Opening
If Q1 2020 was the quarter of shock, Q2 was the quarter of response. Between April and June, Canadian governments at every level deployed the largest fiscal intervention in the country's history. The Bank of Canada held rates at 0.25% and expanded its balance sheet through quantitative easing. The federal government launched the Canada Emergency Response Benefit (CERB), the Canada Emergency Wage Subsidy (CEWS), and a suite of business lending programs that collectively pumped hundreds of billions of dollars into an economy that had effectively stopped. The full weight of COVID stimulus on Canada's investing landscape was becoming clear. For Canadian private market investors, Q2 2020 was a test of endurance: portfolios were under stress, redemption gates were going up, and the question was whether the stimulus firehose could prevent a liquidity crisis from becoming a solvency crisis. By June, the answer was cautiously becoming clear—but the damage was real, and the scars would persist.
The Macro Picture
The Bank of Canada held its overnight rate at 0.25% throughout Q2, having exhausted conventional rate cuts in March (BoC, April-June 2020). The central bank pivoted to unconventional tools: large-scale asset purchases of government bonds, provincial bonds, and corporate debt, along with lending facilities designed to keep credit flowing to businesses. The message was unambiguous—the BoC would do whatever it took to prevent a deflationary spiral.
Canadian CPI data told the story of an economy in suspended animation. Inflation effectively collapsed, hovering near 0.1% through Q2 as consumer spending evaporated and energy prices remained depressed (Statistics Canada, Q2 2020). This wasn't the kind of inflation central bankers worry about managing—it was the kind they worry about spiralling into deflation.
Unemployment hit 14.8% in April, the highest figure in Canadian statistical history (Statistics Canada, April 2020). The number understated the true damage, as millions of Canadians who had stopped looking for work weren't captured in the headline figure. The effective unemployment rate, including those who wanted work but weren't actively seeking it, was estimated to be significantly higher.
The federal government's response was massive. CERB provided $2,000 per month to millions of Canadians who had lost income. CEWS subsidized 75% of wages for eligible businesses, preventing mass permanent layoffs. The Business Credit Availability Program and expanded Export Development Canada lending provided lifelines to enterprises. By mid-Q2, these programs were flowing, and the bleeding began to slow.
Public markets responded first. The TSX Composite, which had bottomed on March 23, staged a powerful rally through Q2. By the end of June, the index had recovered roughly half of its pandemic losses. The rebound was uneven—technology and healthcare led while energy and financial sectors lagged—but the direction was unmistakable. Investors who had maintained their positions through the March panic were seeing recovery.
Private Markets Impact
Private markets in Q2 2020 occupied an uncomfortable middle ground: the worst fears of systemic collapse were receding, but the sector was far from healthy.
Redemption gates and liquidity stress. The most significant private market event of Q2 was Romspen Investment Corporation's decision in April to suspend redemptions on its mortgage investment fund. For Canadian MIC investors who had treated these vehicles as quasi-liquid, the gate was a watershed moment. Romspen wasn't failing—it was protecting its remaining investors from the fire-sale dynamics that would have occurred if it honoured all redemption requests simultaneously. Other MICs implemented similar restrictions, though Romspen's scale and reputation made it the headline event. The message to Canadian retail investors was clear: the liquidity you were promised in your offering memorandum has conditions, and those conditions were just triggered.
On April 20, the Ontario court appointed FAAN Mortgage Administrators as trustee over Fortress Real Developments—a separate but related crisis in the Canadian private lending space that had been brewing since before the pandemic. The Fortress situation, while distinct from pandemic-driven stress, compounded investor anxiety about the MIC and syndicated mortgage sector (Globe and Mail, April 2020).
Private equity in holding pattern. PE deal activity remained largely frozen through Q2. Valuations were uncertain, due diligence was complicated by remote work, and both buyers and sellers were waiting for clarity. Canadian PE firms focused on portfolio management—supporting existing investments, negotiating covenant amendments with lenders, and ensuring their operating companies could access government support programs. New deal announcements were sparse.
