What Moved
Canadian CPI for October came in at 4.7% — the highest since 2003 and firmly in territory that was testing the Bank of Canada's patience. For investors evaluating their alternative investments allocation, the inflation data demanded attention. Shelter costs, food, and energy were all contributing to persistent above-target inflation. The "transitory" narrative was effectively dead (StatsCan, Nov 2021).
The Bank of Canada had no scheduled decision in November, holding at 0.25%. But market pricing was shifting rapidly — rate hike expectations for early 2022 were hardening, and bond yields were rising in anticipation.
Canadian housing showed no signs of slowing despite the rate-hike signals. November national sales remained well above historical averages, and prices continued to climb. The market appeared to be front-running rate hikes — buyers accelerating purchases before borrowing costs increased (CREA, Nov 2021).
Year-end PE deal flow was exceptionally strong. Several notable Canadian mid-market transactions were announced, and the exit environment remained favourable. Fund managers were reporting strong year-end capital commitments from institutional allocators increasing their alternatives exposure.
What It Means
The acceleration of rate-hike expectations was beginning to create urgency in Canadian private markets. Borrowers were rushing to lock in low rates. Investors were making year-end allocations before the environment shifted. Deal sponsors were pushing to close transactions at favourable financing terms.
For private credit investors, this urgency warranted caution. Loans originated in a rush to beat rate hikes might involve compressed due diligence timelines or stretched underwriting assumptions. The last loans made before a rate-hike cycle are often the ones that face the most stress — they're underwritten at peak prices with the lowest rates, creating maximum sensitivity to subsequent changes.
The inflation data was now clearly signaling that the BoC would need to act. At 4.7%, CPI was more than double the 2% target. Even accounting for supply chain effects, the breadth of price pressures — across shelter, food, energy, and services — suggested that monetary policy accommodation had gone on long enough.
For investors making year-end allocation decisions, the question was how to position for a rising-rate environment. Private credit with short-duration, floating-rate characteristics was well-suited. PE investments in companies with pricing power would also benefit. Real estate development with completion timelines extending into a higher-rate environment needed careful evaluation.
What We're Watching
The December BoC decision would be the last of 2021 and would set expectations for the January rate-hike decision. Any change in tone could move markets.
Year-end housing data would indicate whether the rate-hike anticipation was accelerating demand (buyers front-running hikes) or beginning to cool it.
Annual PE and VC data from CVCA would quantify the strength of the 2021 deal environment and provide context for 2022 expectations.
Closing
November's message was one of transition. The boom conditions of 2021 — zero rates, surging housing, record PE activity — were approaching their expiry date. For Canadian alternative investments, the time to ensure portfolios were positioned for a higher-rate world was now, not after the first hike.
For the full quarterly analysis, see Q4 2021: Peak Everything.
Alts Insider provides educational content for Canadian accredited investors. This is not investment advice. Always consult qualified professionals before making investment decisions.