Private Markets: Opportunities and Risks in a Transitional Financial Landscape

Pierre Daillie: [00:00:00] Welcome back. I’m Pierre Daillie, Managing Editor at AdvisorAnalyst.com, and this is Insight Is Capital. With private markets set to explode from 13 trillion to 23 trillion in just five years, family offices and high net worth investors are going all in on alternatives. But as interest rates fall and a new US administration shakes up the rules, the big question is, where are the best opportunities and what are the hidden risks that lie ahead? Today, we’re sitting down with Ash Lawrence, head of AGF Capital Partners to break down the key trends, shaping the future of private equity, private debt, and hedge funds.

This is a conversation you won’t want to miss.

Disclaimer / Announcement: This is the Insight is Capital podcast. The views and opinions expressed in this broadcast are those of the individual guests and do not necessarily reflect the official policy or position of advisoranalyst. com or of our guests. This broadcast is meant to be for informational purposes only.

Nothing discussed in this broadcast is [00:01:00] intended to be considered as advice.

Pierre Daillie: Ash, welcome. It is great to see you again and to have you on the show.

Ash Lawrence: Thanks, Pierre. Great to be here again.

Pierre Daillie: before we get to talking, tell us a little bit about your background, the arc of your career, and what’s getting your attention these days.

Ash Lawrence: Yeah, sure. not to spend too much time and go too far back, but I always describe myself as a reformed engineer. My original training was, in engineering and then I reformed through the process of an MBA, but most of my career I have spent in the private markets, mainly in the real estate space.

so I worked for, Brookfield Asset Management, one of the larger global asset managers for a good chunk of my career. probably with a few defining moments in it, I was working in real estate there through the GFC. To a great financial crisis. so I think that was one, an incredible learning experience, but also somewhat formed the basis for some [00:02:00] of the growth that we have seen in the last decade or maybe starting in 2010, 2011 in the post GFC world and living through that was a big, factor and influencer, I would say, on my career in the private markets.

And then, I guess about three years ago now, almost exactly three years ago, made the move over to AGF to really build the alternatives business and what I would call a traditional asset manager playing in the equities fixed income space, that is really just another step in that growth of private markets and maybe more broadly alternatives as AGF, which most of our business, not all, but most of our business is in the retail space, in terms of the clients of the other end of our investment products.

and what we’ve seen over the last maybe 10 in its early stages, but certainly over the last five years and, increasing, [00:03:00] involvement from that channel in the alternative space and the private market space specifically. and so moved over here to move along with that transition, really, and start working not just on the institutional side, but also on bringing some of these solutions to the retail side.

Pierre Daillie: Excellent. And, it’s a quirky time that we’re in. It feels very transitional. How has the rising interest rate, higher for longer rate environment affected alternative investment strategies?

Ash Lawrence: Yeah, so it’s interesting. It differs by strategy. So I think we saw rates start to rise and end of Q1, Q2 of 2022.

if you think about the space we operate through our affiliate with, affiliation with Kensington Capital Partners, so the private equity and venture space. I would say quite honestly, it was more of an, a negative impact with the speed and amount with which those rates increased over that time frame.

[00:04:00] had some real direct impacts in that space. it created, uncertainty around financing costs. It created uncertainty around valuations. it created big gaps between buyer expectations in terms of selling assets on portfolio companies versus, or acquiring versus seller expectations on the values that, that they think their portfolio companies are worth.

What this ended up doing was creating almost a freeze in the transaction markets, right? And private equity and the recycling of capital and the creation and realization of that value requires a, relatively healthy transaction, environment. That led to a lot less distributions going to investors.

It, led to some downdraft on performance numbers. so that had a pretty direct impact and you’ve seen it in the Sort of benchmark market returns around private equity on the flip side when rates were going up. Private credit was [00:05:00] a beneficiary and really it’s a few reasons. There’s the most obvious of rates go up.

It means rates on the individual loans within a portfolio are likely also going up. private credit tends to be floating rate portfolios, like the loans within the portfolios are floating rates. So there was a direct benefit there from just a return perspective. But there are a couple other factors that happened as well.

