Private Assets & The High Net Worth Attraction

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[00:00:00] Pierre Daillie: Welcome back. I’m Pierre Daillie, Managing Director at, and this is Insight is Capital. My guests today are BMO Global Asset Management’s, Jeffrey Shell and Lillian Ferndriger. Jeffrey is head of Alternatives Commercial ESG, and Innovation from BMO Global Asset Management.

And Lillian is Director of Alternatives Distribution at BMO Global Asset Management. Jeff, Lillian, welcome and thank you so much for joining us for today’s episode.

[00:00:31] Jeff Shell: A pleasure to be here.

[00:00:33] Lillian Ferndriger:Thanks for having us.

I’m excited for our conversation. Today we’re going to delve into the realm of private market investing, a vital instrument for portfolio diversification that promises attractive risk-adjusted returns.

These markets offer an entrance into asset classes and strategies that were previously largely inaccessible territory in the public domain. Moreover, the defining features of private markets, their risk return profiles stand as a powerful key to unlock the full potential of a private wealth portfolio.

A look back in time reveals the compelling performance of private markets as they have consistently outshone public markets becoming a beacon of wealth accumulation and differentiated return stream. In recent times, this asset class has been winning hearts transitioning from its longstanding institutional clientele to captivate high net worth individuals, the segment that’s been growing the fastest.

Now, we’re witnessing an exciting shift, often referred to as the democratization of access. This transformation marks a significant stride for the wealth management industry as it throws open the doors to a broad suite of previously inaccessible specialized strategies within private equity, private debt, real estate infrastructure, and other real assets.

The allure of reduced minimum tickets, enhanced transparency in reporting and lower fees adds to the appeal of these markets. But perhaps the most enticing advantage of this democratization is the boon it provides to private wealth. It serves as the final puzzle piece in portfolio construction, enabling clients to harness an all-encompassing asset allocation in private markets, sub strategies.

This allows for portfolio diversification, enhanced returns, volatility reduction, and crucially a shield against inflation. Today we’re gonna delve deeper into these fascinating dynamics of private market investing. Let’s get started.

Jeff, Lillian, again I know I’ve already said it, but it’s wonderful to have you. And I think to begin, please tell us about the arcs of your respective careers, how you got into the business in the first place, and what’s got you tap dancing into work these days?

[00:03:18] Jeff Shell: Lillian why don’t you start off? Because the, the-


… the arc of your career is a lot more sensible and straightforward-


… than the the arc of mine.

[00:03:27] Liliian Ferndriger: Fair enough. Yes. So my background has been in throughout my entire career just starting as working as an assistant to a financial planner right outta school. From there I ended up learning just what advisors need to be able to run their books of business, but jumped over into the sales side, onto the wholesale side at a smaller firm back in the day that was all about closed end deals and commodities.

From there I jumped over into another asset manager where it was segregated funds and mutual funds, and then from there into sales management. Most recently my experience was over at a hedge fund manager doing national accounts. And so what that means is trying to get products, private markets products approved at the different dealers across Canada.

And there’s where I learned the the need for education and how exciting this area is because it is not that easily accessible. So when the opportunity at BMO arose to be part of Jeff’s team to be able to bring private markets and alternative investments through a bank manufacturer, I had to jump at the chance and of course, to work with Jeff.

[00:04:41] Jeff Shell: [laughs]. Well-

[00:04:43] Pierre Daillie: Your turn, Jeff.

That’s quite a, that’s quite a layup to you, Jeff.

[00:04:48] Jeff Shell: [laughs]. We think we, we all feel very fortunate that Lillian chose to join us around a year ago to help build out this business. My background is highly varied. I grew up in technology. I really grew up in management consulting. I had a variety of different experiences. Joined the bank 12, 13 years ago in corporate strategy.

Spent the majority of my time at the bank in BMO Capital Markets. Most recently I was responsible for financial institutions and in doing so, supported a lot of private markets players and got to know their businesses in different ways that we can support them. So around that time BMO made a significant decision, the refocus our asset management business on Canada, and to really think ahead in, in what we want our product self to look like, what we want our solutions to look like to delight our customers for many years to come.

And private markets was a big I would say, gap in our portfolio, and it’s really been a big gap in the portfolios of Canadian high net worth investors. And the opportunity to come over and to build a team with great people like Lillian to not only select and create great products, but to also position them in a way where people really understand the benefits and they can apply them in ways that institutions in Canada and really across the world have been doing for decades.


[00:06:14] Pierre Daillie: Thank you. So we’re gonna talk about private markets today. Until recently, private market assets have only been accessible to institutional and ultra-high net worth or accredited investors. They’ve become more widely available now to an increasing set of investors. Why do private market assets continue to appeal so much to the wealthiest of investors and institutional investors?

[00:06:45] Jeff Shell: The wealthiest investors often made their wealth or created their wealth through private markets. So a lot of the high net worth, ultra-high net worth segment in Canada became that way through entrepreneurial activities.

And those activities generally don’t trade publicly. So there’s a inherent understanding of private markets that I think start off with a pretty compelling appeal. And when you talk to many of business owners about their choices, their investment choices, their best investment choices is often the thing that they’re most familiar with, which is putting more money or more resources into the company that they’ve built into an industry that they really understand.

And so to have the opportunity to take some of their well, and then to allocate that to other business owners in a way where you’ve got professional managers who know exactly how to create value to guide them to great outcome, that’s a very compelling proposition.

And our belief is that the ultra-high net worth were presented with it before others that there was a lot of focus on education, and there’s more of an inherent understanding of the private markets or privately held companies than maybe we would see more broadly.

