Canada’s largest pension fund plans to nearly double the size of its credit holdings over the next five years, and it’s counting on an upturn in leveraged buyouts to generate some of that growth.

Andrew Edgell, global head of credit investments at Canada Pension Plan Investment Board, said the fund expects to have more than $115 billion (US$84.1 billion) in credit assets by 2029, compared with about $62 billion today. Much of that will be handled by its in-house investment team, which is prepared for a thaw in the buyout market after a couple of slow years.

“There’s pent-up demand. In discussions with sponsors, there’s a greater sense of optimism,” Edgell said in an interview. “There’s also so much dry powder that’s really pushing the LBO market to get unlocked.”

Global mergers and acquisitions rebounded in the first quarter of 2024 compared with a year earlier, driven by mega-deals in the finance, software and energy sectors. Still, there’s a long way to go before private equity firms return to the brisk dealmaking pace seen a couple of years ago, and uncertainty about interest rates remains a headwind.   

CPPIB, the manager of Canada’s national pension fund, is expected to reach $1 trillion in assets around 2030, from almost $600 billion today. It has been investing in private markets for years, and its top executives see attractive returns in plunging even deeper into private lending — which already represents about two-thirds of its credit holdings.

Less than 20 per cent of the fund’s credit portfolio is being managed by third parties, according to Edgell, though the firm maintains strong relationships with some of the world’s largest alternative asset managers. It recently committed $350 million to Blackstone Inc.’s BGreen III private credit fund for renewable power and energy infrastructure. It has also provided financing to support acquisitions led by Carlyle Group Inc., KKR & Co. and CapVest Partners, among others. 

 “We’ve sent the message to the market that we’re a direct lender, but we want to be pragmatic about it,” Edgell said. “And because we have direct investment expertise, we can do co-investments or work on opportunities with those partners on sizable deals.” 

CLOs Return 

A revival in the market for collateralized loan obligations could provide another boost to deal activity, Edgell said. New-issue CLOs have increased 53 per cent compared with 2023, Bloomberg News reported last week. “CLOs are being issued again, which improves the LBO math,” Edgell said.

CLOs are divided into tranches, with the senior portion rated as investment grade, the mezzanine part below that and an equity slice making up the riskiest layer. Big buyers of the senior tranche — typically more than 60 per cent of the instrument’s structure — had backed off for a while, given their ability to lock in rich yields from more vanilla debt instruments.

Still, without a lot of LBO activity yet, lenders are “clamoring” to compete for the transactions that come up, Edgell said. As deal flow increases, “we’ll get to a more natural balance and you won’t have lenders having to do silly things,” he said.

Competition among lenders is bringing down spreads for issuers in general, even if the total cost of borrowing is still elevated due to high interest rates, Edgell said.

Issuers that are only concerned about price may choose between private credit and other sources of capital, he said. The best private credit managers however will develop long-term relationships with sponsors and earn loyalty from issuers that may be willing to pay a little bit more in return for flexible loan terms, he said. 

“It’s more fit-for-purpose for their business plan. And they know that if something goes sideways, then they know who they’re dealing with,” Edgell said. “They know they’re dealing with a partner that has capital.”

The potential risk in private credit is concentrated in smaller firms that haven’t been around for long, he said. But, he said he doesn’t see any systemic risks in the asset class.

“One thing to keep in mind is the move to private credit is actually a great thing for the capital markets because it matches the assets with a more suitable liability. And even when there’s leverage used, it’s very little leverage,” Edgell said.