What Moved
Financial markets continued their remarkable recovery in May. The TSX gained roughly 3% for the month and was now up over 30% from the March 23 low. The rally was driven by reopening optimism, massive fiscal stimulus, and the belief that central bank support would backstop risk assets (TSX data, May 2020).
The Bank of Canada held at 0.25% — the emergency floor established in March — and expanded its bond-buying programs. Quantitative easing was now a feature of Canadian monetary policy for the first time, suppressing yields across the curve (BoC, May 2020).
Government stimulus was flowing at scale, reshaping the landscape for alternatives along the way. CERB payments reached approximately eight million Canadians. The wage subsidy program was supporting payrolls at hundreds of thousands of businesses. Mortgage deferrals — offered by Canadian banks for up to six months — were providing breathing room for borrowers facing income disruption.
In private markets, the focus shifted from crisis response to damage assessment. MIC managers were reviewing their loan portfolios for early signs of borrower stress. PE fund managers were working to stabilize portfolio companies and position them for recovery.
What It Means
The gap between public market performance and private market reality was widening. The TSX was up 30% from its lows while private credit portfolios were still working through the first wave of pandemic-related issues. This disconnect wasn't new — private and public markets operate on different timescales — but the magnitude was striking.
For private credit investors, the mortgage deferral programs were providing a critical bridge. Borrowers who might have missed payments were instead deferring them — buying time for both the borrower and the lender. The question was what would happen when deferrals expired. If the economy recovered quickly enough, deferred payments would resume. If not, the deferrals were simply delaying defaults.
Government stimulus was doing the heavy lifting. Without CERB and CEWS, the economic damage would have been far more severe, and private credit losses would have been significantly higher. For investors in Canadian alternative investments, this underscored an important reality: in extreme environments, government policy can be as important to private market outcomes as the quality of the underlying assets.
What We're Watching
Provincial reopening timelines were the immediate focus. Ontario and Quebec — home to the bulk of Canadian private credit assets — were beginning to lift restrictions. The pace and success of reopening would determine how quickly private market conditions normalized.
Mortgage deferral expirations would begin in the fall. The trajectory of borrower re-engagement with payment schedules would be a key indicator of underlying credit health.
The emerging narrative of a "V-shaped recovery" in financial markets was being tested against economic reality. If the V held, private markets would follow. If it was an illusion, further stress was ahead.
Closing
May brought the beginning of a cautious recovery — in markets, in the economy, and in investor sentiment. For private market investors, the month was less about returns and more about gathering information. The damage assessment was still underway, and the picture wouldn't be clear until the fall.
For the full quarterly analysis, see Q2 2020: Stimulus and Survival.
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