[00:08:11] Liliian Ferndriger: And I think too, that there has been a shift when it comes to the acceptance behind private markets and understanding what they actually are. We invest as Canadians in our pension plan and no one as the maple model across the street and across the world about over 50% in private markets in CPP.

We already are investors in there. It’s just getting that access and trying to find a way to do it individually that has been lacking up until now.

[00:08:42] Jeff Shell: It, I think part of it also has to do with the naming convention. Like people have referred to them as alternatives. Alternative gives you the sense that they’re fringy or they’re somehow a deviation from the norm. But when you actually unpack what alternative are, you end up in the spot where you started, Pierre, when you’re describing private markets.

You can really do some amazing things as a private owner that are harder to do as a public owner. And when we look at the span of private ownership, even if we just start off with companies, so looking at the private equity space that in the US 85% of companies that have over a hundred million dollars of revenue or privately ha-

So you actually get, it’s not a fringe part of the market. It, in fact, it is more representative of the real economy, some might argue than than publicly traded. And so to not have that within your portfolio does create a pretty significant gap. And when you do own it and you own it with professional management through private equity structures, you start to enjoy the benefits that pension plans and other professional managers have enjoyed for years. And not doing one part of it that’s private equity.


And then you’ve got, private credit that finances in large part private equity. It could include other things too, but in large part finances private equity in ways that again, you’ve got professional managers who really understand how to underwrite credit risk, and they’ve grown in a space that, I won’t say the banks have abandoned, but because of the regulatory pressures, banks have been less inclined to participate.

So you’ve got private equity that requires financing, that’s helped breed a very exciting market in in private credit. And then the other two pieces that you mentioned real estate and and infrastructure, also amazing things to own privately relative to the public option.

If we talk about real estate private ownership a- allows for the model where you can, buy buildings, you can improve the buildings, and then you could sell them at some point in the future. The things that many people do as DIY investors and buying property, and if they’ve got the expertise to do it themselves the public markets version of that REITs it doesn’t allow for the same amount of improvement in value creation.

It’s more about an efficient way to buy a stabilized asset that produces great income. And then turning to infrastructure, again, owning it privately allows you to really stretch out your time horizon as an owner and to invest in the types of platforms that you can grow by adding more solar panels or more electrical transmission capacity to not only benefit from really stable cash flows, but also to get a lot of value appreciation.

So anyway, all of this to say is that private markets, it’s not fringy. It’s a really-

… really big part of the economy. And owning something privately versus owning it publicly allows you to do some really amazing things that create value that produce a strong income and can help really diversify versus public markets holding.


[00:11:58] Liliian Ferndriger: like calling that the four basic food groups of private

[00:12:01] Pierre Daillie: markets.

[laughs]. I think it’s I, two points. One to Lillian’s point about CPP being a substantial investor in private markets behind the scenes, I think, you could also extend that to, investors, famous investors like Swensen, David Swensen at Yale Endowment, who pioneered a lot of the entry into private equity and private markets in, in, in the Yale Endowment itself.

But I think it’s worth noting that wealthy investors, as much as anyone else, to stay that way, and, they like to stay wealthy, these solutions these private markets solutions, private equity, private debt real estate infrastructure, they’re they have been structurally designed, first of all to cater to that audience of investors historically.

But they’re also structurally designed to be less risky and less volatile than public markets. That’s really one of the great misperceptions institutions, endowments, and wealthy investors understand these assets better. And that’s, to your point Jeff, about, entrepreneurs being, the, not only the, the bearers of the high net worth of high net wealth in Canada and elsewhere.

If you’re an entrepreneur, you understand these assets, you understand how these assets work, you understand how business works at a basic level. And even at a very granular level, you’re able to look at financial statements and reporting and make a and make a personal assessment of those assets.

Having, with the experience of having been an entrepreneur running your own business, running your own family business or empire you have the ability of that. And so my, I just to cap off my point wealthy investors want to be able to participate in the ownership of assets where there is more control, not less control over what happens in terms of management, perhaps valuations and volatility, right?

[00:14:28] Jeff Shell: Yeah, I think that’s a really important point. Like when you buy into a private structure and you do it in a fund format, you typically have very seasoned management that with very tried and tested value creation plans, taking companies, buying them, turning them from good to great. And the way that they do it not only do they have the value creation programs, they’ve got access to a deep roster of advisor.

And those advisors will take a very active role in helping guide those companies. It’s not necessarily a comfortable spot to be as a business owner that’s been acquired by a private manager. But it’s one in which, time has shown that you can create an awful lot of value through a variety of different mechanisms.

The three main categories of value creation that we have seen over the last 20 years in private equity… I’m only talking about private equity right now our financial engineering, where seasoned managers will look at what they’ve purchased, and they’ll use their buying power and their financial wherewithal to optimize the balance sheet.

In other major source of value creation has been that his interest rates have been as low as they’ve been. If you’re able to create more income from improving the performance of a company, that income gets valued with very high multiples that just keep increasing.

And then the third is they fundamentally getting into that company, using your advisory network, using your value creation capabilities to actually improve the underlying performance. Our view is that for the next decade or so, it’s pretty hard to project interest rates.

But let’s just assume that they stay ale- elevated. If they do, the financial engineering is unlikely to be a major source of value creation from private ownership.

We certainly don’t think that multiples are going to expand. We think they’re going to contract. And so our focus and is on managers have got a great track record choosing very good companies and then helping guide them to be even better. And that, from a a due diligence standpoint, we spend much more time on the on the third track than we would in other business environment.

