Having access to private capital enables investors to construct portfolios capable of transcending the limitations of stocks and bonds
Investors nowadays may be looking for opportunities outside of what was once generally considered a standard investment portfolio of 60-per-cent equities and 40-per-cent bonds, since this type of asset allocation is anchored to the volatility of the public markets.
It’s no coincidence they’re looking elsewhere now. The current environment features low interest rates and high equity market valuations. The solution lies on the other side of the public market. Enter, private capital.
Much like the far side of a distant mountain range, the lesser-known realm of private capital can be daunting or simply inaccessible, since it presents a significant barrier to entry for a typical investor. But this reserved asset class can be extraordinarily lucrative for those with a sense of adventure and know what they’re doing, or at least have a trusted and qualified guide.
The term private capital, simply put, describes assets that are not accessible for purchase on publicly traded markets. These assets are not frequently priced as assets on a public exchange are, and, generally, they also have liquidity restrictions, require notice to redeem and a minimum investment time commitment.
These constraints can help manage investor behaviour, because private assets are not as easily traded as a stock held in a direct trading investment account, and, therefore, irrational decisions can be avoided. Historically, private capital was for institutional investors and high-net-worth individuals, because high minimum investments were required to access. This has changed.
Some segments of private capital may include:
Mortgages : Private mortgage funds can provide capital preservation and a stable, high level of interest income. The loans may be secured first and second mortgages on income-producing properties. Public market comparable: mortgage investment corporations (MICs)
Private debt : These investments are made by providing debt financing to corporate entities through private transactions. Private debt opportunities are most often illiquid investments that generally need to be held until maturity. Investments seek a high cash flow (yield) compared to traditional fixed-income assets. Public market comparable: high-yield fixed-income products
Hard real estate assets : Such real estate is often income producing and spread among different geographic locations and property types (for example, multi-family, industrial, storage, office, senior living and retail properties.) Public market comparable: real estate investment trusts (REITs).
Infrastructure and renewable resources : Investments made in infrastructure and other real assets include highways, water plants, communication, airports, wind and solar farms, farmland and timber. Public market comparable: publicly traded infrastructure firm securities.
Private equity : Investments made in later-stage private companies (companies not listed on a public stock exchange). Public market comparable: publicly listed small-cap stocks .
Venture capital : Similar to private equity, but investments are made in early-stage private companies. Public market comparable: publicly listed small-cap growth stocks
There are some key advantages to having private assets in your portfolio. The first is diversification. Private assets offer exposure to corners of the economy that public investments don’t. In the past two decades, the number of public companies has declined and the number of privately held companies has increased.
“Investors may need access to these markets in order to achieve broader diversification into great companies,” said Bijal Patel, an industry veteran and chief financial officer at Nicola Wealth.
He goes on to explain that another advantage is lower volatility in performance returns.
“Private companies’ valuations are much more a reflection of their actual earnings versus extraneous factors which often influence public market valuations,” he said. “For this reason, they experience lower volatility in pricing.”
Patel also highlights that “by partnering with great sponsors who take activist roles in helping companies to achieve long-term growth versus chasing quarterly earnings, investors may get the opportunity for enhanced returns.”
Finally, in the current low-interest-rate environment, investors are finding typical fixed-income investments less attractive. Private fixed-income assets may provide an opportunity for good cash flow and target attractive yields and returns compared to public-market fixed-income assets.
Sounds great, so what keeps most investors from venturing into this market?
To start with, most private assets have high minimum investment thresholds. Many private funds require investors’ money to be committed for a set period of time, usually more than five years, giving the general partner time to invest, manage and finally divest the fund. There are often significant penalties should you need to sell sooner.
Furthermore, the management fees can be onerous. Investors generally have to pay for access to this world, because private markets demand specialized expertise from fund managers and deals largely come about on the basis of relationships.
I always aim to allow my clients access to the advantages of private investing while minimizing the disadvantages by using pooled funds and limited partnerships focused on infrastructure and renewable resources, private real estate holdings, private equity, venture capital, private debt and mortgages.
As an investor, you may want to work with an investment manager (your guide) who can invest on favourable terms with specialized general partners, participate directly in financings through co-investments, and maintain an evergreen fund structure that gives investors the ability to put funds in — and, if necessary, take them out — at times of their choosing.
Keep in mind that many private asset funds take years to deploy the capital that they raise, so choose one that does not implement minimums and can invest your money right away.
Having access to private capital enables investors to construct portfolios capable of transcending the limitations of stocks and bonds. Like a brave pioneer, you can’t discover all the opportunities available without exploring the offerings along the road less travelled.
Jennifer Leathem, CFP, CIM, is a financial adviser at Nicola Wealth. This article should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.
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TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
Companies in this story: (TSX:GSPTSE, TSX:CADUSD)
The Canadian Press. All rights reserved.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
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