'Psst! Want to buy some receivables?"
Well, now you can, through a fund for high-net-worth investors that makes factoring and bridge financing its business. Or you can buy a share of timberland (a hot topic at cocktail parties in recent months, wealth managers say), prime commercial buildings or farmland in the U.S. Midwest.
Private investing is growing up in Canada. Far from the old notion of alternative strategies being a bit dicey – littered with the bleached bones of failed hedge funds, as it were – some recent offerings had even the biggest investors pushing to get in the door.
Last summer, Brookfield Asset Management flew right past its target of raising $750-million (U.S.) in a fund to buy timberland in the United States, Brazil and Australia. The company closed the Global Timberlands Fund at $1-billion. In October, Brookfield had even greater success with an infrastructure fund, the Brookfield Infrastructure Fund II for big investors, such as sovereign wealth funds, pension plans and insurance companies. It closed the fund at $7-billion, well beyond its initial target of $5-billion.
"We're seeing a lot of interest in private assets," says Sam Sivarajan, head of investments and sales at Manulife Private Wealth in Toronto – "commercial real estate, agricultural land, timberland, private mortgages." The appeal, Mr. Sivarajan says, is that these assets are not correlated to the stock market or interest rates.
"They're a pretty good buffer, especially in volatile markets," he says. Long term, they're a good hedge against inflation. The Manulife Canadian Real Estate Investment Fund gives high-net-worth investors a share in a portfolio of about 20 blue-chip commercial buildings across Canada.
"One of the advantages of buying private assets is that when the market sneezes (or worse), private assets hold their value because they are not traded on a daily basis," Mr. Sivarajan says.
You don't have to be a sovereign wealth fund to participate in alternative investments – so called because they provide an alternative to marketable securities such as stocks and bonds – but you do have to be wealthy, or what is called an accredited investor.
In Ontario, for example, an accredited investor is a person who alone or with a spouse has financial assets of more than $1-million or net assets of at least $5-million, or whose net income before taxes surpasses $200,000 alone or $300,000 with a spouse.
Rules vary from province to province.
People of lesser means can invest in many alternative strategies but they have to plunk down at least $150,000, which would not be a sensible thing to do because they'd have too many eggs in one basket. Regulators set that minimum to protect smaller investors who may need their money back on short notice. As well, some fund managers would rather not deal with a flood of small investors.
Ideally, people who venture into alternative investments will have at least $3-million to invest, says Tony Maiorino, vice-president and head of RBC Wealth Management Services in Toronto. That's because you don't want any one investment to comprise too big a proportion of your portfolio.
"Try to keep it below 10 per cent."
A drawback with private investing is that you usually cannot get your money out on short notice.
Indeed, since the 2008 financial panic, many individual investors have been wary of alternative investment strategies, Mr. Maiorino says. Instead, people are investing directly in a business owned by a friend or relative with no intermediary involved.
"There are a lot of interesting things going on, but they're not always happening through an investment fund."
So what about those receivables?
Asset-backed loans and factoring are the business of Bridging Credit Fund LP, a fund created by Bridging Finance Inc. in November of 2013. The fund returned $1.42 a unit since inception for a compound annualized return of 7.44 per cent. Minimum purchase is $5,000 for accredited investors and $150,000 for people of lesser means.
Say you're a small manufacturer that has just delivered a big order to Wal-Mart. You've had to pay for your materials and labour, but giants such as Wal-Mart often don't pay their suppliers for 60 or even 90 days. You're strapped for cash.
So you sell your Wal-Mart receivables to a fund like Bridging Credit for less than full value. The fund in time collects full value from Wal-Mart. To you, the manufacturer, the difference is just a cost of doing business, says Craig Machel, vice-president and portfolio manager at Richardson GMP in Toronto. To investors, it's a low-risk opportunity to spice up their portfolios in a time of historically low yields.
"Investors in the fund reap an attractive percentage return," Mr. Machel says. He considers the risk to be low. "Be certain that in this private lending, whether mortgages or bridging, we're not interested in the return if there's a risk of capital loss."
As well as factoring, the fund offers loans secured by such things as inventory and equipment. Natasha Sharpe, president of Bridging Finance, is former chief credit officer for Sun Life Financial's $110-billion global portfolio.