[00:17:00] Pierre Daillie: And that third track is something that doesn’t exist in mutual funds or ETFs or other investments. You have a lot more con- because you’re directly interacting with the businesses that you own-

Yeah. I-

[00:17:17] Pierre Daillie: … In private markets, right? So you have the, you have portfolio management than you’ve got the, this deep bench of advisors, and then you have the actual interaction between the m- the manager, the portfolio manager, the deep bench, and the proprietor, the owner of the business, or the controlling interest of the business.

[00:17:37] Jeff Shell: In that, that active ownership, Yeah.

… is something that you just don’t see having as much influence in public markets. If you look at public market governance it tends to, and of course it varies, but it tends to be more on the risk management side than on the value creation side, where in, in in private markets, you certainly see a lot of focus on value creation and a ton of alignment of interest between the manager that’s representing the investors, and they’re often also investors in the in the outcomes of that company.

[00:18:12] Pierre Daillie: But I should I, I should-

And companies… Sorry, I don’t mean to interrupt you.


[00:18:19] Pierre Daillie: But companies sometimes go from being public- publicly traded businesses go private.

And that’s for the very reason that, that you’re talking, it’s when you have a large swath of publicly public ownership, publicly traded ownership, not public ownership, but publicly traded ownership there, un- unless some kind of activism takes place on the board through proxy fights and things, which we do see.

It it’s just, you don’t have to go through that in private markets.

That’s right.

[00:18:59] Pierre Daillie: It happens naturally. That naturally the controlling interests or the owners of the private companies are gonna interact with their private market owners. And-

That, that’s a great point.

… solve the problems internally without having to go through this whole shareholder proxy voting fight that, that often happens with a lot of companies. When things aren’t going the way shareholders like.

And that-

It ha- it happens more, far, more quietly in the private market.

[00:19:28] Jeff Shell: In the public market, you- you’re really believing in the management team and in private markets, you’re really believing in the value creation team. So it’s a little bit different of a spin on how you how you select companies. We, of course, at Global Asset Management are big believers in public markets, and we really like the way that public and private markets could compliment each other.

Now, there’s a study that that one of our friends JP Morgan did a number of years ago that looked at what happens if you’ve got a portfolio that’s got 80% equities in 20% debt 60, 40, the traditional portfolio, 40, 60 the other way around, and then you add in 20% alternatives.

So you end up rebalancing, creating a bit of space, adding in 20% alternatives. And they also use more of a private market definition that you’ve been using Pierre. So the private equity, private credit-


And then,

[00:20:25] Pierre Daillie: In Realta.

And you also have a great chart for your previous point that I didn’t cover off, which was that, that there’s, in terms of companies in with over a hundred million in revenue there’s eight times more private companies with over a hundred million in revenue than there are publicly traded businesses.

[00:20:47] Jeff Shell: That- that’s

[00:20:47] Pierre Daillie: right. And what those two-

Which is the 85, 80, 85 or 87% of the market of bus- businesses with revenue over a hundred million is private.

[00:20:59] Jeff Shell: That- that’s right. And that the two punchlines from those charts would be from the one that shows the private ownership, that if you really want to have diversified access to the real economy, you probably want to have private markets in there. And then i- particularly on the equity side, I think the punchline from the asset allocation chart is that by thoughtfully and including private markets in your portfolio, you’re likely to reduce risk over time and also improve the return.

[00:21:28] Pierre Daillie: So that it kinda, it reminds me know, back to Lillian’s point about CPP. Canada is 3% of the global economy, right? In terms of market capitalization. If you have 40, 50, 60% of your assets in Canadian equity markets you’re completely blowing out. The overweight of home country bias, right?

And the ratio’s a little bit higher for private versus public. But it, it reminds me of that same diversification mantra that was, that, that continues to circulate, which is, why would you invest so much of your wealth in one geographical region or one country and not look at the rest of the world or the world of opportunities?

And that’s the same thing here, is that you have 13% of the, just speaking of the US of course, you have 13% of the US economy in terms of business is publicly traded companies. 87% of it is private. How could you not look at private? And I think it’s not that people haven’t looked, it’s that it was inaccessible.

Yeah. And I think that’s what’s-

If you weren’t of a certain strata or wealth, you couldn’t, or you weren’t an endowment or an institution, you couldn’t, you could not look at those because you couldn’t have, there wasn’t enough money in your portfolio to allocate to those those assets, right? So I think-

And that’s the exciting

[00:23:11] Liliian Ferndriger: shift that’s happening right now, Pierre.


Is the fact that advisors are now looking at the way that they’re building their portfolios differently. Back to the same idea, if diversification is king, how can you be diversified without looking to the private markets.

And knowing how to use the private markets in your portfolio to be able to bring down the risk and increase your return to what Jeff was talking about from our charts from JP Morgan is really important. And so the way that we look at private markets is we put them into three buckets on what they can do for a portfolio.

So we’re either looking for a return enhancer, right? So that’s where our private equity stuff would start to come in. Then we look at income generator, right? So our private credit, perhaps our real estate. And then finally we look at more a risk mitigation or diversifier in general.

And so we bring that all together into modern portfolio theory. And you have all these new tools that advisors now have at their disposal and constructs that we’re now providing for them to be able to build really great portfolios. And it’s just through education and through awareness, and that they now have this access, that’s what our mission is right now is to pound the table and get people to start-


… looking at private markets.

[00:24:24] Pierre Daillie: And that’s why we’re having this discussion today. I liked your point. Thank you Lillian, that was great. Your point Jeff on, all private market assets being grouped in with alternatives and how, that leads to a lot of misperceptions or misjudgments about what they are or what the correct, taxonomy should be for private markets.

I think why don’t you talk about what the difference is between, liquid alternatives and private market assets? ‘Cause there’s some key differences to bear in mind, right?

