What Moved
The Bank of Canada held at 0.25% on December 9, closing out a year that would be remembered in any 2020 year-in-review of alternatives as the most volatile in modern Canadian market history. The Bank reiterated that rates would remain at the lower bound well into the recovery period (BoC, Dec 9, 2020).
Canadian housing ended 2020 with a flourish. December sales were up sharply year-over-year, and the national average price had risen roughly 13% for the full year — remarkable given that the first quarter included a pandemic-driven shutdown. The housing boom was broad-based, touching virtually every Canadian market (CREA, Dec 2020).
The first COVID-19 vaccines were administered in Canada in mid-December, marking the beginning of the end of the pandemic health crisis. Markets had already priced in the recovery, but the actual injections provided a psychological milestone.
Canadian PE deal activity for 2020 totalled approximately $14 billion — 33% below the five-year average and the lowest since 2016. The pandemic had effectively shut down deal-making for two quarters, and the recovery in H2 was insufficient to close the gap (CVCA, 2020 Annual).
What It Means
2020 was a year of two halves for Canadian private markets. The first half tested every assumption — liquidity structures, borrower resilience, manager communication, and government backstops. The second half began the recovery that would accelerate into 2021.
For private credit, the year's report card was better than feared. The Romspen gate and various MIC distribution adjustments in Q2 were real stress events, but the sector avoided catastrophic losses. Government support programs, the housing recovery, and borrower resilience all contributed to a better-than-expected outcome.
For PE, the year was largely lost from a deal-making perspective. But the dry powder accumulated in 2020 — capital raised but not deployed — would fuel an active deal environment in 2021 and beyond. The 2020 vintage of PE investments, made in the depths of uncertainty, was likely to prove attractive over time.
The dominant theme heading into 2021 was the zero-rate environment and its consequences. Emergency-level rates were pushing unprecedented volumes of capital into alternatives. MIC AUM was growing rapidly. Private REIT allocations were increasing. The yield-hunting dynamic that began in the second half of 2020 was accelerating.
What We're Watching
The 2021 outlook was dominated by the vaccine rollout timeline and its economic implications. Faster distribution would mean faster normalization — supportive of PE deal activity, housing, and economic growth broadly.
Whether the BoC would begin to discuss rate normalization in 2021 was a key question. Any hint of future tightening would affect every private market strategy, from mortgage lending to leveraged PE.
The sheer volume of capital flowing into private credit warranted close monitoring. Growth this rapid historically leads to eventual quality deterioration — the question was whether it would happen in 2021 or later in the cycle.
Closing
2020 tested Canadian alternative investments like no year in recent memory, and the sector emerged battered but functional. The recovery was real, the opportunity set was expanding, and capital was flowing. As the year closed, the foundation was being laid for a boom that would define 2021 — and for the challenges that would follow it.
For the full quarterly analysis, see Q4 2020: Yield Hunting in a Zero-Rate World.
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