The private credit market in Canada is often saddled with misconceptions by companies seeking financing, f they’re even aware of the market at all. The term “private credit” is interchangeable with ‘non-bank credit’, ‘private debt’ or ‘alternative lending’. Private credit firms have direct relationships with the businesses to which they are lending and stay committed until the loan is repaid. Private credit lenders form partnerships with their borrowers.
While most of these partnerships are with businesses backed by a private equity sponsor – aka ‘sponsored lending’ – more and more ‘non-sponsored’ companies are forming these partnerships directly with private credit firms. As the number of these partnerships grows amidst a landscape where banks are becoming more risk averse, the importance of the private credit market to the overall health of the economy grows too.
In Canada, the perception remains that private credit is still a bit “wild west”. There is not the same level of acceptance of private credit as a viable means for lending as there is in most other economies, particularly in the U.S., where private credit is being called ‘the buzziest corner of Wall Street.’ There are persistent myths about the market that distort its inherent value to the financial system in the country.
Arif Bhalwani, CEO of private debt firm, Third Eye Capital, has spent a lot of time debunking these myths. Arif Bhalwani has appeared on panels and podcasts as a thought leader in the private credit industry, offering explanations on how private credit can and should function in partnerships with banks, and help fill much needed funding gaps.
“In Canada, we have a unique market for private credit, in that about 80% of our business lending comes an oligopoly of six banks,” says Bhalwani. “When you look at the U.S., only 20% of lending comes from banks, despite there being thousands of them. So we see a huge discrepancy in the availability of funding sources in Canada. That means some businesses are not get the funding they need to grow, invest, and hire. Without sufficient financing sources, Canadian companies will struggle to remain competitive.”
Bhalwani believes the industry is fighting against a cultural misconception that private credit funds are ‘lenders of last resort’. He points out that in the U.S. private credit’s biggest funds have asset pools larger than some of the SIFIs (systematically important financial institutions – the too-big-to-fail banks).
Another misconception is that private credit is only appropriate for ‘bad’ or ‘risky’ businesses – ones to which the banks have said no, and that aren’t likely to remain solvent. But because of tightening credit restrictions and increased regulatory oversight, even the ‘good to great’ businesses are turning to the private credit market to provide financing. The private market also provides much-needed risk allocation for the overall financial system.
Because of this adverse selection risk, private credit firms engage in a far more rigorous due diligence process compared to traditional banking institutions. Interestingly, many of these businesses may have previously secured financing from banks. They turn to private credit for its unique solutions, drawn by the speed and bespoke flexibility it can offer to more complex or unique situations.
“Providing solutions is the core of what we do at Third Eye Capital,” says Bhalwani. “We work with businesses that fall outside the scope of banks, and help them overcome changes or challenges so they can flourish.”
