What Moved
The Bank of Canada held at 0.25% on October 28 and maintained its forward guidance: rates would stay at the lower bound until economic slack was absorbed and inflation was sustainably at target — "well into" the recovery (BoC, Oct 28, 2020).
Canada's second wave of COVID-19 was building. Ontario and Quebec reimposed targeted restrictions in many regions, and daily case counts were exceeding the spring peak. Markets took the second wave more in stride than the first — the TSX was broadly flat in October, as investors expected the economic impact of targeted restrictions to be less severe than the full lockdowns of March-April.
Private equity deals in Canada remained subdued. The CVCA reported that 2020 deal volumes were tracking well below 2019 levels, with many sponsors still focused on supporting existing portfolio companies rather than making new investments. Deal value for the year was on pace for approximately $14 billion — 33% below the five-year average (CVCA, Q3 2020).
In private credit, conditions continued to normalize. MIC managers reported steady origination, healthy collection rates, and minimal new defaults. The sector was performing better than most had expected six months earlier.
What It Means
The divergence between PE and private credit was a notable feature of the 2020 landscape. While PE deal activity was at multi-year lows, private credit was performing steadily. This reflected the different nature of the two asset classes: PE deals require visibility on future earnings and exit options, which remained uncertain. Private credit, particularly mortgage-backed, was supported by the tangible collateral of real estate — and real estate was booming.
For investors with PE allocations, patience was the operative word. Sponsors sitting on dry powder were waiting for better visibility, not because opportunities didn't exist, but because pricing risk-adjusted returns in an uncertain environment was genuinely difficult. This discipline would likely benefit future vintages — investments made after the worst of the uncertainty cleared would be underwritten with better information.
For private credit investors, the October data was reassuring. Mortgage deferral take-up rates were declining (meaning fewer borrowers needed deferrals), and collection rates on active loans were near pre-pandemic levels. The MIC sector had navigated the crisis without the catastrophic loss rates that some had predicted.
What We're Watching
Vaccine development was the dominant forward-looking variable. Phase 3 trial results from Pfizer and Moderna were expected before year-end. Positive results would fundamentally change the economic outlook and risk appetite.
The second wave's economic impact was worth monitoring. If targeted restrictions were sufficient to control spread without broad lockdowns, the economic recovery could continue. If broader measures were needed, the recovery would stall.
Year-end capital allocation decisions were approaching. For investors evaluating alternatives for 2021, the question was whether the current environment — zero rates, government support, housing boom — would persist or normalize.
Closing
October's picture: a private markets environment that was functioning better than the headlines suggested. Private credit was resilient, housing was strong, and PE was patiently waiting for its moment. The year had been extraordinary, but the underlying investment thesis for Canadian alternative investments remained intact.
For the full quarterly analysis, see Q4 2020: Yield Hunting in a Zero-Rate World.
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