The Case for Private Credit in a Canadian Portfolio — and the Risks to Understand
Private credit has grown into a major global asset class. For Canadian investors who can tolerate illiquidity, it offers returns that fixed income markets cannot match. But the risks are real and worth understanding carefully.
For most of the past decade, Canadian investors chasing yield had a difficult choice: reach further down the public credit quality spectrum, accept equity-like volatility, or settle for GIC rates that lagged inflation.
Private credit — debt financing originated and held outside the public bond markets — offers a third path. But it is not a free lunch.
What Is Private Credit?
Private credit refers to loans that are originated by the lender and held to maturity, rather than traded on public markets. In Canada, the most accessible form for individual investors is real estate-secured private lending: first and second mortgages on residential and commercial properties, made available through mortgage investment corporations, private funds, or individual syndications.
Why It Has Grown
Post-2008 banking regulation significantly raised capital requirements and reduced banks' appetite for certain lending categories — construction loans, bridge financing, loans to borrowers with non-standard documentation. This regulatory retreat created a persistent gap that private credit has filled.
Borrowers who cannot access bank financing on their preferred terms can often access private credit at higher rates, and that spread is the return opportunity for lenders.
The Return Profile
Real estate-secured private credit in Canada has historically generated yields meaningfully above public fixed income alternatives, reflecting both a credit risk premium and an illiquidity premium — the additional return investors earn for accepting restricted access to their capital.
With the Bank of Canada's overnight rate currently at 2.25% and conventional mortgage rates in the high 3% to low 4% range, first-mortgage private lending typically prices in the 6% to 9% range, with second mortgages and higher-risk situations priced meaningfully above that. Returns vary significantly depending on loan-to-value ratio, property type, borrower quality, and term. Investors should be cautious of offerings promising unusually high returns without clear explanation of the underlying risk factors.
The Risk Factors
Private credit carries real risks that deserve serious consideration. Liquidity risk: your capital is typically locked up for the term of the loan. In most structures, early redemption is not guaranteed. Credit risk: borrowers can default, and while loans are secured by real property, enforcement takes time and incurs costs. Collateral risk: in a declining real estate market, the value of the collateral securing the loan may fall, reducing recovery in a default scenario.
In a market where Ontario vacancy rates are rising and property values have come under pressure, collateral risk deserves particular attention. Loans originated at peak property values with thin LTV cushions carry more risk than the headline rate may suggest. According to transaction data from Colliers, average price per suite in the GTA has declined roughly 20% from peak levels — a meaningful shift in the collateral base for loans originated at 2021 and 2022 valuations.
Portfolio Allocation
Private credit is increasingly considered a complement to traditional fixed income, not a replacement. Investors who understand the illiquidity, conduct thorough due diligence on the manager and underlying loans, and allocate an appropriate portion of their portfolio — not their entire fixed income allocation — are best positioned to benefit.
As always, understanding the specific terms, manager track record, underlying collateral quality, and your own liquidity needs is essential before allocating. This is not investment advice. Consult qualified financial and legal professionals before making investment decisions.