This article is the third in our special report Outlook 2026, which puts 2025 in the rear-view mirror and spotlights challenges and opportunities in the year ahead. See the other articles here.
Private credit is playing an increasingly bigger role in family office portfolios. Most often, these exposures are via funds that provide floating rate loans to companies seeking flexible terms. Such borrowers are generally considered higher-risk, yet the potential for higher yield and mitigation of rate risk has helped private credit as an alternative asset class draw a growing number of investors, sometimes in place of private equity exposures, as returns in that space have failed to keep pace.
In a new report from Canadian Family Offices titled The Multi-Family Office Landscape in Canada 2025, one-quarter of MFOs surveyed have increased their allocations to private credit/debt. (The report is available to Canadian Family Offices’ newsletter subscribers and is to be released widely next month.)
That represent the highest percentage growth among asset classes in the survey, outpacing private equity. And it reflects higher demand overall for private credit in recent years, says Mikhial Pasic, head of alternative investments at RBC Wealth Management Canada. “Private credit has had an unusually really strong period of returns,” he says.
Absolute returns for private credit have been in the double digits in 2022, 2023 and 2024, he adds. By comparison, private equity has offered low- to mid-single-digit returns in those years.
In bad times, these loan agreements quickly become equity-like in nature.
Keith McLean, Chamberlain Family Office Advisors
Pasic predicts private credit performance will likely finish 2025 in line with historical returns, in the high single digits. Investors, he adds, can expect a similar return profile for 2026 amid persistent concerns about economic headwinds that could exacerbate problems in the space—which is notably riskier than other types of fixed income.
“Anytime a riskier part of the credit market has seen a lot of activity, there’s probably more bad decisions being made,” he says.
Keith McLean, co-founder of Chamberlain Family Office Advisors in Toronto, says family offices should approach private credit with more caution heading into the new year.
“Private credit sits somewhere in between high-yield public credit and equity,” he says. “And, in bad times, these loan agreements quickly become equity-like in nature.”
Amid market stress, borrowers’ underlying fundamentals come more sharply into focus, potentially leading to substantial markdowns on loans more so than other debt.
A hidden correlation to equities?
In a column for Canadian Family Offices earlier this year, McLean noted that Canada has been a hotbed for private credit deals due to its lower central bank policy rate and more stringent bank regulation, among other factors.
Also driving growth have been interval private credit funds offering more frequent redemption opportunities for investors, whereas previously many funds had limited liquidity. Because of the liquidity constraints, most investors were institutional, given that they had the capacity to remain invested amid broader market volatility.
Filling a lending void following the 2008 financial crisis—as traditional financial institutions faced tighter regulation—private credit has grown into an estimated $3-trillion market globally.
But fuelling this growth has been a wide swath of investors who might be ill-equipped for risk in adverse conditions.
“In the good times, all people focus on is the cash flow that comes off the loans,” McLean says, noting that private credit has been attractive because its yields typically exceed those for bonds and syndicated debt.
Yet borrowers—which are often smaller companies seeking quicker access to capital with less restrictive covenants than they could realize through traditional lenders—are taking on more risk and are less resilient to economic headwinds.
Given its classification as an alternative asset, investors might assume that private credit is less correlated to public markets and economic challenges. But the “correlation is just more hidden from investors,” McLean says, as private credit fund asset values are generally marked monthly rather than daily.
“As long as there’s liquidity with good bids” to buy underlying assets, “the pressure to mark down values is not there,” he says, adding that that has been the case recently.
AI raises the stakes
Yet that private credit/equity correlation could become more evident if, for example, the artificial intelligence bubble were to burst, says Jonathan Baird, Toronto-based editor of the Global Investment Letter.
“Because of the astronomical costs in the AI arms race, many more companies are issuing debt,” he says.
Increasingly, the bond market is pricing debt higher—or showing reluctance to lend the large sums required—as investors “question whether the cost of scaling up data centres is going to earn the expected return,” Baird says.
That has led some tech companies to turn to private credit, including Oracle Corp., which recently borrowed US$38 billion.
Baird adds that the growing use of private credit to fund AI growth highlights one of the biggest risks for the asset class: the lack of liquidity.
Should AI’s growth stall, it would stress public markets and send ripples into private credit, leading more investors to seek redemptions. This would put pressure on funds, which in turn might have to gate redemptions or face substantial asset markdowns.
Warning signs or one-offs?
Trouble spots have already appeared in private credit, though they are unrelated to AI growth. U.S. auto parts maker First Brands Group and subprime auto lender Tricolor, both of which had significant debt in private loans, recently declared bankruptcy. A report by Cambridge Associates notes the insolvencies appear to be idiosyncratic, involving alleged fraud, and don’t necessarily indicate more widespread risks.
“If recent defaults indeed end up being one-offs with overall default rates remaining low, they will if anything underscore the resilience of the [private credit] ecosystem,” says Daniil Shapiro, a market analyst and director of product development at Boston-based Cerulli Associates.
A more likely and broader risk for 2026 is falling interest rates, which “can make private credit incrementally less appealing” compared with other income-generating investments, Shapiro says.
Anytime a riskier part of the credit market has seen a lot of activity, there’s probably more bad decisions being made.
Mikhial Pasic, RBC Wealth Management Canada
For family offices looking to get a handle on private credit risk, McLean suggests two proxy indicators. First is the share prices of business development corporations (BDCs) such as Ares Capital Corp. involved in private credit lending. Falling share prices, as seen this year, may indicate challenges.
The share prices of BDCs are often more volatile than the underlying assets, McLean explains, and so a price decline of 25 per cent for them might mean the loan book is off three or four per cent.
The other proxy is Moody’s Baa spread, which is near its tightest range in 40 years, similar to previous run-ups to market stress.
Although the spread reflects the difference in yields between non-investment-grade and investment-grade bonds, investors can infer that the spread between private credit yields and investment grade has also tightened, McLean says.
“Basically, people have chased incremental yield to a point that [the spread] is so narrow they’re not compensated enough for the potential risks,” he adds.
Looking under the hood
At the same time, Pasic says, investors seeking higher-yielding private credit funds should be wary, given they may employ riskier strategies to achieve those returns.
Consequently, family offices looking at top-performing funds from the past few years should understand how those returns have been generated, as the space overall has experienced few stresses that exacerbate the downsides of riskier strategies such as leverage, he says.
“Try to extrapolate how those strategies might fare in more challenging environments,” he advises.
Risks aside, high-single-digit returns for private credit in 2026 are a reasonable expectation, he adds. Investors, however, are likely to be better served by funds that take more conservative approaches to generating yield than those engaging in high-risk strategies.
“We think that those taking a bit less risk,” Pasic adds, “are more likely to be rewarded in the coming year.”
Joel Schlesinger is a Winnipeg-based freelance writer who has written for Canadian Family Offices since 2021. Specializing in investment, wealth advice, real estate and personal finance, he is also a regular columnist for the Winnipeg Free Press, and his work regularly appears in The Globe and Mail, Calgary Herald and Edmonton Journal.
The Canadian Family Offices newsletter comes out on Sundays and Wednesdays. If you are interested in stories about Canadian enterprising families, family offices and the professionals who work with them, but like your content aggregated, you can sign up for our free newsletter here.
Please visit here to see information about our standards of journalistic excellence.