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The world of private investments used to be restricted to only the most affluent individuals. Unlike stocks or mutual funds, there isn’t fractional ownership of these assets, so the total investment amounts needed to get in on this space were larger.
Furthermore, these assets aren’t publicly listed and traded, so finding information on them has been difficult. There have also been strict rules requiring the accreditation of investors that can be approved to invest in some vehicles.
However, private investments have opened up to the average investor recently – and demand is taking off.
The investments can include a stake in a private company, a physical asset such as an apartment building, or a fund that pools several of these assets. It can also include private credit – basically loans or bonds issued by a private company.
“Investors are showing increased interest in private investments,” says Ray Punn, vice president of wealth solutions at Skyline Wealth Management Inc. in Guelph, Ont.
He sees many investors seeking portfolio diversification beyond the traditional fixed income, equity, and cash split. Mr. Punn also notes there has been an evolution of what that diversification means – now including asset classes that didn’t even exist a decade ago, such as digital assets and sustainable investments.
Dennis Mitchell, chief executive officer and chief investment officer at Starlight Capital LP in Toronto, says several factors are driving the demand for private assets.
A big one is that public markets have seen elevated and prolonged periods of volatility divorced from the fundamentals of many businesses and assets. Investors are increasingly attracted to the returns of private assets that are shielded from market volatility and offer pure exposure to the asset and business performance.
There’s also another major factor at play – the poor returns of most readily available fixed-income investments in recent years.
Michael Lindblad, vice president of wealth management at Waypoint Investment Partners Inc. in Toronto, says that “given the low interest rate environment, investors are increasingly looking for investment opportunities that could potentially provide higher returns – and they are willing to forego the benefit of liquidity to achieve this.”
He adds private investments can provide uncorrelated returns that add diversification benefits to investors’ portfolios, as well as lower overall portfolio volatility.
Mr. Mitchell says the low correlation to publicly traded assets and volatility should drive better risk-adjusted total returns for individual investors.
“With real yields for fixed income and equities both negative, real assets stand out as a source of tax-efficient, real yields,” he says.
Mr. Punn adds that private investments also give investors the ability to hedge against the volatility and swings that occur in publicly traded stocks.
He gives the example of a private real estate investment trust (REIT), for which the valuation of the unit price is based on the fair value of the underlying asset itself, plus the net cash flow. The valuation of a publicly-traded REIT, on the other hand, may swing up and down based on factors that have little to do with the asset’s intrinsic value.
Opportunities in the private space
As for what types of private investments are most useful for individual investors, Mr. Punn says products based on real estate, such as industrial and multi-residential, have performed very well historically.
“With the rapid growth of e-commerce, demand has skyrocketed for logistics, warehousing, and distribution space, driving up valuations and occupancy,” he says.
Meanwhile, with housing unaffordable and even unavailable in many markets – specifically for first-time buyers – apartments are serving as a viable alternative.
Mr. Mitchell says he prefers private real assets such as real estate and infrastructure because of their income and low correlation to traditional equities and fixed income.
Mr. Lindblad’s firm favours private credit as a way for investors to augment their fixed-income returns in this low interest rate environment.
He says individuals should look for a private credit investment with a proven track record and a standardized framework that the asset class operates in. For example, mortgages have a standardized legal framework, which means there is a streamlined process in case something goes wrong.
Still, it’s a fact that private investments can come with a higher degree of risk.
Mr. Mitchell says the key risks for individual investors allocating to private assets are due diligence, transparency and liquidity. Generally, individual investors don’t have the resources and experience to perform proper due diligence on private assets, which provide less liquidity to investors, and transparency is usually lower than for publicly traded assets.
However, he notes that firms such as his are now providing professional due diligence on private real assets, along with the transparency required to understand risks.
Nevertheless, investors who need immediate liquidity should not invest in private investments as they often come with a lock-up period and steep fees to exit early, Mr. Lindblad says.
“It is important for investors to truly know what they’re invested in instead of simply looking at a previous track record and taking a manager’s word for it,” he adds.
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