Members of the committee, thank you very much for this opportunity.
I am available to answer your questions about “why now”, and to conclude in French.
Canada's small and medium-sized enterprises are responsible for outsized employment, particularly during periods of disruption such as we are experiencing with AI today, and also for outsized exports, yet Canadian SMEs face a structural credit disadvantage that their advanced-economy G7 peers do not. It is documented and solvable, and the solution is before you today in the documents shared in advance.
What is private credit, and why does Canada need it? Private credit is not exotic or new. It is a necessary part of every mature and advanced financial system. It's a fast and cost-efficient complement to the banking sector. Private credit sits within the alternative assets class, along with infrastructure and private equity, including venture capital and real estate. These four alternative asset classes are the four pillars of institutional investment beyond public stocks and bonds.
Of the four alternative pillars, private credit is the most directly relevant to the main street economy and the one most conspicuously subscale in Canada. Critically, Canada doesn't need to wait for global private credit superscalers like Apollo, Ares and KKR to give itself the capital its main street economy requires to compete. Canadian SMEs are precisely the borrowers that a made-in-Canada private credit system would serve. We have the institutional capital, the financial expertise and the regulatory capacity. What we lack are scaled-up private credit managers.
Canada has built about $180 billion in private credit allocations through its pension funds and institutional investors, including insurers, but the limited scale of domestic private credit fund managers means that the majority, likely $90 billion to $140 billion, or 50% to 70%, is deployed into U.S. private credit markets rather than Canadian companies. Canadian capital is financing the U.S. main street, not our own. Similar capital leakage occurs in the U.K. to U.S.-based private credit fund managers. The combined annual leakage from Canada and Europe into U.S. private credit is between $190 billion and $340 billion. Canada's SME private credit gap is $311 billion below the G7 median, and it is the domestic face of the same structural failure coin.
The same gap that starves Canadian SMEs is the gap that makes Canada an attractive destination for redirected EU capital, if we build the system to receive it. The solution is that, over 10 years, we build a network of 25 federally connected regional private credit fund managers, directly lending to Canadian SMEs in quantities of $5 million to $25 million, targeting $100 billion in new SME credit in aggregate and approximately $30 billion in trackable EU foreign direct investment. These would be Canadian-owned, regionally anchored funds serving the borrowers that Apollo and KKR will never reach, such as the mid-market company in Saskatoon, the clean-tech manufacturer in Rimouski and the indigenous-owned enterprise in northern Ontario.
We propose two policy levers, both modest in cost. One is a $10-billion temporary sovereign guarantee covering the principal and interest in case of non-payment. The contingent federal liability for this would be $700 million, far smaller than the Canada Strong fund's $25-billion endowment and comparable in logic to CMHC's role in housing. This signals to European and Canadian institutional investors that Canada is a credible destination for redirected mandates. This guarantee would be either priced out or completely phased out after an initial period of three to five years.
Second is a $12.5-billion revolving liquidity facility, with loans up to $500 million per fund manager repaid at a 10-year treasury rate over 10 years, requiring a 1:2 private match. The costs would be repaid by participants. Eligibility for these facilities would be capped at fund managers under $50 billion assets under management, encouraging participation by emerging and indigenous institutions from all parts of Canada.
The Canada Strong fund has established the principle that federal anchor capital crowds in private and international investment for Canadian nation building. This proposal extends that model to main street.
Thank you very much.