What Moved
The Bank of Canada held at 5.00% on October 25, extending the pause to three consecutive decisions. The rate plateau was becoming the defining feature of the environment for alternatives of every kind. The Bank's tone was shifting — acknowledging that previous rate hikes were working their way through the economy and that the risks of over-tightening and under-tightening were becoming more balanced (BoC, Oct 25, 2023).
Canadian CPI for September came in at 3.8%, remaining stubbornly above target. The slow pace of disinflation continued to defer expectations for rate cuts into 2024 (StatsCan, Oct 2023).
Housing markets were subdued but stable in the fall. Transaction volumes were below historical averages but sufficient to maintain market functioning. Prices were flat nationally, with the correction now clearly over even if recovery had not begun (CREA, Oct 2023).
Private credit was delivering peak yields. MIC managers with well-performing portfolios were generating returns at the highest levels in over a decade, reflecting the 5.00% base rate environment. New origination continued at conservative terms, building a strong 2023 vintage.
PE deal activity was selective but growing. Canadian mid-market transactions were closing at valuations that reflected the higher-rate reality — lower multiples, more conservative structures, and greater emphasis on operational value creation.
What It Means
The patience premium was now fully crystallized as a concept. Investors who maintained their alternative allocations through the difficult 2022 period were now being rewarded with the highest private credit yields in years, stable housing collateral values, and the prospect of eventual rate cuts that would further improve conditions.
For MIC investors, the peak-rate environment was translating into peak returns — with better risk characteristics than the boom-era returns. The yields from 2023 originations reflected genuine risk compensation in a stable environment, not the compressed spreads and aggressive underwriting of 2020-2021. These were more sustainable returns built on stronger foundations.
The BoC's more balanced tone was a forward signal. While rate cuts were not imminent, the Bank was clearly moving toward a more neutral stance. This meant the next change in rates would likely be down — a positive development for private credit, housing, and PE alike.
For PE and the broader landscape of Canadian alternative investments, the improved valuation environment was creating genuinely attractive entry points. Companies available at 8-10x EBITDA (versus 12-15x in 2021) with conservative leverage structures represented significantly better risk-adjusted opportunities.
What We're Watching
Year-end BoC decisions (December 6) would set the tone for 2024. Markets were increasingly pricing in rate cuts beginning in Q1 or Q2 2024.
Annual PE and VC data from CVCA would quantify the recovery in deal activity and set expectations for 2024.
Year-end private credit performance data would provide the definitive assessment of how the sector navigated the 2022-2023 tightening cycle.
The emerging narrative around the 2023 private credit vintage deserved particular attention. Loans originated throughout 2023 at peak rates, on corrected collateral values, with tightened covenants and conservative LTV ratios, were building a portfolio that stood in stark contrast to the 2020-2021 vintage. Historical data across private credit cycles suggests that vintages deployed at peak-rate environments tend to deliver above-average risk-adjusted returns — the 2023 vintage was shaping up to be a textbook case.
Closing
October brought clarity: the peak-rate environment was delivering for disciplined investors. The yields were real, the risk profile was favourable, and the direction of travel — eventually — was toward easier conditions. For Canadian alternative investors, patience was paying off.
For the full quarterly analysis, see Q4 2023: Waiting for the Turn.
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