The Power of Private Equity

Private equity is a dream that holds the promise of long-term returns for investors willing to wait. Since the 1970s, private equity markets have grown steadily. In Canada, the private equity fund management industry (which includes buyout and related private equity funds, as well as venture capital funds) oversaw a capital pool estimated at $105.4 billion at the end of 2012.[1] With this trend, private equity could well be a gold mine for investors.

Many institutional investors’ portfolios and large institutional capital pools use private equity investments, partially out of the necessity for diversification and lower risk. For example, the Canada Pension Plan holds more than $88.5 billion in private and alternative strategies, representing 40.4% of its total $219.1 billion portfolio.[2] The Ontario Teacher’s Pension Plan has over $68.7 billion in private and alternative strategies, representing 49.5% of its net total portfolio.[3]

It’s not only Canadian institutions that see the benefits of private equity and are allocating resources to this asset class – the trend is similar in the U.S. Examples include the California Public Employees’ Retirement System, the Washington State Department of Retirement Systems, the California State Teachers Retirement System and the New York State and Local Retirement System. Some of these institutions have made multi-billion-dollar investments in private market securities.

These larger, more sophisticated investors realize that incorporating private and alternative strategies into their investment portfolios offers several benefits that investing in public equities cannot provide:

  • Public equities represent only 30% of investable assets. Including private equities in your portfolio allows you to access the other 70%.
  • Private equities are generally illiquid and therefore have an embedded return premium (price discount). The return premium on private equities is significant, often as high as 40%.
  • Private equities can help reduce correlations, and therefore provide diversification and lower risk for an investment portfolio.

As attractive as investing in private equities may sound, there are many obstacles preventing regular retail investors from tapping into this sector.

First, regulatory limitations prohibit most investors from directly purchasing private market securities. Generally, investors must pass a certain threshold of net income or net worth to be able to invest in private equities. Accredited Investors must have a net worth of over $5 million, over $1 million in investible assets or a net income of at least $200,000 per year (for an individual; $300,000 for a couple). The regulations in Ontario for investing in private equity for retail investors are strict and are intended to shield investors from private equity’s illiquidity, perceived risk level and product complexity.[4]

Another barrier preventing some retail investors from investing in private equity is a lack of understanding of and experience with private equity on the part of both investors and their financial advisors.

You can overcome these barriers by educating yourself about private equity – and by choosing a financial advisor who is a qualified Portfolio Manager. Portfolio Managers have extensive knowledge of and experience with private equity, and if you work with one, you do not have to personally meet the high-net-worth requirements because the Portfolio Manager is considered the Accredited Investor and works on your behalf.

If you would like to further diversify your investment portfolio, speak with a representative at DFS Private Wealth about exploring private equity and alternative securities for your portfolio. Our qualified Portfolio Manager enables all our clients to have access to the opportunities private equity offers, even if they do not meet the high-net-worth requirements. Talk to us today to see if these investments are right for you.

[1] Conference Board of Canada (2013). The private equity experience of Canadian business. Retrieved June 27, 2016, from http://www.cvca.ca/wp-content/uploads/2014/07/PrivateEquity_RPT_FINAL.pdf

[2] Canada Pension Plan Investment Board (2015). 2014 annual report. CPPIB. Retrieved June 9, 2016, from http://www.cppib.com/en/our-performance/financial-results.html

[3] Ontario Teachers’ Pension Plan. (2014). 2013 annual report. OTPP. Retrieved June 9, 2016, from https://www.otpp.com/documents/10179/712513/-/4fc371f9-5c3f-41c0-a625-a4512020113e/Annual%20Report.pdf

[4] O’Hara, Clare (2016). Ontario investors get wider access to private capital markets, The Globe and Mail, Jan. 12, 2016. Retrieved June 27, 2016, from http://www.theglobeandmail.com/globe-investor/investment-ideas/new-rules-give-ontario-investors-access-to-high-net-worth-market/article28134344/

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