[00:25:09] Jeff Shell: Yeah. When you use the broad topic of alternatives, you could be referring to liquid alternatives. You could be referring to hedge funds, you could be referring to collectible, you could be referring to people’s private real estate holdings. You could be talking about crypto. It’s such a broad base, but it’s really hard to get comfortable knowing what it is you would be buying and how you would fit it into a portfolio like Lillian just described.

And that’s why we like the more narrower version, the private market version. There’s certainly some very compelling liquid alternative strategies, which really at the core of it is using some more sophisticated techniques in order to be able to isolate risk and either put more of it on or take less of it.

That is not our focus right now. Our focus is trying to broaden investors access to the very huge significant part of the real economy that currently isn’t investible. And our approach to doing it is twofold. We look at what our advantages are as BMO financial group and the, when people think about BMO, they think about a bank.

When they think about a bank, they think about deposits and loans and maybe, other banking related products. The loan portion of our bank is huge, and our track record is fantastic as a commercial underwriter.

We are a ma- in a very special group of Canadian banks who are known as being very shrewd stewards of capital, very smart underwriters. And so a big portion of what we are doing to give access to people in ways that they wouldn’t otherwise have to sophisticated investment products, is using our commercial underwriting as the basis to design some pretty special products.

And so there should be a look forward to more solutions coming from BMO in the coming year with the theme of giving investors access to the bank underwriting expertise. Outside of that what Lillian and I and the rest of the team do is we look at across different managers that have capabilities we can never create ourselves.

Maybe they’ve got an expertise in investing in technology. Georgian is a good example. We partnered with Georgian one of Canada’s best known, ha- technology investors to design an access vehicle for Canadian high net worth investors.

But we, but our scope of reviewing other solutions is global, and we spend a lot of time with other managers. And once we have a strategy, we think about how do we deliver it in ways that will get through some of the hurdles that people have historically had to buying private markets products. And so we are quite excited about a product that we are going to be bringing to market early summer.

And that product provides diversified access to private equity, private credit, real assets, so some real estate, lots-

… of infrastructure through a single vehicle. And you’re able to buy that vehicle when it makes sense for you, so you don’t have to wait for them to be in market raising funds. You can buy when it’s the right time for you to buy. And you do, although we don’t suggest that you hold it for a short period of time, you do have the flexibility to be able to sell when it makes the most sense for you.

So you get access to those four food groups that Lillian talked about. In that access, it’s not that 3% that you talked about in Canada, it’s the 97% outside of Canada.

So in the spirit of choosing a partner who has capabilities, we don’t, they’ve got almost 2,000 professionals around the world looking for great opportunities. They’ve got portfolio management where you’re, they’re able to see every single deal in the network and choose the ones that work the best for the Canadian investor. And we are working hand in glove with them to design-

… And we did to design a solution that we think really is gonna be a special compliment to the to the portfolios of many Canadian investors.


[00:29:43] Pierre Daillie: You have a suite of private market assets in place, and you call them one, one, one grouping of those assets is co- is core.

And right, the other is octane, right? So how does that work?

[00:30:04] Jeff Shell: So going back to Lillian- to Lillian’s comment, the way that you build a portfolio was so highly customized. And investment advisors know this better than anyone, that the needs of investors are going to vary. So those who are looking for a little bit more octane in their portfolio would focus more on return enhancers, those who are looking for more stability of income… We’ve got income related solutions. Those are gonna be credit oriented, or as Lilian said infrastructure real estate where you’ve got long run contracted cash flows, and then you have your diversifiers.

The things that if you’re primarily invested in Canada, they give you access outside of Canada. But one of the magical things about private markets is you can create diversification benefits without sacrificing on yield. So for a standard and I know there’s no such thing and I- I’m in I’m in some uncomfortable ground here, but for-


… a typical 60 40 investor-

… who’s looking for a balanced solution, we would overweight a diversifier, we would have that as the core within their portfolio, could be y- let’s say two thirds of their private market allocation. And then we would look with satellite strategy, so compliments to the core to be able to get that extra thing that investors are looking for.

Maybe they want a bit more income, so we would dial up the income portion of the sleeve, maybe they’re looking for octane, and then we would dial up the return enhancers.

And it’s really those three building blocks that advisors ought to be thinking about in order to create portfolios that give you the benefit of of private markets. We are very much in favor of having a core solution that allows you to buy when you wanna buy and sell when most appropriate for the investor.

What we have found, Lillian and I and the rest of the team, Lillian would of course have experienced this before I would, based on her experience with advisors and with investors. What we have found is really changing is advisors are having more discussions with their clients and understanding more about their preferences.

In an environment like this where it’s really hard to predict what the next period of time is gonna look like from an equity standpoint, really hard to predict interest rates and what they’re going to generate. There’s even more of a sense from people who grew up in businesses, family owned businesses, or made their money in private market to wanna invest more in the thing that they know and less in the thing that they don’t. That’s moving in ways that are hard to understand.

And so we’re finding that advisors are having more open discussions with their investor clients who are asking about private markets, and they’re actually finding that, like when you position it as this is a scaled way to do the thing that you have been doing, your family’s been doing for generations-

… that there, there’s not only recognition of why that’s a beneficial thing to do with the portfolio, there’s quite a deep attraction. And within that attraction, we are actually finding that people who might have been interested in investing in technology, but they, it’s so hard to follow what’s happening when you invest in technology. They’re interested in maybe not the hype assets, maybe they’re interested in more of the infrastructure that ends up supporting today-

… and tomorrow’s technology today and tomorrow’s economy. And that’s part of how we chose the strategy that we led off into the tech space. You’re dealing with North American, largely North American software companies, that’s who they invest in, whose customers are also businesses. So again, not hyper assets. They- they’re creating products that are valuable to the economy.

