Beyond the numbers: Delivering private credit’s advantages

David Ross

Managing Director, Head of Private Credit
Northleaf Capital Partners

With a growing number of Canadians heading into retirement each year, many investors are focused on yield in order to turn their investment portfolios into a source of dependable long-term income.

While interest rates are higher today than in early 2022, so is inflation. The search is on for investments that can generate a strong and consistent stream of income that’s high enough to outpace inflation without taking on excessive risk.

In this environment, we believe private investments have the potential to truly shine. Historically, these investments, including private equity, private credit, and private infrastructure, have delivered a return premium above that of their publicly traded counterparts, summarized in the graphic below. 

How private assets have outperformed public assets<sub>1<sub>

1 Quarterly returns in CAD. Private equity excess return is calculated as the average difference between the rolling 10-year returns of the Cambridge US Private Equity legacy definition) Index and the MSCI World TR Index between December 2009 and December 2022. Private infrastructure excess return is calculated as the average difference between the rolling 10-year returns of the Preqin Private Infrastructure Index and the S&P Global Infrastructure TR Index between December 2017 and December 2022. Private debt excess return is calculated as the average difference between the rolling 10-year returns of the Preqin Private Debt Index and the ICE BofA Gbl Brd Mkt TR HCAD between December 2010 and December 2022.

The chart above illustrates the average return difference between liquid and illiquid versions of the same asset classes, assuming a 10-year holding period. It shows that a significant return difference exists in each of these major asset classes.

In 2020, Northleaf Capital Partners (“Northleaf”) and Mackenzie Investments established a strategic relationship providing individual investors access to private markets. Here, David Ross, head of private credit at Northleaf, one of Canada’s largest global private markets investment firms, discusses this rapidly growing asset class in the Canadian retail market. 

David, tell us a little about Northleaf.

Northleaf is an institutional investment manager, active in global private equity, credit and infrastructure. We got our start as part of TD Bank. We were pioneers in raising institutional capital to launch our first private equity fund in the early 2000s.

We became Northleaf in 2009 and in the years that followed, we launched our infrastructure and private credit businesses to complement our activities in private equity.

We have now raised over US$24 billion in commitments from more than 250 institutional and family office investors. We have nine offices in key markets across North America, the U.K., Asia and Australia. 

How did Northleaf enter the private credit space?

It’s really a natural progression from our private equity roots. We have a decades-long history of partnerships with top private equity firms in North America, the U.K. and Western Europe. Historically, these firms sourced debt for their leveraged buyouts from traditional bank lenders. But in the aftermath of the global financial crisis of 2007-08 and ensuing liquidity crisis, the banks began pulling back from this business, as they repaired their balance sheets to comply with stricter regulatory requirements.

This created a vacuum for private lenders, who gained significant market share. Private borrowers were still in need of capital to expand their businesses and private lenders were able to provide this capital with more flexible terms. The banks often employ a “one-size-fits-all” approach to underwriting. But private credit lenders are able to underwrite each deal based on the unique circumstances of the borrower.

Northleaf’s relationships in the private equity space facilitate direct access to many very attractive lending opportunities. The opportunity set among private companies is significantly larger than among public companies, particularly among mid-sized companies where we specialize. Northleaf’s consistent focus on the mid-market has provided our investors with high-quality lending opportunities at very attractive yields. 

How does Northleaf uncover opportunities?

Northleaf has a unique multi-channel sourcing strategy that provides access to a substantial pipeline of high-quality investment opportunities globally. Again, this goes back to our relationship with private equity investors. We primarily lend to companies that have been, or are being, purchased by private investors. These are highly capable, highly motivated and well-capitalized investors who build and grow these target companies on behalf of their own institutional clients before selling the business, hopefully at multiples of the purchase price.

These relationships, in addition to our team’s local offices and coverage in key global markets, provide us with a robust pipeline of more than 750 lending opportunities per year. We apply our disciplined underwriting process to select the best opportunities. We invest in less than 5 percent of the deals we see with a focus on finding the best relative value and building a robust, diversified portfolio for our investors. 

What kind of companies does Northleaf lend to?

We focus our lending activities on companies in developed markets and in sectors with defensive, non-cyclical businesses. These businesses are characterized by stable demand for their products or services and predictable cash flows.

In lending, whether private or public, the real risk is capital impairment — something we spend a considerable amount of our time and resources to avoid. So that means we avoid lending to businesses in sectors like restaurants, travel and tourism, storefront retail, and anything directly linked to commodity prices.

We are focused on lending within sectors like health care, financials or software and services, where the products or services are critical to the operations of market-leading businesses. These are not necessarily glamorous businesses and some of these opportunities may be surprising to the average investor. For example, heating, ventilation and air conditioning (HVAC) businesses can have revenues that are highly predictable, because customers are less likely to change providers or be cost-sensitive when they have an issue with their HVAC system.

We also like sectors where the revenues are stable and unconnected to the economic cycle, such as health care and veterinary services, or those that have contractual revenue frameworks, like providers of critical software to blue-chip customers and government entities. 

How is Northleaf faring in this higher-interest-rate environment?

The single most important development in our market over the past 18 months is the increase in base rates — those set by central banks like the Bank of Canada and the U.S. Federal Reserve. Northleaf’s private market loans are contracted on a floating rate basis — that is, the rate our borrowers pay is an amount above the base rate. This means our loan economics improve as rates rise. As such, our investors have been net beneficiaries of the increase in interest rates.