As rates were going up, it created, I won’t really call them external to private credit because it was credit related, but things like, the regional banking crisis in 2020 free that had a broader impact of restricting credit from some of the, typical places that would count banks, regional banks, et cetera, which expanded the market for private credit rapidly at the same time rates were going up.

And so there was this really incredible time over, really 23 for most of 24 for private credit where there was a huge benefit to [00:06:00] that. and it’s not just rates, like I said, it was this lack of credit from some of the other, spots that it was typically coming from. the, sort of last space that we operate in is, what I’ll call the absolute return or hedge fund space.

And, this is a little bit of a generic answer, but a lot of times in the multi strategy world, any period, almost regardless of what’s causing it, but of uncertainty or volatility, it creates opportunities, right? There’s dislocations in the market as a result, there’s arbitrage opportunities.

There’s opportunities. And if you have sort of traders or portfolio managers that are skilled at taking advantage of that, these are actually the time periods that, that multi strategy hedge funds tend to do very well. And I think when you actually saw this play out as rates were zooming up on a pretty steep slope through most of 2022, multi strap hedge funds and the strategies that New Holland runs [00:07:00] actually had a very good year in 2022.

That volatility, that unknown, that dislocation, it creates these opportunities as well. it’s different for each sector we operate in on what that, 2022, 23, most of 24 period caused.

Pierre Daillie: That’s very interesting given the, the context of 2022 and what happened to the bond market in 2022, while also equities were also, drawing down.

That’s right. And now, of course, since that time, we’ve seen central banks, ease, begin their easing process, cutting rates, easing monetary conditions, maybe all of the above or some of the above. just this week, the, the Fed has decided to pause for now on the cutting, but the easing of monetary conditions hasn’t, stopped or subsided.

and [00:08:00] of course, we’re seeing long bond yields, continue. React, and, trade, in and around four point a half percent in the US and, similar behavior, but at lower yields in Canada, around three and a half or three, 3.2, 3.2 to three point a half. Given those easing monetary conditions since the context that you just talked about a moment ago, what impact, what impact has that had on alternative strategies since?

Ash Lawrence: Yeah, maybe I’ll go in the same order to be a little consistent. I think the most obvious is, that’s a positive in the private equity world, right? We’re starting to see, over the, let’s call it second half of 2024, we’re starting to see some green shoots in terms of transactions, and the other thing I’ll say is obviously rates increasing creates some of this issue, but I would almost say the [00:09:00] bigger issue that did occur was the speed with which they increased.

So once you’re through that period where they are going up very quickly, there is a period of time where even if they’re not coming down, the markets will just stabilize around where those rates are, and people will adjust. And so when you’re, when they’re bringing rates down, as they were a lot of part of last year, it’s a much more or less a slower process.

You just mentioned they’re going to delay some cuts. So the markets can adjust better if things aren’t so rapid, at least private equity markets. And so we’re starting to see some of that deal volume come back. we’re starting to see, performance start to pick up a bit. it’s not where it should be or where I would think, the practitioners in that space hope it gets to over the course of the year.

But we’re seeing signs. And we’ll probably get to the Trump administration. There’s some choppiness now because it’s various things going on. But I think we are [00:10:00] starting to see signs. private credit, obviously rates coming down will impact to some degree returns. But again, you’re able to adjust if there’s some clarity on speed and time and there’s a, measured pace to it, which central banks are trying to do.

And, I think if you’re like some of the portfolio loans that we hold, you probably had some floors in there for the benchmark rates. So you’re a little bit protected as rates go down with your existing portfolio, you might start as we are to think about putting some fixed rate loans in the portfolio.

Maybe not that many, but. to protect yourself against rates continuing to go down. yeah, we’ve seen a little bit of, I’ll call it moderation of returns in private credit, but, not the same extent going down that we saw going up. I think there’s been some structural changes in the market, quite frankly, that give private credit and private debt, [00:11:00] maybe more specifically, a good runway.

The bigger thing I think that, that sort of rates easing and, Sort of monetary policy becoming a little easier to predict from the Fed is that the US typical lenders banks broadly syndicated loan market has come back And so in the upper mid market space and in the I’ll call it jumbo loan space You are seeing quite a bit of competition now because those players have returned and they want their market share back And so in that space you’re seeing a little more compression on pricing of loans.

