Asset managers make private market push with retail investors in mind

Asset management firms are increasingly venturing into private markets with financial advisors and their high-net-worth clients in mind. Last year’s downturn is helping them make the case.

“If you didn’t have alternative investments in your portfolios, you didn’t do well and your clients are not happy,” said Victor Kuntzevitsky, portfolio manager with Stonehaven Private Counsel, part of Wellington-Altus Private Counsel in Toronto. “And a client not being happy means advisors are not happy. And advisors not happy means complaining to the asset management arms. So there’s been a race to launch these alts.”

Toronto-based Purpose Investments launched three private funds and an accompanying platform for advisors in April, and Wealthsimple launched a private credit fund with Sagard in March.

Banks’ asset management arms are also getting involved with a mix of proprietary funds reserved for their own wealthy clients and others available broadly.

TD Asset Management is offering hybrid public-private products for its bank’s clients, and BMO Global Asset Management released two private credit funds offered exclusively to its high-net-worth clients. It added the BMO Georgian Alignment II Access Fund LP, a venture capital fund that’s available broadly, earlier this year.

BMO has more launches planned, including “evergreen” products that allow clients to invest on an ongoing basis, unlike closed-end funds that raise funds upfront.

“It allows investors to simplify their experience to think more about returns and less about things like capital calls,” said Jeff Shell, head of alternatives with BMO GAM.

The Purpose funds also accept investments daily or monthly, and allow for limited quarterly redemptions, and Mackenzie introduced a fund last year with an interval structure allowing for some redemptions.

Tyler Meyrick, head of corporate strategy and private assets with Purpose, said the evergreen design makes them better suited to being used as core portfolio strategies than a vintage private fund that raises capital over a fixed period and then closes to new investors.

“It’s easier from an allocation perspective for advisors to use it as that cornerstone allocation of a certain percentage of their portfolio,” he said.

Kuntzevitsky agreed that advisors prefer open-ended over closed-end funds.

“Advisors really want to create efficiency in how they operate,” he said, and closed-end funds may require clients to wait years for liquidity while a fund exits its underlying positions.

“With an open-ended fund, we make an allocation and then next month, when a new client comes in, we can make another allocation for the same fund, so your clients hold the same assets. With closed-end funds, you make the commitment and you can’t make any additional commitments, so it creates these inefficiencies in the book of business.”

The shift is creating an incentive for fund companies to launch more open-ended investments, Kuntzevitsky said.

From institutional to retail

Another development pushing private asset managers into the retail market is that many large pension funds are now managing private assets internally, said Marc-André Lewis, chief investment officer with CI Global Asset Management.

“That created sort of a void for private funds,” he said: private asset managers that used to fulfill all their funding needs from institutional investors are turning to the retail market.

CI has developed a private market product offered through existing CI GAM funds, with a standalone offering memorandum fund to be released later this year.

Lewis, who joined CI in 2021 from the Abu Dhabi Investment Authority, pointed to large pension funds that allocate between one-third and half of their portfolios to private investments — a strategy that paid off last year. The Ontario Teachers’ Pension Plan Board and the Ontario Municipal Employees Retirement System, for example, rode private equity, private credit and infrastructure investments to 4% returns while broad 60/40 portfolios posted double-digit losses.

Now, asset managers are pushing the formula and its apparent stability to the broader market.

“Private markets aren’t fringe,” Shell said, adding that 85% of U.S. companies with more than $100 million in revenue are private.

He also pointed to the increased concentration in major stock indexes, where a handful of large tech companies dictate the trajectory. In a few years, Shell said, private markets are “going to become a bigger part of the retail balance sheet.”

The funds also come with risks, most notably a lack of transparency. The case of Bridging Finance, a private credit fund manager now in receivership and facing allegations of fraud, has contributed to hesitation and confusion in Canada.

“Dealers are a little more cautious,” said Ramesh Kashyap, managing director and head of the alternative investing group with Ninepoint Partners.

A report this year from Boston-based asset manager State Street Corp. said that while demand is growing in the retail space for private investments, the firm’s survey found “a strong consensus that the current market and product conditions are not right to make mainstream retail access to private markets happen in the near term.”

Respondents said private markets need to become more transparent before they catch on, and that new products are needed.

That transparency means understanding the funds’ fees — many charge a performance fee when a fund exceeds an annual return threshold — and illiquidity. Even funds that offer monthly or quarterly redemptions limit how much can be removed, and private assets aren’t marked to market the same way public securities are, so investors may have to wait for valuations to be adjusted.

Typical high-net-worth investors can tolerate some illiquidity, though.

“Most investors don’t need 100% of their portfolio to be liquid at all times,” Lewis said.

He added that there may also be a benefit to private assets’ illiquidity and lack of marking to market: clients aren’t as likely to make poor, knee-jerk decisions based on the latest news. “I think it prevents overreaction, and that’s something that’s underappreciated from private markets,” he said.

Educating investors

Jean-Paul Bureaud, executive director with investor advocacy group FAIR Canada, said a lot of investors are interested in private assets, and the recent product innovation is good to see.

“If the retail investor can participate in the private equity market, where there’s much bigger upside potential, it’s worth exploring,” he said. “But like anything there’s going to be hype and it may not be for everyone.”

That’s partly because of the redemption schedules and, given the nature of the investments, there’s also more dispersion between funds, Bureaud said, with “some big winners and a lot of losers,” so research is especially important.

Kashyap also pointed to the importance of education and considering managers’ track record.

While many funds may be new in the Canadian market, a lot of those being offered come from large U.S. managers with long track records, Kuntzevitsky said.

Shell warned that alts can sometimes be jumbled into one large group when funds have very different objectives, from higher returns to growing income to diversification. “You need to be really clear on what the client is trying to achieve, and you also need to be really clear on what the private market product achieves,” he said.

Kuntzevitsky also noted that the push toward private markets may be coming at the wrong time. Alternatives are an important building block for diversified portfolios, he said, but in a volatile market with lagging valuations, there’s a risk of entering at sub-optimal levels. He’s “aggressively” reducing his exposure to alternatives.

“We want to be more nimble and you can only do that with liquid assets,” he said.