What Moved
The Bank of Canada had no scheduled decision in August, holding at 2.50% after July's historic 100bp hike. The September decision was expected to bring another substantial increase — markets were pricing in 50-75bp.
The housing correction in Canada deepened through August. The Toronto average home price was now down roughly $300,000 from the February peak. Southwestern Ontario markets — Kitchener-Waterloo, Hamilton, London — were seeing declines of 20% or more from their highs. Sales volumes were at multi-year lows (CREA, Aug 2022; TRREB, Aug 2022).
Inflation showed early signs of moderating from its June peak, with July CPI coming in at 7.6% — still extreme but trending in the right direction (StatsCan, Aug 2022).
In private markets, the correction was creating two distinct dynamics. Existing portfolios were under pressure — borrower stress was increasing and loan extensions were more frequent. But new lending opportunities were improving — higher rates meant wider spreads, lower property values meant more conservative LTV ratios, and reduced competition meant better deal selection.
What It Means
August illustrated a fundamental principle of private credit: the best lending opportunities often emerge in the most challenging environments.
Managers with available liquidity were finding attractive rescue lending situations — borrowers who needed bridge financing to manage through the correction, developers requiring completion financing when original lenders pulled back, and distressed properties available at significant discounts to recent valuations.
These opportunities represented the other side of the stress equation. While the boom-era loan book was under pressure, the new origination environment was offering risk-adjusted returns that were materially better than anything available in 2020 or 2021. Higher base rates plus wider credit spreads plus lower property values equalled a significantly more favourable risk-return profile for new lending.
For investors considering new private credit allocations, this was a counterintuitive but historically validated observation: the best time to invest in private credit is often when the existing portfolio data looks worst. Investments made in stressed environments — at conservative LTV ratios and higher yields — tend to deliver the strongest risk-adjusted returns over their lifecycle.
PE deal activity remained subdued, but the repricing of assets was creating what would eventually become an attractive entry point. Across the landscape of Canadian alternative investments, patient capital was being rewarded.
What We're Watching
The September BoC decision would further tighten conditions. With rates moving above 3%, the affordability math for housing and borrowers would deteriorate further.
Private credit performance data for Q2 and Q3 would quantify the extent of portfolio stress — distribution reductions, extension rates, and any formal defaults.
Whether distressed and rescue lending activity would translate into new fund launches or fundraising from established managers was worth tracking. The opportunity set was growing as conventional lenders retreated and borrowers in sound projects faced temporary financing gaps.
The broader real estate market dynamics also warranted attention. While residential correction dominated the headlines, the commercial sector — particularly office — was facing its own structural challenges as remote work patterns solidified. Industrial and logistics assets, by contrast, continued to command premium valuations, supported by e-commerce demand and supply chain reconfiguration.
Closing
August's lesson: stress and opportunity coexist. The correction that was pressuring existing private credit portfolios was simultaneously creating the conditions for better future returns. For Canadian alternative investors, the key was maintaining the perspective — and the liquidity — to participate on both sides of the equation.
For the full quarterly analysis, see Q3 2022: The Correction Accelerates.
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