What worked. Despite the headline stress, significant parts of the Canadian private market ecosystem functioned well through Q2. Private credit managers with exposure to essential services—healthcare, logistics, food production, telecommunications—saw their portfolios perform largely as expected. Borrowers in these sectors were generating revenue even through lockdowns. Some private debt funds that had maintained cash reserves began deploying capital at attractive spreads, picking up opportunities that distressed sellers needed to move.
Government stimulus programs directly benefited many private market portfolio companies. Businesses backed by PE sponsors accessed CEWS to retain employees. Real estate borrowers in MIC portfolios used government support to maintain mortgage payments that might otherwise have gone into arrears. The stimulus didn't just save jobs—it prevented a cascade of defaults that would have devastated private lending portfolios.
The Canadian housing market, after a sharp April freeze, began showing signs of resilience by June. Low interest rates and pent-up demand started translating into renewed activity, particularly in suburban markets where pandemic-driven demand for space was already emerging. For MIC portfolios weighted toward residential construction and development, this was an early positive signal.
What We're Watching
Q2 2020 offered several insights that would shape Canadian alternative investments for years to come.
Government backstops change the calculus. The scale of Canada's fiscal and monetary response in Q2 2020 was without precedent. For private market investors, the lesson was that systemic risk in developed economies is partially backstopped by sovereign balance sheets. This doesn't eliminate investment risk—individual managers and borrowers can still fail—but it means that the worst-case macroeconomic scenario is less likely to materialize than models might suggest. It is worth considering how government intervention capacity should factor into portfolio stress testing.
Redemption gates are features, not failures. The instinct to view Romspen's gate as a sign of trouble was understandable but incomplete. The gate protected long-term investors from the consequences of short-term panic. Funds that honoured all redemption requests in a crisis would have been forced to sell assets at distressed prices, destroying value for remaining unitholders. The distinction between a liquidity management tool and a sign of insolvency is critical—and many Canadian investors learned it the hard way in Q2 2020. Investors considering MICs and other open-ended private vehicles should understand their gate provisions before investing, not after a crisis triggers them.
Stimulus creates moral hazard—but also opportunity. Zero interest rates and massive government spending prevented catastrophe, but they also began distorting markets. By June, credit spreads had already tightened significantly from their March wides. Asset prices were recovering faster than the underlying economy. For private market investors, this created a complex environment: the opportunities to deploy capital at distressed levels were disappearing quickly, but the fundamental risks in the economy hadn't resolved. The best managers recognized this tension and deployed capital selectively rather than aggressively.
Patience was rewarded. Investors who maintained their private market allocations through Q1 and Q2—who didn't panic, who accepted the illiquidity, who trusted their managers' underwriting—were in a stronger position by the end of June than those who had attempted to exit. This was not guaranteed in advance, and it doesn't validate complacency, but it reinforced the principle that private markets reward patient capital.
Closing
Q2 2020 was the quarter that determined whether the COVID shock would become a temporary disruption or a systemic collapse. Thanks to the most aggressive policy response in Canadian history, it was the former. Private markets survived—battered, gated in some cases, and fundamentally changed in others—but they survived. The MIC sector faced its first real liquidity test and revealed structural vulnerabilities that would take years to address. PE deal activity stalled but didn't collapse permanently. And the stimulus programs that saved the economy also planted the seeds of the low-rate, yield-starved environment that would define private market investing for the next two years. By the end of June, survival was no longer in question. The new question was what kind of market would emerge from the wreckage.
SOURCES
- Bank of Canada rate decisions and monetary policy reports, Q2 2020
- Statistics Canada Consumer Price Index, Q2 2020
- Statistics Canada Labour Force Survey, April-June 2020
- Government of Canada CERB and CEWS program announcements, April 2020
- FAAN Mortgage Administrators court appointment, April 20, 2020
- CVCA Canadian Private Equity Market Data, Q2 2020
- Globe and Mail, Fortress Real Developments coverage, April 2020
- CREA housing market data, Q2 2020
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