We’re also seeing that credit spreads are wider, a testament to the market’s perception of a heightened risk environment. Base rates have risen by over 500 basis points since the lows in early 2022, and the credit spreads and annualized fees we’re charging on new loans is up over 100 basis points. All told, we’re able to invest in new loans at gross asset yields of ~12 percent, before the impact of fund leverage. That rises to over 15 percent after the impact of leverage used in our fund. This attractive yield environment led us to increase the annual distribution on our senior, lower-risk lending fund to 10 percent in Q4 2022.

What does the future of private credit look like?

Let’s state up front that defaults may increase, both in public and private markets. Some businesses will struggle to service their debt given the rise in financing costs. There will be failures and some lenders will end up recovering less than 100 cents on the dollar in specific loan-default scenarios. However, we expect the impact to be more acute in cyclical industries and/or highly levered businesses, which is not our focus.   

But will it be worse in private credit than in public markets? Historically, that has not been the case. In the past, private markets have seen lower losses and higher recoveries, due to more conservative loan structures and stronger lender protections.

Importantly, even after factoring in a modest increase in defaults in private lending, we believe today’s attractive yield environment will provide investors with strong absolute and risk-adjusted returns relative to other fixed-income investments. The higher yield environment is serving to more than offset the modest uptick we expect to see in defaults and losses.

How could an investor position private credit in their portfolio?

History has shown us that private credit has the potential to provide investors with a healthy yield premium over comparable high-yield public market investments, at a risk level that is much closer to investment-grade credit. As market yields rise, plateau and perhaps trend very slowly down over time, we believe Northleaf private credit strategies have the potential to offer yield-seeking investors a very healthy return. That’s coupled with the potential for strong annual cash distributions and historically impressive capital preservation compared to other higher-yielding types of fixed income.

Through our partnership with Mackenzie Investments, we are breaking down barriers for all Canadian investors by providing our institutional private market capabilities to individual accredited investors, offering advisors and investors an innovative way to reconstruct portfolios for a changing world.


When a large public corporation needs to raise capital, it typically does so by issuing bonds. When a privately owned company needs to raise capital, it generally has two options: borrow from a bank or borrow from a private lender.

Compared to bank loans, private credit deals are usually more complex, offering more flexible terms and repayment schedules that are tailored to the borrower’s needs. They are also usually completed more quickly, often part of a longer-term multi-transaction partnership between borrower and lender.

The bespoke nature of private loans can make them unattractive to traditional lenders and securitized structures, yet the nature of borrowers and inefficiency of markets create an attractive spread premium.

Aside from funding a business’ operations or growth strategy, private loans are also commonly used to support buyout transactions by private equity investors.

Private loans differ from traditional bonds in several ways. Private loans are unlisted, non-quoted and generally only available through a private credit fund.

Unlike bonds, private loans are generally not rated by a third-party credit-rating agency. The creditworthiness of the borrower is assessed by the private lender, based on thorough due diligence and their extensive experience.

Highly skilled private lenders may add value in this relatively inefficient market by identifying and sourcing attractive opportunities and complementing these activities with specialized diligence and deep knowledge of private markets. This helps account for the yield premium and attractive risk profile relative to many other fixed-income assets.

Portfolio construction with private credit

Private credit may be well-suited to helping investors navigate challenging fixed-income markets. Its appeal includes a yield advantage over most types of traditional bonds, a floating rate that insulates against changing interest rates and customized legal protections for lenders in case of default.

Higher yields: Private loans typically offer a healthy yield premium over comparable broad investment grade bond indexes and can also exceed that of high-yield debt. Private companies accept these higher borrowing costs in return for quicker execution, and greater flexibility and customization than public markets. 

Floating rate: Private loans are usually priced as an interest-rate spread on top of a reference rate like the secured overnight financing rate (SOFR), which moves in tandem with the U.S. Federal Reserve Board’s overnight lending rate target. While traditional bonds can be harmed by rising interest rates, yields on private loans rise in step with rates, mitigating potential capital losses. When interest rates decline, investors are protected by a pre-negotiated base rate “floor.”

Credit quality: Private credit investments have historically shown lower default and loss rates than public credit, owing in part to better lender protections. Private lenders typically create the loan’s legal documents and incorporate measures that prevent borrowers from taking actions that may damage the chances of the loan being serviced and repaid in full. Private loans also offer enhanced loan customization, increased flexibility and better alignment with borrowers, usually making it easier for the borrower to remain current on the loan despite changes in external conditions.


DISCLAIMER: Units of Mackenzie Northleaf Private Credit Fund (the “Fund”) are generally only available to “accredited investors” (as defined in NI 45-106). The information contained herein is qualified in its entirety by reference to the Offering Memorandum (the “OM”) of the Fund. The OM contains information about the investment objectives and terms and conditions of an investment in the Fund (including fees) and will also contain tax information and risk disclosures that are important to any investment decision regarding the Fund. This material is not intended to constitute an offer of units of the Fund or any other fund referred to herein. Past performance is not necessarily indicative of any future results and there can be no guarantee that the Fund will achieve a yield similar to any yields referred to herein. The Fund has material exposure to public market investments, the amount of which will fluctuate over time.

The content of this article (including facts, views, opinions, recommendations, descriptions of or references to, products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it. This article may contain forward-looking information which reflect our or third-party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of Oct. 13, 2023. There should be no expectation that such information will in all circumstances be updated, supplemented or revised, whether as a result of new information, changing circumstances, future events or otherwise.