And those products are in spaces like cybersecurity in, in spaces like industrial automation where we know there’s gonna be natural growth as the economy continues to-

… be rewired with zeros zeros and ones as opposed to, steel and rubber. And in, in a format where they’ve known these companies for a long time, they’ve established their place in the market. A lot of investors who have an interest in technology, but they found that, found the space daunting, find the vehicle and the manager that we’ve put in front of them to be quite a compelling way to, have fun with their investing-

… and also expect the type of octane that you get out of out of return


[00:34:55] Pierre Daillie: Yeah. So that’s, that’s one of the avenues within your suite that investors can access venture capital type investments. And-


… as you said, not necessarily of the hype assets but, industrial automation is an exciting example to talk about because, the industrial investment in technology was really, it was under invested for quite some time, maybe at least a five or six or seven year lag.

And so there’s a lot of pent up opportunity in that space as companies start to spend more money on technology and infrastructure itself. Tech- in terms of automation I think, COVID really the pandemic really highlighted all of that as well. But those aren’t, those private opportunities are not available in the public marketplace.

And, by the time you hear about something exciting, it’s already, typically valued well beyond comfort levels, right? And so when you have an opportunity to get into, private businesses of any kind that have that hold, great promise it’s a lot more exciting to do that at a lower valuation than at what could be deemed to be a high valuation.

As it’s so often, when people get involved in IPOs, companies going public for the first time and have never had an opportunity to be in at the, at, somewhere between the seed and IPO level. You’d often paying very dearly for it. And that’s not a strategy that really sits well with most high net worth investors or pensions or endowments. Why would I buy a business as it goes public?

I’d much rather explore the opportunities at the at the ground, or, closer

[00:36:54] Jeff Shell: to the ground level. And That’s what I find too, is actually resonates quite well with both advisors and investors is in the private markets, it’s more personal.

[00:37:04] Liliian Ferndriger: The money that you’re investing, where it’s going. The companies, the GP that’s working on these on these deals is integrated into the companies. They are part of those companies. And as an investor, you can say that you were part of that growth, and I think that really does resonate. You end up having ownership over it more so than if you’re just buying a stock on an exchange.

[00:37:28] Pierre Daillie: Yeah. It has more impact and it it, it’s more impactful, but it also has more impact on the investor mindset. I’m curious, are advisors, when they bring up the subject themselves as opposed to being asked about it, when advisors are bringing up private equity or private assets to their high net worth clients, are they seeing like an aha moment where, the client says, oh, I, I wondered when you’d come to me with this, or, I wondered if you’ve ever, if you would ever come to me with this?

And now it’s available, right? It’s now advisors can actually say, I have, we have a channel where, we can s- you know, bring you into the private market and,

[00:38:19] Jeff Shell: Yeah. Yeah, P- Pierre I would say that it, the openness to the conversation is probably been there for a long time from the investor standpoint, maybe even more so-

… in an uncertain environment like today. But when it come, when the advisor for the advisor to have the confidence to get into that space, the obvious question that the investor would t- would ask is, okay, I am interested. How do I buy it? And then the advisor has to go through all the nuances of, okay, you wanna invest a million dollars, $100,000, $10,000, great, but you’re not actually investing that, you’re committing that.

And at some point in the next three to five years, that’s gonna get drawn. I can’t tell you when, it depends on when they find something to buy and that thing is gonna be really good and you know that they’re gonna do a great job, but it’s hard to project even how that investment plays out.

Once they buy that thing and it’s not one thing, it’s probably 10 to 30 things-

… there’s also going to be a series of sales and recapitalizations and events that will have money show up in your account at some point between now and 13 years from now. It’s a very, it’s a very unnatural discussion for somebody to have who’s been used to advising their clients and building wealth in a certain way.


And so that’s part of what makes us so excited about these new formats that you can buy it not so different from how you would buy a mutual fund. You could sell it when is appropriate to sell. You don’t have to wait for the net great investment. Your money gets pulled when you wanna invest, and it gets-

… Spread out over a diversified pool that’s global. So you really do in- invest, you don’t commit. And so it, by eliminating a lot of, there aren’t barriers [inaudible 00:40:11]-

[00:40:11] Pierre Daillie: There, there aren’t onerous lockups, there aren’t, you don’t have-

That’s right i-


[00:40:19] Jeff Shell: Now where people should be wary. We talked about the three different formats or the three different objectives, return enhancers income generators and diversifiers. diversifiers in your core we would highly recommend that you ensure that there’s a basis of liquidity and valuation that seems fair and appropriate.

When you’re talking about the return enhancers, fundamentally, you’re buying company is not tomorrow, but when the time makes the most sense, when you found the right asset, when you found the right price, and you’re selling it once, the value creation program has been had a chance to to create to do the thing that it’s supposed to do, and it’s being sold at some point in the future.

You don’t wanna rush timing. You don’t wanna force money in too early-


… and you don’t wanna force money out too early, and you don’t wanna hold on too long. And so when you’re thinking about your return enhancers, and that’s part of the reason why it probably belongs for most investors of a satellite as opposed to a core, you really need to accept that you’re dealing with a longer time horizon investor experience.

And that, we can get to that in building a portfolio with advisors that makes sense for clients. But that’s the part that we would be very cautious for investors who are thinking about a private equity solution other than the as a rule would think be very cautious about a private equity solution that needs to hold companies for a long period of time that promises liquidity in a way that doesn’t match up with the thing that they’re buying and the value that they’re creating.


