Warnings from Canada’s Pension Fund Chief on Private Credit Market
The CEO of Canada’s biggest pension fund recently cautioned that the private credit market is essentially a “buyer beware” environment, urging institutional investors to tread carefully. John Graham, who leads the C$778 billion ($561 billion) Canada Pension Plan Investment Board (CPPIB), shared his insights in an interview with the Financial Times.
Graham mentioned that the CPPIB predominantly invests directly in private credits instead of through funds. He stressed the importance of being knowledgeable, stating, “You need to be sophisticated and know what you’re buying,” particularly for those investors in non-investment grade private credit.
While Graham acknowledged the benefits of private credit in distributing risk, he expressed concern over the rapid pace at which transactions are being finalized. “We have to make sure we’re not compromising on due diligence,” he remarked, indicating that he sometimes has to remind his team that “it’s OK to miss something.”
Since taking on his role in 2021, after previously overseeing credit strategy at CPPIB, Graham’s comments come at a time when there’s been a significant influx of capital into the private credit sector this year, accelerating transaction speed.
According to PitchBook, private funds raised $154 billion in the first nine months of this year. Although executives anticipate raising less than $230 billion in 2024, current funding levels are still notably higher than those from a decade ago.
Additionally, individual investors seem to be stepping up their engagement in this market. A consultancy report by Oliver Wyman indicated that personal credit holdings among wealthy individuals have surged by 2.5 times in just three years, outpacing traditional institutional investors’ growth.
However, the sector has experienced some challenges this year. John Gray, President of Blackstone, mentioned in October that the era of excessive returns was likely over due to central bank interest rate cuts, noting that private lending yields were only in the mid-teens and performance had deteriorated.
The failures of First Brands, an auto parts manufacturer, and subprime auto finance company Tricolor—both burdened by debt from non-bank lenders—shook credit markets and highlighted the potential risks inherent in private credit investments.
Compared to other major pension funds globally, CPPIB allocates a larger proportion to private markets, with 11% in public and private credit and 29% in private equity. Graham pointed out that despite recent underperformance from private equity funds, CPPIB has been pursuing investments in this asset class for 20 years. “We continue to believe in a governance model centered around private equity and private ownership,” he added.
Graham further noted that the collaboration between institutional investors, like CPPIB, and private equity funds—referred to as general partners—has proven to be a beneficial arrangement for all involved.
He also acknowledged that changing market dynamics, including the influx of private capital into private equity and buyout managers offering significant fund backers the chance to invest directly in companies to cut fees, could definitely influence their interest in this asset class.
Last month, the Institutional Limited Partners Association cautioned that the surge in transactions relying on wealthy individuals’ funds might sidetrack managers from focusing on pension plans and funds.
