What Moved
The Bank of Canada had no scheduled decision in August, holding at 0.25%. The Bank's messaging remained consistent: rates would stay at the lower bound until inflation sustainably reached the 2% target, which was not expected for years (BoC, Aug 2020).
Canadian housing demand intensified through the summer. August sales were up over 30% year-over-year nationally, with some suburban and exurban markets seeing even larger gains. The pandemic-driven desire for more space, combined with near-zero borrowing costs, was fuelling a surge that exceeded even the 2016-2017 boom in some metrics (CREA, Aug 2020).
In private credit, the COVID recovery was creating a new challenge: yield compression. As competition for loans increased among private lenders, borrower rates were declining. The 8-10% returns that MICs had offered in early 2019 were compressing toward 6-8% for comparable risk profiles. The flood of capital seeking yield in a zero-rate world was driving down returns across private credit.
PE activity was picking up selectively. Canadian mid-market sponsors were finding opportunities in sectors accelerated by the pandemic, including e-commerce logistics, digital health, and technology infrastructure.
What It Means
The yield-hunting dynamic was now the dominant force in Canadian private credit. With conventional savings and fixed income offering near-zero returns, capital was pouring into alternatives at an accelerating pace. MIC managers reported record inflows. Private REIT allocations were growing. Private credit funds were raising capital faster than at any point in recent memory.
This was a rational response to the rate environment — investors needed income, and private credit provided it. But rapid capital growth in any lending sector carries risks. When capital grows faster than quality lending opportunities, one of two things happens: yields compress (which was occurring), or underwriting standards decline (which was the risk to watch).
For investors, the question was becoming: at what yield does private credit stop compensating for its illiquidity and risk? If a MIC offered 6% when GICs offered 0.5%, the premium was substantial. But the 6% needed to be sustainable — not a function of increasingly aggressive lending.
The housing boom was reinforcing this dynamic. Rising prices made existing loans safer (lower LTV ratios) but also encouraged new lending at higher valuations. The prudent managers were maintaining conservative LTV standards even as prices rose. Others were lending at higher valuations, effectively betting that prices would continue climbing.
What We're Watching
Mortgage deferral expirations in the fall would be the next test. If the majority of deferred borrowers resumed payments, it would confirm that the crisis was temporary. If significant numbers defaulted, the private credit sector would face its first real stress test since March.
Housing price trajectory through the fall was critical. Seasonal cooling would be normal, but if prices continued to accelerate, it would reinforce the bubble narrative that was building.
Private credit fundraising data would show whether capital inflows were accelerating further — important context for understanding future return potential.
Closing
August marked the beginning of what would become a defining period for Canadian alternative investments: the yield-hunting era. Zero rates and abundant capital were reshaping the market in ways that would take years to fully play out. For investors, the opportunity was real — but so was the importance of selectivity.
For the full quarterly analysis, see Q3 2020: The V-Shaped Illusion.
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