There has been a shift from public, listed equity markets and mainstream bonds toward private equity and credit over the past few decades

These are challenging times for alternative investments such as private markets, where higher interest rates have chilled activity, but there are reasons to be optimistic about Canada’s private capital markets, according to research firm Preqin.

Over the past decade, assets under management rose steadily to reach a record $322.6 billion by September 2022, the firm, which tracks the alternative investment classes of private equity, credit, real estate, and hedge funds, said.

Dry powder – unspent capital – rose sharply, almost doubling from $60.8 billion in 2020 to $111.3 billion in 2022. 

The report, published in association with the Canadian Association of Alternative Strategies & Assets, said that the number of private equity fund managers based in the country has also increased, from 126 in 2018 to 191 in February 2023. Overall, there are 1,175 private capital fund managers investing in Canada. For Canada-based real estate funds, $20.2 billion was raised in 2022, up from $8 billion in 2021. In infrastructure, $15.1 billion was raised in 2022, up from $6.1 billion.

Globally, the picture for private markets has been more difficult than of late. A decade and more of ultra-low/negative interest rates fueled a drive for yield, drawing in money to less liquid areas such as private markets, and this squeezed yields as valuations rose. With rates rising, some of that dynamic is reversing. 

There has been a shift from public, listed equity markets and mainstream bonds toward private equity and credit over the past few decades. This has been driven by many forces, such as more onerous reporting standards on listed firms since the Sarbanes-Oxley accouning laws in the US two decades ago, a desire to get away from the relentless focus that stock markets entail, and investor desire for the premium that less liquid investments bring.