Private markets becoming more accessible, but due diligence needed

Accessibility to private markets is growing in Canada.

Calgary-based Accelerate Financial Technologies Inc. filed a prospectus for Canada’s first private credit ETF last month. The fund will aim to generate a 10% yield, paid monthly, from a portfolio of hundreds of secured floating-rate loans to private middle-market companies.

BMO Global Asset Management also announced in March that it partnered with investment firm Carlyle to launch a global diversified private equity portfolio for accredited Canadian investors later this spring.

The pool of accredited Canadian investors is growing too. Securities regulators in Alberta and Saskatchewan have adopted amendments that allow people with sufficient financial knowledge to invest in prospectus-exempt products, even if their assets or income don’t meet the accredited investor threshold.

Although private markets are becoming more accessible, they aren’t suitable for all investors. Compared to public markets, private markets have less transparency and offer less liquidity.

Most investors don’t know what questions to ask about private-market investments, said Steve Balaban, chief investment officer of Mink Capital Inc. in Toronto. While public companies must publish financial statements in a standardized fashion every quarter, private companies have no such requirement.

And marketing materials for private-market investments may use varying benchmarks and time horizons for reporting performance. For example, comparing performance to the S&P 600 versus the Russell 2000 could result in a difference of a few percentage points, Balaban said.

Advisors need to know how to ask the right questions and understand a private market product “inside and out” before recommending it to a client, Balaban said. He recommends advisors learn about a fund’s team, investment strategy, process, fees and structure, reporting, secondaries and ESG strategy.

Another issue is the illiquid nature of private markets.

For example, private equity is typically structured with a two-to-three-year lockup, with early liquidation only possible with a penalty, Balaban said. After the lockup period, investors can make monthly or quarterly redemptions, but redemptions are capped at a percentage of net asset value to prevent runs on capital.

Advisors should provide clients with adequate information on private market products to help them make an informed choice, and help find the most suitable investment fit for their needs.

“It’s this balance: you need to simplify things, but you don’t want to oversimplify it so that it discounts the risk,” he said.

Other product news

• Evolve Funds Group Inc. launched the Evolve Artificial Intelligence Fund (ARTI) on March 22. The ETF, which is actively managed and trades on the TSX, provides exposure to AI companies and uses generative AI in its portfolio construction via a database generated by Gradient Boosted Investment Inc., also known as Boosted.ai. Evolve said Boosted.ai’s large language model technology determines a company’s likelihood to benefit from increased global adoption of AI. The ETF’s management fee is 0.60%.
• Franklin Templeton introduced three high-dividend, low-volatility index ETFs listed on Cboe Canada on March 28. The Franklin Canadian Low Volatility High Dividend Index ETF (FLVC) has a 0.15% management fee, the Franklin U.S. Low Volatility High Dividend Index ETF (FLVU) has a 0.12% fee and the Franklin International Low Volatility High Dividend Index ETF (FLVI) has a 0.25% fee.
• TD Asset Management Inc. launched three target maturity Canadian bond ETFs and three target maturity bond ETFs on April 9. The maturities for each set range from 2025 to 2027. The ETFs trade on the TSX and the maximum management fee for all six funds is 0.20%.