Skip to main content

iStockPhoto / Getty Images

Many investors are understandably unfamiliar with the private credit market — the non-bank lending sector geared to medium and large-sized predominantly private companies borrowing outside of traditional debt markets.

Despite enjoying exponential growth over the past couple of decades, private credit has long been the exclusive domain of large private or institutional investors.

“It’s a more specialized type of lending,” says Steve Locke, chief investment officer of fixed income and multi-asset strategies at Mackenzie Investments.

However, access to the private credit space is finally opening up to individual accredited investors looking for the potential of higher returns than what they can often get from traditional fixed-income investments.

The appeal of private credit

With private credit, borrowers are seeking specific terms or structures not offered by banks or traditional fixed income markets. This market has grown from less than US$50-billion in 2000 to more than $840-billion as of 2019. It supercharged after the 2008 financial crisis, when regulators were prompted to restrict the traditional banking sector’s ability to serve certain borrowers.

The private credit asset class has historically provided investors with relatively strong risk-adjusted returns, Mr. Locke says, given the specialized nature of originating, underwriting and structuring these types of loans.

Mackenzie Investments believes the potential advantage of private credit is particularly relevant today, given the historically low government bond yields and narrow corporate bond spreads. Investors seeking growth from the fixed-income side of their portfolios may have to accept low returns of typical bond funds or search for higher yield.

But even traditional risk-on investments are paying less these days, with high-yield bonds currently yielding around 4 per cent, according to the ICE BofA U.S. High Yield Index, which measures the performance of high-yield debt.

“The high-yield bond market today doesn’t have what we traditionally think of as very high yield anymore,” Mr. Locke says.

Mackenzie’s private credit alternative

Investors interested in the private credit market have another alternative — the Mackenzie Northleaf Private Credit Fund. Launched at the beginning of this year, it was created out of Mackenzie’s strategic partnership with Toronto-headquartered global private markets investment firm Northleaf Capital Partners, and the desire to provide easier access to alternative investments to individual investors.

Throughout private credit’s rapid growth, Mr. Locke says investment has typically been subject to heavy restrictions, such as minimum investments in the millions of dollars and lockup periods up to 10 years. With the Mackenzie Northleaf Private Credit Fund, restrictions are greatly reduced, putting them within reach of many individual accredited investors.

Private credit can generate higher yields

While access to private credit has widened, many of the dynamics are still niche. For instance, private loans in the sector are sometimes held by a single or a small group of lenders and generally aren’t traded, Mr. Locke notes. Because of this, investors are typically compensated with a higher yield.

“There’s a lot of diversity in these areas of the market that can be accessed, and there are often yield premiums, including illiquidity premiums that have been traditionally out of reach for most fixed-income investors,” he says.

These dynamics have typically given private credit investments a significant yield advantage compared to even high-yield bonds. For instance, Mr. Locke says the senior secured lending within the Mackenzie Northleaf Private Credit Fund has in many cases been able to access net yields of around 6-to-8 per cent.

“There’s also a leverage component to the private credit piece,” he adds, “which boosts those available yields a bit further.”

These are typically floating-rate investments, meaning that when central bank interest rates eventually start to rise, these private credit yields can rise with them, Mr. Locke says.

Private credit expertise

Of course, higher returns typically come with higher risk, which is why investors should look for expertise when selecting private credit managers, Mr. Locke says.

Private credit managers need to have deep knowledge of the space, including an ability to source the best opportunities, execute rigorous due diligence and construct well-diversified portfolios of private credit investments.

“Northleaf brings these qualities and institutional expertise in managing private credit,” he says.

On the Mackenzie side, Mr. Locke says some risks can also be managed by maintaining a portion of the fund in two Mackenzie exchange-traded funds: Mackenzie Global High Yield Fixed Income ETF and Mackenzie Floating Rate Income ETF.

“Private credit is the primary allocation; the secondary allocation is in these public market ETFs,” he says. “We can actively manage those and, if we feel there’s a more decided downside risk in the market, that’s a point where we would look to mitigate some of that risk.”

Mackenzie Investments believes alternatives can add value to portfolios

Alongside private credit, private markets also include equity, infrastructure and other private assets that are also becoming more accessible to individual investors.

Mackenzie has been a pioneer in the alternative space, launching Canada’s first liquid alternatives strategies mutual fund in 2018, and currently offers six liquid alt mutual funds and three ETFs in the space.

Mr. Locke expects the number of alternative options for individual investors to keep growing.

“It’s really the idea of accessibility for investors to an area which we believe can add value to their portfolios,” Mr. Locke says. “So you might say, the time has come.”

Speak to your financial advisor. This material is not intended to constitute an offer of units of Mackenzie Northleaf Private Credit Fund (the “Fund”) or any form of investment advice. The Fund is generally only available to “Accredited Investors” (as defined in National Instrument 45-106 –Prospectus Exemptions). The information contained herein is qualified in its entirety by reference to the Offering Memorandum (“OM”) of the Fund. The OM contains information about the investment objectives and terms and conditions of an investment in the Fund (including fees) and will also contain tax information and risk disclosures that are important to any investment decision regarding the Fund. The past performance of any asset class may not be repeated. The use of leverage within a fund increases both the opportunity for gain and the risk of loss.

Advertising feature produced by Globe Content Studio with Mackenzie Investments. The Globe’s editorial department was not involved.