is finished, and the loan is repaid only if the project is completed and sold or refinanced.
Concentrated or diversified, by region, property type and borrower.

The central measures of a MIC's risk are its loan-to-value ratio, which shows how far property values can fall before a loan is uncovered, and its underwriting: whom it lends to, on what security, and how property values are established.

Syndicated mortgages are a different arrangement. Each investor takes a direct interest in a single mortgage on a single property, alongside other investors, so the outcome depends on one borrower and one project. Ontario long regulated them under mortgage brokerage law; oversight of most non-qualified syndicated mortgage investments sold to retail investors moved to the Ontario Securities Commission effective July 1, 2021 (Financial Services Regulatory Authority of Ontario, notice on the transfer of retail non-qualified syndicated mortgage investments to the OSC).

Worked example: where a loss lands in the capital stack

A hypothetical property is valued at $1,000,000 when two loans are made against it.

Layer	Amount	Loan-to-value, counting loans ranked ahead
First mortgage	$600,000	60%
Second mortgage	$200,000	80%
Owner's equity	$200,000	—

Assumptions: the borrower defaults, the property's value falls 20%, and enforcement, legal and sale costs total $60,000. Unpaid interest is ignored.

Sale price: $1,000,000 less 20% is $800,000.
Net proceeds: $800,000 less $60,000 is $740,000.
The first mortgage is repaid in full, leaving $740,000 less $600,000, or $140,000.
The second mortgage receives $140,000 of the $200,000 owed: a loss of $60,000, or 30% of its principal.
The owner's $200,000 of equity is gone.

The same 20% fall cost the first mortgage nothing and the second 30%. On its own, the second mortgage is 20% of the property's value; counted with the first, it is 80%, the figure that shows how little room it had.

Worked example: a redemption queue

A hypothetical open-ended mortgage fund holds $95 million in loans and $5 million in cash, allows quarterly redemptions, and its documents let the manager limit redemptions when cash is short.

Assumptions: in a weak property market, loan repayments slow to $3 million in the quarter, redemption requests rise to $20 million, and no new money arrives.

Cash available: $5 million on hand plus $3 million of repayments is $8 million.
Share of requests that can be paid: $8 million of $20 million is 40%.
Unpaid requests: $20 million less $8 million is $12 million, carried into the next quarter's queue.
Paid pro rata, each redeeming investor receives 40% of the request, and the fund is left with no cash, so next quarter's capacity depends entirely on repayments.

Selling loans to raise cash is the alternative, but in a weak market buyers pay less than face value and the discount falls on the investors who stay. Distributions can continue while redemptions are suspended: the loans still pay interest, while principal returns too slowly to pay out departing investors.

The risks

Credit risk. Borrowers default. A lender serving borrowers that banks declined is lending to borrowers judged too risky, too complex or too slow to approve. Underwriting decides whether a portfolio absorbs defaults, and it is tested only when conditions turn.

Concentration risk. If much of a fund sits in one region, property type, project or borrower, one local downturn or one default can cause losses across much of the portfolio.

Liquidity risk. Private credit is generally more liquid than private equity, with shorter terms and, in many MICs and mortgage funds, periodic redemptions. But redemptions depend on cash, and a queue forms quickly when repayments slow and requests rise together.

Rate sensitivity. Higher rates raise income on floating-rate and new loans. They also raise borrowers' payments, straining projects and businesses financed when rates were low, and the strain shows up later as arrears and defaults. Rising rates have tended to slow the property sales and refinancings that repay many real estate loans.

Valuation risk. Private loans are not priced daily by a market. The manager values them, using its own assessment and periodic appraisals of the security. A fund reporting a stable value while property markets fall may be deferring the recognition of losses rather than avoiding them. Smoothed values also make reported volatility, and reported correlation with listed markets, lower than the economic reality may be.

Conflicts of interest. Related-party loans, borrower fees kept by the manager, and managers who also develop or own the projects they lend to create incentives that can diverge from investors' interests. Two of the cases below involved them.

Leverage and manager risk. A fund that borrows amplifies both income and losses, and its own lender ranks ahead of its investors. The manager sources, underwrites, values and works out the loans, so outcomes vary widely between managers, more than between strategy labels.

Four Canadian cases

Each is described from court, tribunal or published records, as at the date given.

Fortress Real Developments and Building & Development Mortgages Canada (syndicated mortgages). Investors put money into syndicated mortgage loans on development projects associated with Fortress Real Developments, administered by the mortgage brokerage Building & Development Mortgages Canada Inc. (BDMC), whose assets were later placed with a court-appointed trustee. In a January 2025 endorsement, the Ontario Superior Court of Justice recorded that about $560 million had been invested by more than 11,000 individual investors across 45 projects, that the trustee had recovered about $179 million, and that investors would continue to suffer a very material shortfall. It also noted significant amounts paid to Fortress or its principals from investors' advances (The Superintendent of Financial Services v. Building & Development Mortgages Canada, 2025 ONSC 627).

