Canada’s riskiest corporate borrowers are deteriorating faster than those in other major economies, according to a Moody’s report that links the trend in part to the country’s high concentration of private equity ownership. Yet despite losses across some of the Maple 8’s private equity portfolios last year, some argue the downturn is creating new opportunities.

The share of the country’s high-risk borrowers—those B3 negative or lower—reached nearly 20 per cent at the end of 2025, more than double the level a year earlier and the highest in at least three years, according to Moody’s. That figure exceeded levels in the U.S., U.K., France and Germany.

Will Gu, a Moody’s analyst, said in a note that inflation, higher rates and U.S. trade disruptions have squeezed margins and raised borrowing costs, leaving leveraged companies particularly vulnerable.

Nearly half of Canada’s 63 rated high-yield corporate issuers were backed by private equity sponsors in 2025, up from almost none in the early 2010s, according to Moody’s. Years of cheap borrowing, abundant capital and growing pension fund allocations to private markets drove a wave of acquisitions globally that left many companies carrying heavy debt loads and more exposed to economic shocks, according to Gu. 

“If private equity ownership continues to account for a larger share of the market, overall credit quality will weaken further,” he wrote in the report. Moody’s recorded 13 downgrades among the riskiest Canadian issuers in 2025, up from seven the previous year and the most since 2020. 

Private equity ownership has risen from roughly one in 10 businesses in 2010 to about one in two today, said Frédéric Bouchard, partner and national corporate finance leader at PwC Canada, driven by institutional investors seeking higher returns. 

Mark Jamrozinski, managing partner for private equity at Deloitte Canada, pushed back on the idea that private equity capital has become excessive in Canada, saying the market remains less competitive than the U.S. and continues to attract American investors seeking growth opportunities. 

According to Gu, about a third of Canada’s weakest borrowers are telecommunications companies, while another third are in metals and mining. The remainder are spread across energy, manufacturing and forest products. Jamrozinski, meanwhile, pointed to software companies and businesses exposed to trade tensions as at-risk areas. 

Canada’s 12-month trailing speculative-grade default rate rose from roughly 2.5 per cent in mid-2022 to about eight per cent in late 2025, well above the global three to four per cent average. Gu said Canada’s relatively small market can exaggerate year-over-year changes, and expects default risk to remain high through mid-2026.

Canada’s Maple 8 are among some of the world’s largest private equity investors. They  collectively managed more than $400 billion in private equity at the end of 2025—about a sixth of their $2.4 trillion assets under management. 

Since interest rates began rising in 2022, the deal-making boom and easy financing conditions of previous years have come to an end, Jamrozinski said. 

Ontario Teachers’ Pension Plan reported a 5.3 per cent loss in the asset class in 2025—reportedly its worst performance since 2008—while Ontario Municipal Employees Retirement System (OMERS) posted a 2.5 per cent decline the same year and a $665 million net investment loss on its $25.6-billion portfolio. Last year, La Caisse generated a 2.3 per cent return in private equity, well below its 12.6 per cent benchmark gain, and Healthcare of Ontario Pension Plan (HOOPP) reported returns of 3.6 per cent, lagging the 11.7 per cent return generated by its public holdings. Canada Pension Plan Investment Board reported a 2.9 per cent return in its private equity segment this fiscal year, down from 10.9 per cent in 2025.

John Graham, CPP Investments’ chief executive officer, told The Logic in an interview that despite private equity having had a “long moment in the sun,” the asset class is now being challenged by a post-COVID backlog of portfolio sales as well as uncertainty around AI. Still, he remains bullish on the asset class over the long term.

“I think the mistake is to go into a holding pattern because what you do is you shut off the flow and the flow is actually pretty attractive,” he said.

Gillian Brown, Ontario Teachers’ chief investment officer, said in the pension fund’s annual report that private equity investors are grappling with slower deal making, fewer exit opportunities and higher interest rates, which has weighed on returns and made transactions more difficult to execute. OMERS similarly attributed part of its private equity underperformance to disappointing results from its growth equity and venture capital holdings.

The tougher environment is making pensions more selective, Gu said. Rather than taking direct stakes in riskier businesses, they are increasingly favouring investments and partnerships with more predictable returns, he added.

Asked whether they are becoming more selective on new deals and what steps they are taking to improve private equity performance relative to their benchmarks, spokespeople for HOOPP, the British Columbia Investment Management Corporation and OMERS declined to comment. La Caisse, the Public Sector Pension Investment Board and Ontario Teachers’ did not respond to requests for comment.

Jamie Vallance, managing director and head of funds and secondaries at Alberta Investment Management Corporation said the pension’s private equity strategy “hasn’t fundamentally changed over the last decade,” with a continued focus on selective investing.

As pension funds recalibrate their private equity exposure, a refinancing challenge could emerge over the next year as companies acquired during the highly leveraged 2021 deal-making boom seek to renew debt in a much tougher market, Jamrozinski said. “There is a risk that private equity needs to inject more capital to keep the businesses going,” he added.

Still, he said, “now is the best time to be investing in private equity, because as the valuations come down, there’s great buying opportunities.” 

Editor’s note: This story has been updated to note that the British Columbia Investment Management Corporation declined a request for comment.

With files from Kevin Carmichael