Private credit—business loans made by non-bank lenders—has expanded rapidly worldwide, but for Canadian businesses, it remains a stable and relatively limited source of funding. Canadian asset managers, however, are actively participating in private credit globally, creating exposures that could matter for financial stability in Canada.

A growing number of businesses around the world are bypassing traditional lenders and turning to loans from non-bank financial institutions, or private credit.

Private credit offers businesses a way to access financing faster and with more flexible terms than they typically could through banks or public debt markets. And it offers investors a way to diversify their holdings while seeking potentially higher returns.

But the growth of private credit has been happening largely outside a regulatory environment, raising concerns about potential effects on financial stability. Borrowers sometimes turn to non-bank lenders when they can’t easily access financing from traditional sources. That can make the loans riskier than usual for the investors involved, particularly where regulatory oversight is lighter.

Information is limited about the market for private credit in Canada and the connections Canadian investors have to the global market. Our analysis helps address this gap. We find that although Canadian businesses are not overly reliant on private credit, domestic asset managers collectively have built a meaningful presence in private credit markets abroad.

Private credit can include a range of activities

Private credit has no commonly accepted definition.

• A narrow definition limits private credit to loans made by lenders other than banks to risky medium-sized businesses.
• A broad definition captures any loan or similar credit product from non-banks to businesses of various sizes.

We use the broad definition to capture different forms of private credit. This includes loans made directly to businesses by large institutional investors and by funds that pool investors’ capital—much like how a mutual fund pools money to buy stocks or bonds.

With this broad definition in mind, let’s look at private credit in Canada, starting with borrowers.

Private credit serves as a limited source of funding for Canadian businesses

In Canada, businesses receive financing primarily through banks and by issuing debt—such as corporate bonds or commercial paper—in public debt markets. Together, these two sources account for about three-quarters of the external funding of non-financial businesses (Chart 1).

The share of loans from non-banks to Canadian businesses has remained broadly stable at about 15% over the past decade, suggesting that private credit has not been displacing traditional sources of funding.