How many times have you seen a product you liked and wished you could buy shares in the company – only to find it was privately held?
Well, with private-equity funds, investors with good-sized portfolios can buy into companies that have hitherto been the preserve of institutional investors and pension funds.
That's only one of the benefits. Private equity, like other alternative investments, also offers the potential for outsized returns to investors who are willing to tie up their money for the long term. Some funds have a five-year time horizon, others 10 years or more. Because the shares don't trade, investors are spared the roller-coaster ups and down of financial markets – also a plus.
While the rules vary by province, private equity has been the preserve of accredited investors – those with high incomes and million-dollar-plus portfolios. Some of it still is. Thanks to a recent easing of securities rules, however, many private-equity funds are available from investment advisors who are also portfolio managers.
Private equity ranges from venture capital to turnarounds of troubled companies to buyouts of mature companies, such as when the owners want to retire. All it means is that the shares are not publicly traded, so they can't be readily sold on the stock market. While the terms vary from fund to fund, some offer yearly redemptions.
On the venture-capital end of the spectrum is Epic Capital Management Inc. of Toronto, an alternative investment manager whose Epic Healthcare funds invest in promising medical-technology companies mainly in the Greater Toronto Area. The firm's three healthcare-based limited partnerships are closed to new investors, but it hopes to launch another, perhaps this fall.
"Our investment thesis is that Toronto is a similar medical cluster, in terms of talent and institutions working in health care, to Boston and San Francisco," says David Fawcett, portfolio manager and Epic's founder. "What it hasn't had until recently is a culture of creating companies."
The sector had been focused on academia and pure research. Now, with the MaRS Discovery District's aid, a nascent medical technology hub is evolving. "We're trying to pioneer and be the first to focus solely on Canadian medical technology companies," Mr. Fawcett says. MaRS works with partners to help entrepreneurs launch and build innovative companies.
Epic's first successful investment was in Synaptive Medical Inc., whose equipment is used in image-guided surgery.
"They had some ideas for disruptive technology in brain surgery and MRI," or magnetic resonance imaging, Mr. Fawcett says. That was in the spring of 2014, when the firm had 15 employees. "As of right now, they're projecting to do $50-million in revenue this year."
Synaptive has nearly 400 employees today, its products are sold around the world and an initial public offering is on the horizon. "When they go public, we exit," Mr. Fawcett says.
Another of Epic's investments – one that will catch the eye of folks who have trouble meditating – is the Muse headband, created by Toronto-based InteraXon Inc. Mindfulness meditation is gaining credibility in health care and other fields. The MUSE headband – dubbed a personal meditation assistant – uses sensors to track electrical activity in the brain while the app plays soothing nature sounds. When your mind wanders, the sounds increase in intensity, as if a storm were brewing, guiding you back to a calmer state.
So far, it is a consumer product, but the technology opens the way to other applications as well, among them driver vigilance. The app can detect the first biomarker of sleep and warn you if you are drifting.
Another player among early to mid-stage companies is Kensington Capital Partners, which runs a $180-million, open-ended, mutual-fund-type vehicle for wealthy investors (accredited investors) called the Kensington Private Equity Fund.
"Private equity is an asset that historically has been available only to really large investors like pension funds or extremely wealthy people," says Rick Nathan, Kensington managing director. "This fund has made it available to hundreds and hundreds of investors." The average investment in the fund is $50,000.
"We've been delighted with the performance of it and its success," Mr. Nathan says. "You get the benefit of being in an asset class without having to write a $5-million cheque."
The Kensington Private Equity Fund is what is known as a fund of funds because it invests in other venture-capital funds as well as directly in companies, Mr. Nathan says. "There are over 100 companies in that portfolio that we have a piece of. It's like buying an exchange-traded fund to get access to a market index. It's a way to participate in an asset class without taking the risk of putting $100,000 into my friend's new company."
The fund pays out profits to investors as distributions. "For the last several years our track record is roughly a 10-per-cent payout a year," Mr. Nathan says. Generally, the historical record is a "pretty good indicator of what to expect."
The fund, which offers annual redemptions as an escape valve, buys into companies with a value of $50-million to $250-million. Holdings are diversified by business and geography, with about 60 per cent in Canada and the balance mainly in the United States.
For investment advisors seeking to help their clients diversify, private equity is attractive.
"We're always trying to find different return streams rather than just the [stock] market," says Craig Machel, a portfolio manager at Richardson GMP in Toronto who specializes in alternative investments. "Private clients are able to access some compelling private-equity strategies that were formerly limited to pension plans and institutional investors."
The opportunities are vast, Mr. Machel says. "Less than 2 per cent of U.S. companies are publicly traded."
Companies are taking longer to go public or staying private entirely, he adds. He reminds clients that with private equity, their money could be tied up as the funds "deploy money responsibly, taking a long time to get invested."
In exchange, investors can expect an "illiquidity premium" as companies "come to fruition and pay us outsized returns."