Bridging Finance (private debt funds). Bridging Finance Inc. managed funds that provided short-term financing to private borrowers. On April 30, 2021, on the Ontario Securities Commission's application, the Ontario Superior Court of Justice appointed PricewaterhouseCoopers Inc. as receiver and manager of Bridging and its funds. In its merits decision of October 28, 2024, the Capital Markets Tribunal found that two senior officers perpetrated or participated in three securities-related frauds that diverted more than $100 million in investor funds and affected more than 26,000 investors, and that the chief compliance officer participated in one of them (Bridging Finance Inc (Re), 2024 ONCMT 23, as summarized in the sanctions decision, 2025 ONCMT 10, June 17, 2025). The frauds ran through loans from two of the funds that benefited the firm's officers or the firm itself.

Romspen (mortgage fund). In November 2022, the Romspen Mortgage Investment Fund, the firm's largest, deferred payment of redemption requests. Its letter to investors said a number of borrowers had stopped paying and repayments had slowed, and deferred redemptions until it was clearer when borrowers would repay and assets could be sold. The fund then held about C$2.8 billion in 134 mortgages, roughly evenly split between Canadian and US projects (Bloomberg News, November 9, 2022, reporting the fund's letter of November 8).

Trez Capital (mortgage and real estate funds). In August 2025, Trez Capital, a private commercial mortgage lender, suspended redemptions in five of its funds, citing elevated redemption requests, ongoing loan funding obligations and active loan workouts, and said monthly distributions would continue (Investment Executive, August 21, 2025, reporting the firm's announcement).

The cases differ in kind. Two turned on losses: exposure to single development projects and payments to Fortress or its principals from investors' advances (Fortress), and lending that benefited insiders (Bridging). Two turned on liquidity: open-ended redemption terms that could not be met when repayments slowed (Romspen, Trez), the pattern in the second worked example.

Disclosure for mortgage funds under the offering memorandum exemption

A fund that invests in mortgages or other loans and raises money under the offering memorandum exemption in NI 45-106 is a "collective investment vehicle", and its offering memorandum must include Schedule 2 to Form 45-106F2. The schedules came from amendments the Canadian Securities Administrators published on December 8, 2022 (CSA Notice of Amendments to NI 45-106). For mortgage lending, the Schedule 2 portfolio summary includes the weighted average interest rate, term to maturity and loan-to-value ratio, the last calculated with all loans ranking equal to or ahead of the fund's mortgage; the split by priority and by property type; mortgages with payments more than 90 days overdue and those with an impaired value; material accommodations made to borrowers in financial difficulty; and details of any single mortgage that is 10% or more of the total.

The schedule applies to offerings under that exemption; a fund using another exemption, such as the accredited investor exemption, need not prepare an offering memorandum. The items still map the risks in this guide.

What holding the class involves

Regular distributions. The class is built to pay income rather than long-term growth.
Credit risk. The lender ranks ahead of equity, but loans default and security does not always cover them.
A horizon set by the vehicle. Closed-end funds hold capital for their term; open-ended funds redeem periodically, subject to limits and suspensions.
Outcomes that turn on the manager. Its lending, valuation and workout decisions drive results, which is why diligence practice concentrates on underwriting.

Tax treatment in Canada

MIC distributions. Dividends a MIC pays, other than capital gains dividends, are treated in the shareholder's hands as interest (Income Tax Act, s. 130.1(2)), without the dividend tax credit.
Return of capital is not taxed when received but reduces the adjusted cost base, deferring tax until the investment is sold or redeemed.
Registered accounts. Shares of certain MICs can be qualified investments for RRSPs, RRIFs and TFSAs, subject to the prohibited-investment rules where the holder has a significant interest in the issuer or does not deal with it at arm's length (Canada Revenue Agency, Income Tax Folios S3-F10-C1 and S3-F10-C2). Units of a limited partnership that are not listed on a designated stock exchange are not qualified investments.

Questions to ask

Where does each loan sit in the borrower's capital structure, and what secures it?
What is the weighted average loan-to-value ratio, counting loans ranked ahead, and how and by whom are property values established?
What share of the portfolio is first mortgages, second mortgages, and construction, development or land loans?
How concentrated is the portfolio by region, property type, project and borrower, and what is the largest single loan as a share of the total?
What would happen to the portfolio if real estate values fell by 20%?
What has the history of arrears, defaults and losses been, and how were defaulted loans resolved?
Does the fund lend to, or alongside, any party related to the manager, and how are those loans approved?
Who keeps the fees charged to borrowers, and what are the total fees and expenses the fund pays?
How often can investors redeem, on what notice, and under what conditions can redemptions be limited or suspended? Has that happened before?
Does the fund borrow, and if so, how much and on what terms?

Key terms

Private credit: lending by funds and other non-bank lenders, negotiated privately rather than issued as traded bonds.
Senior debt: debt repaid before all other claims on the borrower.
First lien: the first-ranking claim on the assets that secure a loan.
Mezzanine debt: debt ranked below senior loans and above equity, paid a higher rate for that position.
MIC: a Canadian pooled vehicle, defined in the Income Tax Act, that makes mortgage loans and distributes virtually all its income to shareholders.
LTV: a loan as a percentage of the value of the asset securing it; for a junior loan, commonly counted with the loans ranked ahead.
Covenant: a condition in a loan agreement that the borrower must keep meeting, breach of which gives the lender rights to act.
Open-end fund: a fund that accepts new money continuously and allows periodic redemptions.
Syndicated mortgage: a single mortgage in which several investors each hold a direct interest.
Liquidity mismatch: the gap between how quickly a fund's investors can ask for their money and how quickly its loans repay.