[00:42:03] Pierre Daillie: It’s, reminds me of a conversation we had on this, on the podcast with another asset manager. And, it was about entrepreneur… It was about the entrepreneurial mindset, which is that, when you’re dealing with ultra-high net worth entrepreneurial individuals or families the- they’re not thinking about… There is an element of where the entrepreneur who has amassed a certain amount of wealth is thinking about, how do I make this, how do I make this more?

But it’s not the p- it’s not their primary objective. Their primary objective is how do I keep it and grow it for as long as possible and keep it in my family, and keep it in my family for, more than two generations or more than three generations.

And the last thing that… One thing I from my experience as an advisor was that, with entrepreneurial clients that I had, they were already in their own minds taking all of the entrepreneurial risk that they were taking, allocating to their businesses, growing their companies and of course the most natural place for them to put more of their investment was into themselves, into their companies.

And so there was an aversion to investing in a lot of their wealth in public markets because of that control factor, that, that idea that, things can go wrong very quickly in the stock market. Things can go wrong in the bond market as well.

And if I’ve got all my assets, my family wealth in publicly traded assets, and everything goes into the tank, the economy goes into the tank, my business might suffer as well. And then I might find myself wanting my assets or wanting some of my wealth to shore up needs in my business at the same time.

And then you have a double whammy, right? Your business is down, your wealth is down. And full circle, that mindset is way more conservative. And that’s why, these types of assets were created to be differentiated pools of wealth where you weren’t going to be subject to the whims of the market and also provide the compliment to that traditional stock bond portfolio that, that you want to have alongside with these assets. That, that’s a great point. And as Pierre the portfolios aren’t constructed with absolutes in mind. And when you are dealing with that high net worth or just, math affluent advisor, and you’re wondering, or the atory investor you do wanna understand what their objectives are. You do wanna understand what they need to live off of that you need to understand how they want to spend their retirement.

[00:45:31] Jeff Shell: You do need to understand what their values are and what they wanna leave to the next generation. And that’s, that really fits into the different buckets. If you’re talking about retirement, you’re thinking more about income, you’re talking about next generation, you’re thinking about more about return enhancers. And if you’re thinking about something that just compliments public markets in the in the best possible way, you’re thinking about diversifiers.

So it, it’s not necessarily a story of absolute it’s the it’s in the texture of really understanding the values of your and objectives of the investors that, that you can find probably the right answers to the allocation question for them.

And that, and

[00:46:11] Pierre Daillie: That would be a very customized discussion. Very, personal discussion and negotiation in terms of, working through, all of your clients’ sort of integral objectives.

[00:46:26] Jeff Shell: And that, that-

… and Pierre, that’s our, our-


… our advice to investors who are, who are thinking about private markets is to work closely with your advisor. Even as products become easier to buy, advice is almost more ess- more essential than ever because you do have the chance to buy some of these things. If you look again at the return enhancer category, the difference between a first core quartile performer and a third quartile can be pretty dramatic.

We’re talking 35% IRR versus maybe scratching to break even, right? So choosing the right manager, building a portfolio, not just taking one position, but thinking about this in terms of the core and satellite, and I’m glad you brought that up that’s really what we would encourage investors to do in close consultation with their advisors.

And you’re

[00:47:24] Pierre Daillie: also available-


… in terms of helping them navigate the conversations, helping them navigate the knowledge that’s required helping them gain the sophistication and awareness of what and how it all works [inaudible 00:47:42]

[00:47:41] Jeff Shell: available.

That’s what I spend all

[00:47:42] Liliian Ferndriger: my time doing.

Yeah. [laughs].

So I work very closely with advisors. I work very closely with their investors. And that’s part of the value add with BMO GAM, is that you do have an entire team that can help support, educate and just help out and to bring private markets to the

[00:47:58] Jeff Shell: masses.


Prob- probably the most fun part of the job, Pierre, is, is-


… is being a part of those aha moments and helping families and helping advisors achieve great benefit in their

[00:48:15] Pierre Daillie: long, in the long run planning.

I agree. I couldn’t agree more. I think that’s, I think that’s probably the most satisfying aspect of the work is actually creating, finding solutions and then having them see, and then seeing them come to fruition, seeing them work is very satisfying.

It’s not hard to understand why advisors are so careful about how they allocate increasingly careful. It, this, things that market has become increasingly complex. And the available options is what is making it more complex. And being able to navigate those options is critical.

So I wanted to come back to something you said earlier, Jeff, which was you were talking about the way that how the allocations, how allocations to private equity, private credit, real estate and infrastructure have historically improved the performance of portfolios.

And you have a terrific chart in your deck, which we’ll put up in lieu of what you’re about to say, just to it’s the it’s, it’s the chart, right? It’s the chart of volatility on one side and return on, on, sorry, volatility on the bottom axis and return on the vertical axis.

But, it’s great to see, you know how, I love the illustration’s perfect. Because it shows exactly how a transformation of allocations, a re- a shifting of allocations from purely public markets to adding an allocation to private markets and some blend of allocation to private markets changes the lower, not only lowers volatility, but enhances returns.

So you have that, you have that move from, am I in the right direction? You have the move from here, [laughs], which is the bottom from the, from the lower right to the upper left, right? Or maybe it’s this way depending on which way the video goes, [laughs], right?

But that’s the ideal. That’s that efficient frontier methodol- or w- way of determining, why would I do this? So can you, do you want to, can you explain how that works?


[00:50:56] Jeff Shell: Or maybe I just did. [laughs].

What we, what I, I think you did an excellent job, but what we really like about that chart is that no matter when you start, if you take a long enough time horizon you’ll note that in no matter whether you start heavily weighted towards equity or heavily weighted towards debt, in all cases by including a well constructed alternative basket within your portfolio, you end up moving your volatility down. And that’s a proxy for risk.

