While the growing demand for private credit will require additional disclosure by institutional investors, it’s yet to be seen whether it will resemble similar restrictions placed on traditional lenders such as banks, says Shane Terrillon, an investment consultant at Aon.

“Private credit being able to step in and help diversify financing solutions more broadly is a good solution. That’s not something that [regulators] should necessarily get in the way of it. I don’t think that they want to either.”

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

Indeed, he says institutional investors make for the perfect candidate to step in for traditional lenders in the space. “I think that because [pension funds] are patient, long-term investors they can weather market volatility in the short term.”

An uncertain landscape for traditional lending due to liquidity constraints and increased regulation is allowing institutional investors to pursue increased positions in private credit. In January, four Canadian pension funds confirmed their intention to gain a bigger footing within the private credit space.

Private credit offers liquidity with the potential for high yield amid volatility challenges with equities, says Stephen Nesbitt, chief executive officer at alternative investment adviser Cliffwater, noting the pace of growth for the private equity ecosystem in North America is arguably one of the biggest trends of the past two decades. “We knew there was a demand for financing. Everything was in place to suggest a growing market.”

Read: Investments in global private credit surpassed US$1.3T in 2022: survey

A recent report by Cliffwater projected returns of 8.9 per cent for private credit within the next 10 years. A 2022 survey from Coalition Greenwich found the value of global private credit reached US$1.3 trillion and a report by BlackRock found the value of global private credit assets under management is projected to increase to $3.5 trillion by the end of 2028.

Terrillon says institutional investors are adjusting current exposure or creating new allocations entirely for private credit opportunities, adding they’ll likely take a conservative approach to private credit through senior secured direct-lending funds.

He credits the increased attention to the asset class to a unique structure that responds well to high interest rates. “Private credit typically has floating rate coupon structures. As short-term interest rates, which are influenced by central banks, increase the coupon rates, those floating rate assets also increase as well.”

Read: Private debt helping institutional investors meet their goals in 2023