The Case for Private Market Exposure
It is a great time to be an individual retail investor. Increased product choice, lower fees, and countless opportunities for self-education have created unprecedented possibilities. One of the most exciting developments is the strategic move by large Alternative Investment Managers to offer more retail-centric funds. These funds now feature improved liquidity with short or no lock-up periods, as well as open-ended perpetual structures.
Historically, private market investments were the exclusive domain of institutional investors like pension funds. Over time, they became accessible to family offices and ultra-high-net-worth investors who could meet high minimum investment thresholds. Today, the landscape has changed. Many large alternative investment funds now offer entry points as low as $5,000 to $25,000, making them accessible to a broader range of investors. So, should you allocate part of your portfolio to this asset class? The short answer is yes.
What Are Alternative Investments?
Alternative investments refer to asset classes outside traditional equities and fixed income. These include the following, among others:
Private Equity: Investments in private companies or buyouts of public companies to take them private. Some private funds will directly invest in companies, only invest in other private equity funds, or do a little of both.
Real Estate: Direct or indirect ownership of income-generating properties. Can provide exposure to mutli-family residential, industrial, retail, hospitality, self-storage, and office properties.
Infrastructure: Investments in essential public assets like roads, bridges, and utilities.
Private Debt: Loans made to private companies, often with higher yields than public bonds. In Canada, there are also Mortgage Investment Corporations (“MICs”) which focus on secured real estate lending.
Royalties: Income streams derived from intellectual property or natural resources. Farmland and Music Royalties are notable sub-sectors that have gained traction recently in Canada.
Key Terms of Any Fund
Before diving into private markets, it’s essential to understand the key terms associated with these funds:
Minimum Investment: The initial amount required to participate.
Gating: Restrictions on withdrawals during periods of market stress.
Lock-Up Period: The minimum duration you must hold your investment before redeeming.
Redemption Frequency and Notice Period: How often you can withdraw funds and the notice required.
Purchase Frequency: How often can you purchase. This is often monthly or quarterly.
Distribution Policy: Whether the fund pays income distributions or reinvests profits.
Tax Treatment of Distributions: How income is taxed—as capital gains, interest, or dividends.
Account Eligibility: The types of accounts that can hold the investment, such as RRSPs, TFSAs, or taxable accounts in Canada.
Valuation Frequency: How often the net asset value (NAV) is updated.
Public vs. Private Markets
Public markets, such as stock exchanges, offer liquidity, transparency, and accessibility. Private markets, by contrast, are less liquid and less transparent but provide the potential for higher returns and portfolio diversification.
There is significant debate about the differences in risk between public and private markets. On one hand, private markets are less liquid and less transparent, which some argue makes them riskier. On the other hand, public markets are more volatile, which others argue increases their risk. While reasonable arguments exist on both sides, alternative investments are becoming more liquid and transparent, whereas public market volatility has persisted or even increased.
The Growing Dominance of Private Companies
In the United States, the majority of companies remain privately held, especially among larger and more established businesses. A striking 87% of firms with revenues exceeding $100 million are private, with public companies accounting for only 13% of this segment, according to Apollo Academy. The trend is even more pronounced for larger employers—86.4% of firms with 500 or more employees are privately owned (Bite Asset Management).
This shift toward private ownership has been accelerating over the past 25 years. The number of publicly traded companies in the U.S. has declined by nearly 50% during this period, reflecting a dramatic contraction in public market opportunities (Advisorpedia). At the same time, private equity’s influence has grown significantly. Private equity firms managed just 4% of total U.S. corporate equity in 2000, a figure that expanded to 20% by 2021 (The Atlantic).
For individual investors, this trend presents both challenges and opportunities. Many private companies—and their growth potential—remain inaccessible through public markets. Allocating a portion of a portfolio to alternative investments, such as private equity, can offer exposure to this substantial and growing segment of the economy, enhancing diversification and potentially boosting long-term returns.
Benefits of Private Market Investing
Enhanced Returns: Potential to outperform public markets over long time horizons.
Diversification: Alternative investments often have low correlation to traditional asset classes.
Lower Volatility: Often exhibit lower volatility that public equities.
Access to Unique Opportunities: Private markets provide exposure to investments unavailable in public markets.
Inflation Hedge: Real assets like real estate and infrastructure can provide a natural hedge against inflation.
Risks to Consider
Illiquidity: These investments often require longer holding periods, though this has improved dramatically over the past decade.
Complexity: Understanding fund structures and terms can be challenging and requires more due dilligence.
Valuation Uncertainty: Unlike public markets, valuations in private markets may not be updated frequently.
Allocating to Alternative Investments
Rivers Wealth portfolios often include substantial allocations to alternative investments, provided a client has been assessed to have low liquidity needs. Extensive due diligence has been conducted on alternative investment funds available to Canadians, resulting in a carefully curated selection of private funds with strong track records. It’s important to recognize that alternative investments encompass a wide range of mandates and risk profiles. As such, allocations are tailored to the individual investor—conservative portfolios will feature markedly different private market exposures compared to growth-oriented portfolios, ensuring alignment with each client’s unique goals and risk tolerance.
Final Thoughts
Private markets are no longer reserved solely for institutions and the ultra-wealthy. With the guidance of an experienced discretionary Portfolio Manager, Canadians can now access a growing list of alternative investments. When thoughtfully combined with a well-structured public market portfolio, these investment opportunities can improve diversification and enhance overall risk-adjusted returns.
Companies are increasingly choosing to stay private longer—or forever. Given the significant pools of private capital available to them, there is less need to go public. If you dislike the daily ups and downs of public markets, alternative investments may provide a superior investing experience. These investments are generally more linked to the underlying fundamentals of the assets they own rather than the wild sentiment shifts in the stock market.
Reach out if you would like to learn more about alternative investments and how Rivers Wealth incorporates them into client portfolios.
