Private credit yield: why advisors should own the loan, not the quote

Canada’s version is distinctive, and for now more conservative. Domestic managers oversee an estimated $20–$30 billion, a sliver of the U.S. market’s $1.5 trillion-plus, concentrated among institutional players and tilted toward multi-tenant real estate rather than the leveraged software borrowers that dominate U.S. direct lending. That caution shows up where it counts: in the documentation. In the U.S. large-cap market, more than 90 per cent of syndicated loans are now covenant-lite, and even within private credit, maintenance covenants have grown rare on deals above roughly $500 million. Europe is drifting the same way, as U.S.-style cov-lite terms migrate from broadly syndicated loans into upper-mid-market unitranche. This is not a documentary nicety: a maintenance covenant is an early-warning tripwire, and lenders who can act at a covenant breach recover materially more than those who wait for a missed payment. The erosion, though, is concentrated at the large-cap end. In the lower-middle market — Canada’s sweet spot — roughly 80 to nearly 98 per cent of direct loans still carry genuine maintenance covenants. The lesson for allocators is to know exactly which covenant package sits behind each position, because the same manager may run a covenant-rich mid-market book and a covenant-lite large-cap one under the same roof.

None of this repeals the illiquidity, and it shouldn’t be wished away. Private yield is the compensation for capital you cannot pull on demand, and the discipline that makes it work — matching a fund’s redemption terms to the liquidity of its assets, insisting on covenants, backing managers who underwrite rather than merely deploy — is the same discipline that separates the funds investors are glad they held from the ones they wish they could exit. Bought that way, private lending isn’t a substitute for the bond market’s quote. It’s an upgrade on what that quote was always meant to represent.

The opportunity, therefore, isn’t necessarily to abandon private credit after a difficult year. It may be to become much more selective about which private credit investors own. A more mature private-credit market. The private-credit industry may ultimately emerge from this period stronger.

The Bank of Canada’s concerns should not be interpreted as a call to abandon the asset class. The central bank recognizes that private credit fills genuine financing gaps and has become an increasingly important part of the financial system. But growth brings responsibility.

For advisors, the next stage of private credit should be less about headline yields and more about underwriting, collateral, leverage, duration and liquidity.