They end up reducing the risk of your portfolio, improving the certainty of performance, so moving to the left, and then you also end up improving your return. And that, that was a bit of an eye opener to us. We thought that we understood the risk part but no matter where you start that your returns also go up, it really shows you the the power of diversification in the construct of a portfolio.

Now, again, that isn’t, we’re not saying go out and buy one alternative product to get to 20% of your portfolio. We’re saying build a core add satellite around that and really work with your advisor to come up with the best mi- best mix and the best timing for you to end up in, in, in a position where you do really enjoy those benefits.

[00:52:24] Pierre Daillie: Does it, do you have any how often do concerns about, about tracking error come up? I know this, the tracking error discussion comes up a lot in lieu of, liquid alternatives. But how does that work when you’re examining tracking error versus, a private equity, private credit real estate infrastructure mix against a traditional portfolio? How do you, how do, how would you address that?

[00:52:55] Jeff Shell: When it comes to private credit, it’s pretty straightforward because private credit products tend to be priced on a floating rate basis. So you don’t have interest rate risk. And the measure of success is basically the strength of your collateral. So what are, what’s the loss rate against the loans that you’ve put out? And over time, a long period of time, we’ve seen that private credit is that very modest losses.

If you choose a reasonable manner and reasonable strategy, you’re gonna up in a reasonable spot, and you’re gonna get the benefits of changes in the interest rate environment that you get from a floating rate product. When you look at private equity valuation is of course very important. But the beauty of private equity is you can actually poke into the portfolio companies and look at the underlying performance.

So are they improving revenues? Are they managing costs? The net result of that is your cash flow. And EBITDAs a great proxy that’s often used.

And so you, what you wanna see is a long track record of performance where you’re able to improve the cashflow of those companies when under the ownership of the manager you’re investing in. And what was gonna change environmentally is the multiples that get attributed to those. So the most important basis of of diligence from our standpoint is understanding the value creation formula. How do they do it? Is it repeatable?

And if it is repeatable, you can look on a quarterly basis and see what impact they have had on a company’s underlying cash flows. And yes the environment is gonna impact the multiples that you ascribed to those. But as a private equity investor, you’re thinking not across quarters or days, you’re thinking across years. And the beauty of having the investment period, as long as it is, as you’ve got guild managers with interests that are aligned with yours, who pick the right deal to exit the investments that that you’re in.


[00:55:00] Pierre Daillie: you mentioned piercing the veil and looking at the individual holdings, is that similar to what Warren Buffett has referred to as look through earnings, look through numbers where… Like for example, I don’t want to get into a discussion about Warren Buffet, but [laughs], obviously his company owns a vast number of businesses within a publicly traded, within this Berkshire Hathaway vehicle.

But at any, in any given year, you’re able to look at all the individual holdings and how they stack up against the total so that the sum of the parts are greater than the whole in some cases, right?

[00:55:45] Jeff Shell: I think there’s a lot in common with the with Warren Buffet’s philosophy of buying great companies with exceptional management teams that have the capacity to grow, that have profit mode.

That’s what private equity managers do at a micro scale. They buy good companies, they are the management team. We should think of them as the management team in the same way that Warren Buffet might, who add a tremendous amount of value through, again, are you choosing the right ones through their value creation program?

And they hold it until the company has r- achieved some stabilized level of growth, or they are just, too big for the fund, which is a great outcome of value creation.


And then the next buyer will pick it up and do something great with it too. So either it trades to another private equity company or a strategic buyer, or maybe it goes public. We don’t see a ton of companies going public, especially in this market environment. And but they don’t need to because there’s a ton of financing through private credit and private equity to to sustain the vast majority of the real economy.

[00:56:56] Pierre Daillie: And do you provide the, that look through information to your investors?

It, it-

[00:57:05] Jeff Shell: … it really will depend on the nature of the the strategy and the fund.


[00:57:11] Jeff Shell: It is conventional to have in the reporting packages the underlying drivers of performance with commentary from the manager.

[00:57:19] Pierre Daillie: How do recent trends in impact investing and ESG integration influence the investment opportunities and strategies within private equity, private credit, real estate and infrastructure for your investors?

[00:57:35] Jeff Shell: So it, that’s a great, that’s a great question. ESG are, a variety of different concepts that that, that are put together for reasons that are easy to understand. But if you pull them apart and you think about the power and flexibility that active ownership provides you through, through private equity, you can really achieve some amazing outcome.

Couple of examples come to mind. There’s a manager who we work closely with who is looking at a European toy company. And they thought great company, they couldn’t believe the valuation that they were able to buy it at, and they were trying to explain to themselves, like, how could this be? How is it that we can get such a great deal? It’s an open market, and there was a process. How can we get such a great deal?

And the conclusion that they came to is that there was a real discount because of their environmental record. They used packaging that was not particularly efficient, the toys that they created while beautiful with a devoted audience. They were not recyclable and they also didn’t use recycled input.

And so there was a penalty, and the penalty in Europe plays out through a tax that gets charged on based on the size and weight of your packaging, and also based on having products that aren’t environmentally friendly. So their value creation program involve improving the product, improving the environmental footprint of the product from the easy stuff like reformulating the package, packaging to the hard stuff like changing the plastic formulation.

They brought in environment, they brought in material science- scientists to help with this. They reformulated the product so that when it’s achieved its useful life, it can be recycled.

And now what they’re working on, their third neck of value creation, again, talking about sustainability in the environment, is making it so that the inputs into that toy are also recycled material. So you truly get the value of the circular economy. The ability to develop a value creation program that is so bespoke, and then to see it through, not over, weeks or months or quarters, but years. That’s something that’s really special about private ownership.

