The private credit industry is thriving, offering businesses tailored financial solutions in a high-interest-rate environment
Arif Bhalwani
August 23 – Toronto. The U.S. Federal Reserve may finally be prepared to adjust the target range for the federal funds rate, which is 5.25 per cent-5.50 per cent, the central bank’s highest since 2001. Fed Chair Jerome Powell, speaking to the Jackson Hole Economic Symposium, signaled cuts will come at the Fed’s September meeting. Powell has been stubbornly sitting on the policy rate for over a year, a frustrating flat line for millions who are ready for an interest rate-cutting cycle to begin.
In Canada, the central bank gave in months ago, when the BOC cut its benchmark interest rate from the 5 per cent it had held firmly for nine straight months, down to 4.75 per cent and then to 4.5 per cent in July. In both countries, the key policy rate remains historically high amid expectations that inflation will fall, and more recently, in the face of some suboptimal job numbers. Powell says he feels confident that inflation is mostly under control, as it steadily drops closer to the Fed’s 2 per cent target.
This extended era of persistently high interest rates brings much more market volatility and much fewer business loans from banks, creating more opportunities for alternative providers of credit. The private credit industry has in fact boomed in this period of steep rate increases – from nearly zero during and just after COVID, to suddenly the highest rates since the 2008 financial crisis.
Arif Bhalwani, CEO of Toronto-based investment management firm Third Eye Capital, has called this the “Golden Age” for the private credit asset class. His firm is one of the largest providers of alternative capital in Canada.
“With banks tightening restrictions on lending, combined with weakening credit fundamentals where borrowers need more tailored support, private debt firms like ours have stepped in to fill the need.”
Private debt fund managers, as well as their investors, must have both a stomach and an instinct for partnering with high-risk companies experiencing some level of distress. Bhalwani says that entrepreneurial spirit is what attracts him to the industry.
“Our firm and our people go well beyond just the extension of credit,” explains Bhalwani. “We form partnerships with businesses that are in transition, offering tailored financial solutions as well as the diversity of our expertise in rescuing businesses in their particular industries.”
The process requires a prolonged period of due diligence, due to the risks involved, but Bhalwani believes that the process is both exciting and essential to the health of the economy.
“The businesses we evaluate often have a solid business, capable leadership team, and a history of success. A few years ago, they would have no problem with obtaining a conventional business loan. But with uncertain economic conditions, they’re now perceived to be too risky – but nothing’s really changed about their long-term asset values.”
For Bhalwani and the private credit industry, this is fertile ground for lucrative partnerships that will benefit both their investors and the industries that are vital to the country’s economy.
With the “higher for longer” era possibly winding down, the goodwill that the private debt industry has gained amongst banks and businesses will likely lead to the asset class becoming a sustainable pillar of the economy.
Investors, especially the most well-heeled ones, have steadily increased their exposure to private credit. They’re attracted to the high-risk, high-reward model, and when they find consistency in funds like Third Eye Capital, they show confidence.
“We have success because we see our portfolio companies as an extension of our business – their successes are ours, and so are their failures. We work directly with CEOs and stakeholders to ensure the business is viable and to maximize its asset values.”
TEC has played an influential role in the private lending space in Canada, where creative solutions are so often required. From an investor’s perspective, understanding the situational protocol of private credit firms is crucial. These firms operate in a high-stakes environment where liquidity can be scarce and risk mitigation is key to ensuring the long-term stability and performance of their funds.
“I think investors understand that private credit is a desirable class for diversification of assets and a shield from market volatility,” Bhalwani concludes. “We have a good approach to protection and value creation, and we’re able to offer reassurance through our track record.”
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