To expand the market, several asset management firms in Canada have launched private market funds with lower minimum investments.Elijah-Lovkoff/iStockPhoto / Getty Images
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While institutional investors have long used private market investments, a growing choice of funds in this asset class is now catering to retail investors. But is the push from asset managers catching on with investors and advisors?
A recent report from Boston-based Cerulli Associates found barriers to private market investments in the retail space. The report estimates that in the U.S., less than 40 per cent of advisors use alternatives, and of those, the portfolio allocation was about 2 per cent. It also estimated the asset class represents a multi-trillion-dollar growth opportunity.
Daniil Shapiro, director of product development at Cerulli Associates, says private market funds often involve a steep learning curve not only for clients but also for advisors. That’s because of these funds’ relative illiquidity, risks associated with unfamiliar underlying exposures, and fee structures that can involve performance bonuses.
“Another issue is there’s no one standard structure,” he says, adding all these complexities make the so-called “democratization of privates” challenging.
But asset managers are trying. To expand the alternative investments market in Canada, several fund companies – including BMO Global Asset Management and CI Global Asset Management – have launched private market funds with lower minimums than traditional private market funds, which often require millions to gain access.
Unlike previous private market offerings that are closed-end, these open-ended or “evergreen” funds allow investors to buy whenever they want and sell periodically, with certain restrictions.
The new crop of funds offers access to these investments that have been mostly out of reach, says Marc-André Lewis, chief investment officer and co-lead portfolio manager of the CI Private Markets Growth Fund and CI Private Markets Income Fund, both of which launched last year. “Normally, [managers of traditional private market funds] aren’t interested unless you have $25-million to invest.”
Canadian asset managers bring that financial heft, partnering with some of the world’s most successful private market managers.
For example, BMO GAM teamed up with Switzerland-based Partners Group Holding AG – a leading provider of institutional strategies in private equity, credit, real estate and infrastructure – to offer BMO Partners Group Private Markets Fund, launched last year. Then, it brokered a deal with U.S.-based Carlyle Group Inc. to launch BMO Carlyle Private Equities Strategies Fund in May.
Both leverage the expertise of managers’ of hundreds of billions of dollars of institutional money with strong track records of returns, says Jeff Shell, head of alternatives at BMO GAM.
Although Mr. Shell says the funds have been well received among advisors, there’s been “an educational process” to help them understand the funds, their upsides and risks, and how they fit into portfolios.
“For many advisors and investors, even the investor-friendly formats that we’re employing … represent a different buying process and ownership experience than conventional products such as mutual funds and [exchange-traded funds (ETFs)],” he says.
“As a result, we have spent a lot of time getting people comfortable with the process. In many cases, we were seeing advisors first buying for themselves so they can experience what their clients will. Advisor uptake has become one of the key leading indicators that we use to assess the appeal of new product launches.”
As of May 31, BMO Partners Group Private Markets Fund had $181-million in assets under management (AUM) after about 10 months on the market, across more than 1,000 individual investors. Mr. Shell says the fund is being used by investors who are “dipping their toes” into private markets as well as investors looking to get their private assets allocation to a specific target.
The recently launched BMO Carlyle Private Equities Strategies Fund, on the other hand, is being used as a “return enhancer.” (BMO has yet to publish AUM to date for the fund.)
The funds have been most popular among business owners who understand private companies, Mr. Shell adds.
“The story seems to be resonating well, and part of the reason why is that the people who are investing are people who have spent their entire careers – and their families have spent generations – in the private markets,” he says.
Meanwhile, CI GAM’s funds have $2.7-billion in AUM as of July 31.
Mr. Lewis says adoption has been “uneven,” as some advisors have been using alternatives for a long time while others are new to the space.
“Providing your clients with exposure to alternatives is a ‘nice to have’ right now, but it’s probably going to become quickly a must-have,” he says.
Barriers to adoption
Mr. Shapiro says fund managers should expect more educational conversations with advisors, a process he calls “an incredibly heavy lift.”
“In a world in which advisors want simple-to-understand and low-cost products, they’re being sold something that’s more expensive and more difficult to implement,” he says, adding that even educating wholesalers on the products is a challenge.
Portfolio manager Cole Kachur at Wellington-Altus Private Wealth Inc. in Prince Albert, Sask., has yet to offer private market products due partly to these challenges.
Another reason is that even though many clients qualify as accredited investors, they often “already have significant private market exposure” because they’re business owners and own real estate directly, he says. “They’re already not 100 per cent correlated to public markets.”
The limited private market exposure clients do have, he adds, is through liquid alternative funds such as NBI Global Private Equity ETF NGPE-T. The fund aims to replicate the long-term growth of an index of publicly traded private equity issuers, including Partners Group PGPHF and Carlyle Group CG-Q.
Charles Lebel, director of investment solutions at National Bank Investments Inc., which manages the ETF, says the fund is “a unique entry point into the world of alternatives” with “exposure to private equity firms without having to comply with all the restrictions of private markets.”
Yet, the ETF does not hold private investments directly, only publicly traded companies investing in private assets.
Some new private market funds with direct exposure are accessible through mutual fund channels as allocations in managed portfolio solutions.
For example, BMO GAM’s managed portfolios include an allocation to BMO Partners Group Private Markets Fund and will soon include BMO Carlyle Private Equities Strategies Fund, Mr. Shell says, noting the minimum investment with these portfolios is $500.
It’s likely more private market offerings will come in the future given the interest from investors and potential market size, Mr. Lewis adds.
“If we can get investors to 3 to 5 per cent of portfolios from zero, it’s a massive opportunity.”
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