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Investing in private markets, once the exclusive domain of institutions and the ultra-rich, is getting increasingly accessible to the public.
The shift comes as the size of markets for both private debt and equity have swelled over the last decade as all sorts of companies have steered away from traditional finance, leading fund managers to look for ways to market these alternative investments to more average investors.
“The diversification profile is very interesting,” said Ben Reeves, chief investment officer at Wealthsimple Inc., which this week rolled out a private credit investment option.
Accredited investors, those deemed wealthy enough by regulators to manage higher risks, have seen already been able to get into the market for at least a decade, but the generally lengthy and potentially risky nature of investments, along with a a lack of transparency in private markets, have been barriers to making them more widely available.
Both Wealthsimple’s recent entry and one launched by Mackenzie Investments last year have responded to the challenge by creating private credit investment options for non-accredited investors that allows them to add to their holdings monthly, while being able to take money out quarterly. The products are more flexible than most private market options, but still have some restrictions around qualifications and minimum investments.
The number of private credit offerings are increasing after a year that saw public stock and bond markets drop in unison to leave investors looking for other options, said Michael Schnitman, head of alternative investments at Mackenzie Investments.
“People are coming to realize that trees don't grow to the sky in equity markets,” said Schnitman, highlighting the diversification potential.
“It's particularly important for retail investors to have access to those private market strategies because they have different sources of return, different sources of risk, different characteristics, different investment universes.”
More and more companies have looked to the private market to raise money following the global financial crisis that led to stricter regulation on lending and more caution from banks, while institutions like pensions have increased their lending exposure in the space as they've looked for higher returns in a decade of low interest rates.
The twin trends have helped push private lending from less than US$50 billion a year globally in 2011 to more than US$200 billion in 2021, leaving total assets under management at US$9.3 trillion at the end of the year, according to Preqin, an investment data company.
The firm expects more growth ahead with assets under management set to rise to US$18.3 trillion by the end of 2027, though Preqin said in its forecast that the push will come increasingly from retail investors as more institutions reach their investment threshold in the space.
The growth of somewhat opaque private markets have however also attracted critics, both on the sometimes aggressive business practices of debt-fuelled private firms, as well on the investment thesis itself.
Private debt pays higher interest rates in part because of the higher risk, said Jeffrey Hooke, a former private equity executive who teaches at the Johns Hopkins Cary Business School.
“That's one of the reasons they have high returns, because they are loaning to junk credit.”
Both funds do emphasize the stability of their private credit loan books, with Mackenzie’s private credit fund covering more than 50 underlying loans in everything from veterinary clinics to waste management companies, while Wealthsimple’s includes a range of sectors like health care, industrial and financial sectors with a focus on family-owned companies.
There is however still the potential for defaults, and both funds reserve the right to halt investor withdrawals as both Ninepoints Partners LP and Romspen Investment Corp. did with funds last year.
Hooke, who has been a vocal critic of numerous aspects of private markets, has emphasized the high fees, lack of liquidity, and questionable valuations that dominate the space.
“Everything's very secretive. I just don't think it's an appropriate investment for widows and orphans or Joe six-pack.”
The lack of transparency also makes it harder to compare between various funds, said Danielle LeClair, director of manager research at Morningstar Canada.
“That peer relative comparison is challenging,” she said.
And while the roughly nine per cent returns that Mackenzie is pulling in and Wealthsimple is targeting is a notable premium to public fixed income options, rising interest rates have created more options for investors looking for a reasonable return with lower risk, she said.
“As investors consider some of these alternative asset classes, I would maybe suggest that they review the entire space of income options ... maybe traditional income is more appealing to them in the current market environment.”
Private credit is only meant to be one aspect of a wider portfolio, said Reeves at Wealthsimple, but one that he said can provide a nice hedge against other asset classes as interest rates and markets fluctuate in the years ahead.
"We'd want our clients to view this as a long-term investment across interest rate cycles, viewed as a component of their diversified portfolio.”