Private markets have historically been the playground of institutional and ultra high net worth investors. However, a quiet revolution has taken place in recent times, changing the investment landscape. This shift is exemplified in the private market's growing appeal, its democratization, and the increased accessibility it offers.
In a recent interview with Jeffrey Shell and Lillian Ferndriger, we discussed BMO Global Asset Management's (BMO GAM) rationale for launching an all-encompassing suite of private market assets for Canadian high net worth investors. We were curious to get the inside take on private market assets, BMO GAM's latest foray.
First, a little background on Jeffrey Shell and Lillian Ferndriger:
Jeffrey Shell, MSc, MBA, Head of Alternatives, Commercial ESG and Integration, at BMO Global Asset Management, has a diverse background that includes technology, management consulting, and corporate strategy. His tenure at BMO Capital Market involved supporting private market players. Recognizing a gap in BMO's offerings and the broader Canadian market, he decided to focus on introducing private market strategies to Canadian high net worth investors.
Lillian Ferndriger, CAIA, is Director of Alternatives Distribution at BMO Global Asset Management, and began her career as an assistant to a financial planner. She later ventured into sales and had a stint in working with advisors on the hedge fund management side of the business, specifically focusing on private market products in Canada. Joining BMO presented her with the opportunity to educate advisors on private markets and alternative investments.
The Lure of Private Markets
The allure of private markets, especially for high net worth individuals, cannot be understated. Many of these individuals carved out their fortunes from the private sector, primarily through entrepreneurship. This intrinsic relationship with the private market gives them a unique perspective and understanding of its benefits. Investing in what's familiar, coupled with the prospects of venturing into other businesses managed by seasoned professionals, is undeniably attractive.
In Canada, for instance, the ultra-wealthy often possess an innate comprehension of private markets, thanks to their entrepreneurial ventures. It's also worth noting that Canadians have a degree of indirect exposure to private markets via pension plans. But direct individual access was largely restricted – until now.
Yet, one cannot discuss private markets without addressing a common misconception: they're frequently labeled as "alternatives." This designation can mistakenly paint them as peripheral or even exotic investments. However, the reality is starkly different. In the U.S., for instance, a staggering 85% of businesses generating over $100 million in revenue are privately held. This statistic alone underlines the importance and prevalence of private markets in the economic ecosystem. Ignoring these assets might mean bypassing the potential benefits they have to offer.
A Closer Look at the Private Market Sectors
Private Equity: A significant portion of sizable U.S. firms are privately owned. Investing alongside skilled managers in this space could yield benefits that pension plans have relished for years.
Private Credit: This component plays a vital supporting role to private equity. As banks, under regulatory constraints, pull back, the private credit sector witnesses exponential growth.
Real Estate: Investing privately in real estate allows for tangible value addition, such as procuring, upgrading, and selling property. This method contrasts starkly with public REITs, which typically gravitate towards stable assets yielding consistent returns.
Infrastructure: Investing privately in infrastructure promises stability and substantial value appreciation potential through long-haul investments.
Public vs. Private – A Comparison
Companies often oscillate between being publicly traded and privately held. The latter offers flexibility, devoid of the public glare and drama that can accompany public ownership – think boardroom confrontations, proxy wars, and shareholder votes. While trust in public markets resides largely with the management team, private markets pivot around the value-creation team. The symbiotic relationship between the two is acknowledged and celebrated by global asset management.
JPMorgan's study has illuminated the merits of diversifying portfolios using alternative assets, like private equity and credit. The prominence of privately held entities in the U.S. business landscape accentuates their economic significance. For a truly holistic economic diversification, investors must weigh the prospects of private markets. Their thoughtful integration into portfolios can mitigate risks and potentially amplify returns.
Interestingly, a noticeable bias exists in the Canadian financial world, with a heavy tilt towards their domestic equity markets, even though it constitutes a mere 3% of the global economy. With a significant chunk of U.S. businesses being private, the potential of private markets is too vast to be sidelined. Financial advisors are progressively warming up to the idea of infusing private markets into portfolios, recognizing the trifold benefits: diversification, risk reduction, and return enhancement.
The Evolution of Modern Investment
The dynamic of the investment world is ever-evolving. The gravitation towards private markets, along with their democratization, is reshaping traditional investment paradigms. As Jeff and Lillian's career insights demonstrate – whether it's bridging gaps in offerings or promoting the immense potential of private markets – there's a tangible shift in focus.
In recent years, the appeal of private markets has grown exponentially among high net worth investors, particularly in Canada. Such assets, once the exclusive domain of ultra-high net worth, accredited investors, and institutions have undergone what some term a "democratization." While private markets present a plethora of investment opportunities, understanding the nuances, challenges, and strategies involved is crucial.
