(Toronto) Investing in private markets, an activity once reserved exclusively for institutions and the ultra-rich, is becoming increasingly accessible to the public.
The change comes as the size of the private debt and equity markets has grown over the past decade, and all manner of companies have moved away from traditional finance, leading fund managers to seek ways to market these alternative investments to more average investors.
“ The diversification profile is very interesting”, observes Ben Reeves, Chief Investment Officer at Wealthsimple, which rolled out a private credit investment option last week.
Accredited investors, those deemed wealthy enough by regulators to handle higher risks, have already been able to enter the market for at least a decade, but the generally long and potentially risky nature of investments and the lack of transparency in private markets have been obstacles to their wider dissemination.
With the recent entry of Wealthsimple into this market, and that of Mackenzie Investments last year, private credit investment options have emerged for non-accredited investors that allow them to grow their holdings monthly, while being able to withdraw cash. money every quarter. The products are more flexible than most private market options, but still have some restrictions on qualifications and minimum investments.
After a year that saw stock and public bond markets fall in unison, investors began looking for other options and the number of offers for private credit increased, observes Michael Schnitman, chief investment officer alternatives at Mackenzie Investments.
“People are starting to realize that trees don’t climb skyward in stock markets,” says Schnitman, pointing to the potential for diversification.
“It is particularly important for retail investors to have access to these private market strategies, as they have different sources of return, different sources of risk, different characteristics and different investment universes. »
A growing number of businesses have turned to the private market to raise funds after the global financial crisis led to tighter lending regulations and greater caution from banks, while institutions like the pension funds increased their loan exposure as they sought better yields during a decade of low interest rates.
This dual trend has helped push private lending from less than US$50 billion per year worldwide in 2011 to over US200 billion in 2021, putting total assets under management at US9.3 trillion by the end of the year. year, according to Preqin, an investment data company.
Preqin expects more growth to come with assets under management expected to reach US$18.3 trillion by the end of 2027, although it said in its forecast that the push will increasingly come from retail investors , as more and more institutions reach their investment threshold in this market.
More opaque markets, higher risk
The growth of somewhat opaque private markets, however, also draws criticism, both of the sometimes dynamic business practices of debt-fueled private companies, as well as of the thesis of such investments per se.
Private debt pays higher interest rates partly because its risk is higher, says Jeffrey Hooke, a former private equity executive who teaches at Johns Hopkins University’s Carey School of Management.
“That’s one of the reasons they have high yields, because they lend to junk credit. »
Both Mackenzie and Wealthsimple insist on the stability of their private loan portfolios. Mackenzie’s Private Credit Fund covers over 50 underlying loans in everything from veterinary clinics to waste management companies, while Wealthsimple covers a range of sectors including healthcare, industrial and financial, with a focus on family businesses.
There is always a risk of default, however, and both funds reserve the right to halt investor withdrawals, as Ninepoints Partners and Romspen Investment did with some funds last year.
Hooke, who has been a vocal critic of many aspects of private markets, points out that high fees, lack of liquidity and questionable valuations dominate this investment space.
“Everything is very secret. I just don’t think it’s an appropriate investment for widows and orphans, or for Mr. and Mrs. Everybody. »
The lack of transparency also makes it harder to compare different funds, says Danielle LeClair, director of manager research at Morningstar Canada.
“This comparison between peers is a challenge,” she says.
And while the roughly 9% yields that Mackenzie earns and Wealthsimple is aiming for are a noticeable premium over public fixed-income options, rising interest rates have created more options for investors looking for more options. a reasonable return with less risk, she says.
“As investors consider some of these alternative asset classes, I would suggest maybe they look at the whole space of income options […] maybe traditional income is more attractive to them in the current market environment. »
Private credit is meant to be just one aspect of a larger portfolio, reminds Wealthsimple’s Reeves, but he says it can provide a nice hedge against other asset classes, as rates interest and the markets will fluctuate in the years to come.
“We would like our clients to view this as a long-term investment through interest rate cycles, seen as part of their diversified portfolio. »