BCI anticipates rising defaults to impact private credit market

BCI expects rising defaults to drive out "tourist investors" from the $1.7tn private credit market

BCI anticipates rising defaults to impact private credit market

British Columbia Investment Management Corp. (BCI) expects rising defaults in the coming months to push “tourist investors” out of the $1.7tn private credit market, according to Bloomberg.   

Executive Vice President Daniel Garant, who is also global head of public markets, stated, “Some of these tourist investors expect private debt to be a bit like it was for the last five years, which is high single-digit or low double-digit returns with not a lot of risk or very few defaults. That’s a bit of an artificial environment, so we think we’re going to go back to something which is more normal.”   

Managing $215bn in net assets, the pension fund joins others in urging caution in the growing private-credit industry. Although the market thrived last year as banks reduced lending, many executives predict tougher times ahead.  

JPMorgan Chase & Co. CEO Jamie Dimon recently warned of potential problems in private credit, saying, “there could be hell to pay.” Canadian investment manager Ninepoint Partners has temporarily suspended cash distributions in three of its private credit funds due to a liquidity crunch.   

Garant predicts defaults will rise, although the timing remains uncertain.   

Higher for Longer   

Garant noted the strong US economy may not justify multiple rate cuts this year, expecting a scenario of “higher for longer” interest rates. The Bank of Canada and European Central Bank recently cut interest rates, but the latter did not signal further cuts.

The Federal Reserve may not start easing until later this year, if at all in 2024, following a Bureau of Labor Statistics report showing accelerated US job growth and wages in May.   

Higher borrowing costs and a persistent price gap between buyers and sellers have led to a decline in dealmaking over the past two years. Garant noted private equity firms will need to work harder on portfolio companies to generate returns.  

This deal drought has also pressured private debt, with fewer deals getting financed despite substantial capital flow.   

In 2022, BCI experienced its strongest year in private debt deployment due to favourable credit spreads. While still allocating to private debt, the pension fund is now more selective because of the capital flow.   

As of the fiscal year ended March 2023, BCI, based in Victoria, British Columbia, had $13.5bn invested in private debt, representing 6.3 percent of its total assets.