Deciphering Private Markets from Alternatives
Jeff, with a robust background in technology, management consulting, and corporate strategy, cautions against lumping private market assets with a broader category of "alternatives." This umbrella term encompasses everything from liquid alternatives and hedge funds to collectibles, private real estate, and even burgeoning assets like cryptocurrency. The lack of precision in such labeling might mislead investors about their actual investments. While many of these "alternatives" have their merits, BMO's primary focus remains on expanding access to the tangible portion of the economy previously off-limits to most investors.
BMO’s Pioneering Approach
BMO Financial Group has been at the forefront of this shift, adopting a dual approach. First, they harness their prowess in commercial underwriting to craft specialized investment products. Secondly, they collaborate with managers boasting distinctive capabilities. An example is their alliance with Georgian, a recognized Canadian tech investor, which underscores BMO’s commitment to melding traditional finance with innovative technology. Their offering, which promises diversified access to private equity, credit, and real assets, epitomizes this approach.
Strategizing with 'Core' and 'Octane'
Classifying private market assets into two buckets: "core" and "octane," BMO seeks to customize portfolio-building. Depending on investors’ objectives, BMO either focuses on return amplifiers (octane) or prioritizes stability with income solutions such as credit-driven investments or infrastructure with predictable cash flows (core). The overarching message? Private markets furnish unparalleled avenues for portfolio diversification, tailored to individual tastes and risk appetites.
Shifting Sands in Investment Discussions
The unpredictability of the market landscape has provoked a shift in how advisors and clients converse. There's a burgeoning appetite, especially among entrepreneurs and those acquainted with private markets, to invest in what they know and sidestep the unpredictable. For many, the appeal of private markets is a sense of familiarity, amplified when advisors frame it as an expanded version of what their families have traditionally engaged in.
Technology & Infrastructure: The New Gold Rush
The tech sector, specifically infrastructure supporting current and future technologies, is capturing investor attention. Instead of chasing the next big thing, astute investors are zeroing in on the foundation. Companies in areas such as cybersecurity and industrial automation, which assure organic growth in a perpetually evolving economy, are increasingly appealing.
Beyond the Glitz of Venture Capital
Venture capital opportunities, especially in overlooked niches like industrial automation, hold promise. The post-COVID world's heightened reliance on tech emphasizes this potential. Yet, the most lucrative opportunities frequently lie outside public markets, rendering private markets even more enticing.
Private Markets: Personalized Investing Reimagined
Private markets promise an intimate investing experience. They contrast with the impersonal nature of stock exchanges, offering a direct stake in a company's growth. This allure has led to an epochal shift in investment dynamics.
Anticipating Challenges and the Promising Horizon of Private Investing
Advisors have traditionally hesitated to delve into private investments, deterred by their complexity. The process, unlike the straightforwardness of stock purchases, is mired in commitments and uncertainties. But emerging investment formats, such as BMO's private markets offerings, promise to make private investing as uncomplicated as mutual fund acquisitions, signifying a transformative phase in private investment.
Private Equity and the Art of Timing
Timing is paramount in private equity. Investors need to grasp the importance of purchasing companies at opportune moments and divesting them once their value has been optimized. This necessitates patience, underlining the notion that investments with extended horizons might be more apt as satellites than core holdings.
The Entrepreneurial Disposition
For ultra-high net worth entrepreneurs, the focus isn't just wealth accumulation but its preservation for ensuing generations. The unpredictability of public markets, coupled with the potential for swift losses, makes them wary. Their solution? Diversified assets immune to market whims.
The European Toy Company: An Example of Sustainable Value Creation
The anecdote of a European toy company underscores the value creation potential in private markets. Penalized for environmental infractions, the company revamped its approach to sustainability, emphasizing recyclability. This encapsulates the long-term vision intrinsic to private ownership, which is liberated from the pressures of short-term outcomes.
Reaping the Benefits of Private Ownership
Private ownership's allure lies in its long-term strategy, free from quarterly performance pressures. Active ownership, where managers have substantial influence, characterizes private ownership, resonating deeply with the entrepreneurial investment class.
Private Markets and Their ESG Commitment
For those prioritizing Environmental, Social, and Governance (ESG) principles, private markets inherently embody these values. Jeff's emphasis on the contemporary significance of private markets illuminates their pivotal role today and for the foreseeable future.
In conclusion, as the landscape of private markets continues to evolve, collaboration and education remain paramount. The promise of these markets is vast, and understanding their intricacies is the first step to unlocking their full potential.
Watch the interview in its entirety:
or, listen to the Insight is Capital podcast (audio only)
More on BMO Partners Group Private Markets Fund, here.
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