Toronto –
Investing in private markets, once the exclusive domain of institutional investors and the ultra-high net worth, is increasingly open to the public.
This shift has led to private debt and equity over the past decade as companies of all kinds moved away from traditional finance and fund managers sought ways to market these alternative investments to more average investors. This occurred due to the expansion of the market size of both.
“The diversification profile is very interesting,” said Ben Reeves, chief investment officer at WealthSimple, which announced private credit investment options this week.
Accredited investors deemed wealthy enough by regulators to manage higher risk have been able to enter the market for at least a decade, but generally have long-term potential Faced with the risky nature of investments and the lack of transparency of private markets. , has become a barrier to making them more widely available.
Both Wealthsimple’s recent entry and an entry launched last year by Mackenzie Investments created a private credit investment option that allows non-accredited investors to grow their holdings monthly and withdraw their funds quarterly. We are meeting this challenge. These products are more flexible than most private market options, but have some limitations regarding eligibility and minimum investment.
As public equity and bond markets fell in unison, investors started looking for other options, said Michael Schnittmann, head of alternative investments at Mackenzie Investments.
Emphasizing the potential for diversification, Schnittmann said, “People are starting to realize that in the stock market, the trees don’t reach the sky.
“For retail investors, having access to these private market strategies is especially important because they have different sources of income, different sources of risk, different characteristics and different investment universes.”
After tightening lending regulations and heightened caution from banks in the wake of the global financial crisis, more and more companies are turning to private markets for funding. Meanwhile, institutions such as pensions have increased their lending exposure in this area in search of higher funds. His 10-year return on low interest rates.
Global private lending, which grew from less than US$50 billion annually in 2011 to more than US$200 billion in 2021, will drive total assets under management to US$9.3 trillion by the end of 2021, driven by these two trends, according to Preqin. reached. data company.
The company expects assets under management to reach US$18.3 trillion by the end of 2027, and expects further growth, though Preqin forecasts that as more institutions reach their investment limits in this area, , anticipates increasing pressure from retail investors.
However, the somewhat opaque private market growth has drawn criticism, both of the sometimes aggressive business practices of indebted private companies and of the investment thesis itself.
Private debt is riskier, so interest rates are higher, said Jeffrey Hook, a former private equity executive who teaches at Johns Hopkins Carey Business School.
“They’re lending to junk credit, so that’s one of the reasons they have such high returns.”
Both funds focus on private credit loan stability, and Mackenzie’s Private Credit Fund covers over 50 underlying loans, from veterinary clinics to waste management companies. We focus on family owned businesses.
Default is still possible, however, and both funds reserve the right to suspend investor withdrawals, as both Ninepoints Partners LP and Romspen Investment Corp. did with their funds last year.
Hook has been a vocal critic of many aspects of private markets, highlighting high fees, lack of liquidity and questionable valuations that dominate the market.
“Everything is very secretive. I don’t think it’s a good investment for widows or orphans or Joe’s six-pack.”
A lack of transparency also makes comparisons between different funds difficult, said Daniel LeClaire, director of manager research at Morningstar Canada.
“That peer-to-peer comparison is difficult,” she said.
And while the roughly 9% return that Mackenzie has achieved and WealthSimple is targeting is a notable premium over public bond options, rising interest rates have made it more affordable for investors looking for reasonable returns at lower risk. Many options are being created, she said.
“As investors consider some of these alternative asset classes, I might suggest that they review the entire area of income options… perhaps in the current market environment traditional income is more attractive to them.”
Wealthsimple’s Reeves said private credit is just one aspect of a broader portfolio, but said it could offer a good hedge against other asset classes as interest rates and markets move in the next few years. increase.
“We would like our clients to view this as a long-term investment that spans the entire interest rate cycle and as a component of a diversified portfolio.”
This report by the Canadian Press was first published on March 23, 2023.
