What Moved
The Bank of Canada held at 0.25% on September 8, maintaining its forward guidance that rate increases would come in the second half of 2022. The Bank ended its net bond purchases — a key milestone in the normalization process. Quantitative easing was over; quantitative tightening was approaching (BoC, Sep 8, 2021).
Canadian CPI for August came in at 4.1% — the highest reading in nearly two decades, intensifying the conversation around inflation and whether alternatives could serve as a hedge. Energy, food, and shelter costs were all contributing. The "transitory" inflation narrative was under increasing strain, with market expectations for rate hikes pulling forward (StatsCan, Sep 2021).
Housing markets showed typical fall seasonality, with activity moderating from summer levels but prices remaining near record highs. The housing boom was maturing but showing no signs of reversing.
Canadian PE had its strongest quarter in years. Deal activity, fundraising, and exits were all elevated, driven by favourable market conditions and accumulated dry powder being deployed. Technology sector deals dominated the headlines (CVCA, Q3 2021).
What It Means
Inflation above 4% was no longer dismissible as a base-effect anomaly. For Canadian private market investors, the persistence of above-target inflation had important implications.
First, alternatives were increasingly discussed as an inflation hedge. Private credit with floating rates adjusts upward as rates rise. Real estate tends to appreciate with inflation over time. PE portfolio companies with pricing power can pass through cost increases. These characteristics made alternatives relevant to the inflation conversation in a way they hadn't been for decades.
Second, the near-certainty of future rate hikes meant that the zero-rate environment that had fuelled the alternatives boom was ending. This wasn't necessarily negative — higher rates improve lending margins and create better risk-adjusted entry points — but it was a transition that would test certain structures and strategies.
For MIC investors, the inflation data reinforced the advantage of short-duration lending. MIC loan books that turned over in 12-18 months would reprice naturally in a rising rate environment, maintaining or improving yields. Longer-duration credit was more exposed to rate risk.
What We're Watching
The October BoC decision would be closely watched for any shift in the rate timeline. If inflation continued to accelerate, the Bank might bring hikes into early 2022.
Global supply chain data was worth tracking. Persistent bottlenecks were the primary driver of goods inflation, and any resolution — or worsening — would affect the inflation trajectory.
PE exit valuations were elevated. Whether sponsors were taking advantage of current conditions to crystallize returns — a rational move ahead of potential rate increases — would signal market sentiment.
Closing
September confirmed that the inflation story was real and the policy response was coming. For Canadian alternative investments, this wasn't a reason to retreat — it was a reason to prepare. The asset classes that perform best in inflationary, rising-rate environments are often the same ones that populate alternative portfolios. The key was ensuring that specific holdings were positioned for the transition.
For the full quarterly analysis, see Q3 2021: Inflation Stirs.
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