You mentioned infrastructure. Infrastructure is a great-

… example as well too. Because when you own infrastructure companies privately, you’re not only thinking about the long-term contracted cash flow that make infrastructure a valuable investment, you’re also thinking about a scalable platform. So for, we’ve got a an infrastructure solution that provides community solar. Your growth plan could involve finding other communities where this would make sense, adding panels improving the way that electricity transfers from the creation to the transmission.

There’s lots of things that you can do to scale platforms to add more value and to really chip away at the e problem the climate related opportunity that needs to get addressed in order for the world to spin the way that we’ve, … grown accustomed to it spinning. So private ownership, lots of degrees of freedom. You don’t have to think about quarters. You can really dig in and have value creation programs that really get at sustainability and the environment. Really get at labor and and broader relations where you might be buying a discount until that’s been appropriately a- addressed. And there’s no better example of active ownership than having the manager effectively control the board and and drive the future, drive the agenda of that company as it works to achieve its potential.

[01:01:32] Pierre Daillie: There’s something very calming about, [laughs], about all this. It, it’s not like I liked your remark about, the quarters not having to worry about quarters. Everything is always, earnings reports, quarterly reporting, and it’s too short, it’s too short of a time for businesses in reality.

And so you can see where, this would behave very differently from the day-to-day gyrations or quarterly gyrations in the stock market could see where it has a great deal of appeal to the entrepreneurial class as well of investors.

[01:02:15] Jeff Shell: It’s a great question, Pierre with, for an advisor to ask in an investor to say, okay, tell me about your business and how you create value, whether they work for a publicly traded company or not, and just draw on a sheet of paper. What are the things that you can improve in the next quarter? What are the things that you can improve in the next year?


What are the things that you can improve with the five to seven year time horizon and patience and support of capital behind you? And you’re gonna find that the things that could really change the shape of the business can take it from a good company to a great company don’t exist in that quarter time horizon, probably don’t exist in that year time horizon. And all of that really gets you to part of the magic of long-term ownership with with, y- really engaged governance and great expertise being being added to to, to how companies operate. And that’s the magic of private equity.

[01:03:13] Pierre Daillie: Yeah. And so if you do value ESG and governance those are things that are inherent to private markets, to your point, right?

[laughs]. Yep.

This has been a terrific discussion. I have to say it’s been very enlightening for me. I hope, the same is true for advisors and other listeners.


[01:03:38] Liliian Ferndriger: I’m most excited about right now is that there’s an opportunity to actually invest in private markets like never before. And being able to give access to Canadians to things that were traditionally only for institutions is something that I’m really passionate about, really excited about.

And I think that the only way that these type of products will get into the hands of investors is in educated Salesforce and making sure that the resources are available for advisors to have meaningful discussions with their investors

[01:04:08] Jeff Shell: and with their clients.



I have zero to add to that. That was perfectly-


[01:04:15] Jeff Shell: … Why don’t we why-



As if, Jeff-

[01:04:18] Liliian Ferndriger: Why don’t we-

… you always have something to add. Come on,

[01:04:20] Jeff Shell: you can do it.


This really is a special time for for private markets. It is the right solution for today. It’s the right solution for the future. There is nuance in introducing the concept and bringing out the benefits within your client’s portfolio. We would love the opportunity to get to know you and your practice and to help you along that path.

[01:04:52] Pierre Daillie: Excellent. Lillian, Jeff, thank you both so much for your incredibly valuable time and insight. It’s been terrific chatting with you.

[01:05:00] Jeff Shell: And you too, Pierre. Thank you.

Thanks Pierre.

Thank you.

We look forward to the next one.


Listen on The Move

In this episode, BMO Global Asset Management's Jeffrey Shell and Lillian Ferndriger join us to discuss newly accessible opportunities in private market assets. Jeffrey is Head of Alternatives, Commercial ESG and Innovation from BMO Global Asset Management. And Lillian is Director of Alternatives Distribution at BMO Global Asset Management.

We delve into the realm of private market investing, now a more widely accessible and vital instrument for portfolio diversification that promises attractive risk adjusted returns.

These markets offer an entrance into asset classes and strategies that were previously largely inaccessible territory in the public domain. Moreover, the defining features of private markets, their risk return profiles stand as a powerful key to unlock the full potential of a private wealth portfolio.

A look back in time reveals the compelling performance of private markets as they have consistently outshone public markets becoming a beacon of wealth accumulation and differentiated return stream. In recent times, this asset class has been winning hearts transitioning from its longstanding institutional clientele to captivate high net worth individuals, the segment that's been growing the fastest.

Now we're witnessing an exciting shift, often referred to as the democratization of access. This transformation marks a significant stride for the wealth management industry as it throws open the doors to a broad suite of previously inaccessible specialized strategies within private equity, private debt, real estate infrastructure, and other real assets.

The allure of reduced minimum tickets, enhanced transparency in reporting and lower fees adds to the appeal of these markets. But perhaps the most enticing advantage of this democratization is the boon it provides to private wealth. It serves as the final puzzle piece in portfolio construction, enabling clients to harness and all-encompassing asset allocation in private market sub strategies.

This allows for portfolio diversification, enhanced returns, volatility reduction, and crucially a shield against inflation. Today we're gonna delve deeper into these fascinating dynamics of private market investing. Thank you for listening.

Where to find Jeffrey Shell and Lillian Ferndriger, BMO Global Asset Management

Jeffrey Shell on Linkedin
Lillian Ferndriger on Linkedin
More on BMO Partners Group Private Markets Fund.

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