The Canada Pension Plan Investment Board plans to nearly double the size of its credit holdings over the next five years, according to reporting by Bloomberg.

Andrew Edgell, the CPPIB’s global head of credit investments, said the fund expects to have more than $115 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.

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“There’s pent-up demand,” Edgell told Bloomberg. “In discussions with sponsors, there’s a greater sense of optimism. There’s also so much dry powder that’s really pushing the [leveraged buyout] market to get unlocked.”

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

A revival in the market for collateralized loan obligations could provide another boost to deal activity, he said. Indeed, new-issue CLOs have increased 53 per cent compared with 2023, according to reporting by Bloomberg. “CLOs are being issued again, which improves the LBO math,” he added.

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

As well, Edgell noted 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.

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.

The potential risk in private credit is concentrated in smaller firms that haven’t been around for long, Edgell noted. 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.”

Read: Four Canadian pension funds increasing exposure to private credit: report