You’re seeing a little more What I’ll call loosening of covenants, as it, to the, benefit of the borrowers. but it’s specific to the, that very crowded space that I’ll say. we operate a private credit in two different spaces and our theory is avoiding those crowded spaces and, playing in spaces like Canadian private debt, mid market, lower mid market, where you don’t [00:12:00] have those same dynamics.

And, With our affiliate out of New York, New Holland Capital, playing in what I’ll call more esoteric, uncorrelated type of private credit strategies as well. And then I could almost give you the exact same answer for multi scratch edge funds that I gave you for when rates were going up as when rates are going down, things are changing, I think maybe, less so rates and honestly more so a lot of other things that are going on in the world and a lot of things that are going on in the U.

S. are again creating this a potential for high volatility, potential for dislocation, and all those things in the hedge fund space. Again, with skilled traders, you can take advantage of those things. they tend to do well, those type of strategies and in times like now, again, does it.

It honestly doesn’t matter if it’s on the way up or on the way down, as long as it’s volatile and [00:13:00] dislocated.

Pierre Daillie: Yeah, I think there’s, I think there’s possibly some, a certain amount of misunderstanding about private equity and private credit. and just to clarify, those are return enhancements to an existing portfolio.

You’re going to get, you’re going to get the illiquidity premium from being in either of those categories and you could fund them from the corresponding traditional bonds or traditional stocks, or traditional stocks and traditional bonds in that order. and where the, where the, absolute return strategies and hedge fund strategies come in, is that.

they provide that element of alpha, that uncorrelated return stream, that acts as a diversifier to a portfolio. more than just simply a return enhancer. It can be both obviously a return enhancement and a diversifier. [00:14:00] but having, those three areas in a portfolio to smooth out.

The, the overall core traditional portfolios that we’ve seen thrive the last 40 years and, facing this transitional period that we’re in, gets, is where things get very interesting. Yeah, I think

Ash Lawrence: that’s right, especially since we, we are in this environment now where oftentimes. bonds and equities are moving in the same direction.

Sure, yeah. Which, looking back long term, there’s always been, that, that was the buffer in your typical 60 40.

Pierre Daillie: Yeah, now, Ash, what risks and opportunities do you see under the new Trump administration? Ah, yes. So many. that’s the big variable right now, right? Yeah.

Ash Lawrence: Yeah. Look, I’ll say the, maybe the most obvious is the non specific, [00:15:00] that, the administration has created a lot of uncertainty in its first couple of months, right? Maybe by design, to be honest, like that’s potentially their, strategy to get to, their policy goals, which are also a little uncertain, I think, to the markets.

But it almost,

Pierre Daillie: I, sorry, don’t mean to interrupt you I, I can’t help, if you watch the talking heads on CNBC and, Bloomberg and they’re all very, intelligent people, but the biggest question seems to be, like, why, is he doing this? Why, is the Trump administration doing this?

Why are they, threatening or, implementing tariffs? and don’t they realize it’s going to destabilize the market? And, all I can think is that seems to be the objective, is to foment an air of uncertainty and destabilization to shake things up. and,

Ash Lawrence: [00:16:00] Hopefully to then ride in like a white knight and stabilize it.

Pierre Daillie: And hopefully it’s just, a negotiating tactic and Yes, Things, things calm down a little. But I can’t

Ash Lawrence: That level of uncertainty is just not good for business. It’s very hard to make decisions. when I was talking about private equity earlier, we did see a little downtick in volume.

over the course of January, like people just weren’t sure how to behave with all this uncertainty from a business perspective. you mentioned the most obvious direct impact. Tariffs are obviously, a huge risk at, present moment and I think the bigger thing I think about around terrorists is we’ve been living in this, era of globalization, again, from an economic perspective, I’m speaking of, and look, if you think about North America, that first free trade agreement, I believe, was 1989, so we’ve had 30 plus [00:17:00] years of our economic system and our sort of business environment, growing and building within that free trade.

world. That’s a structural shift. If this is the beginning of that ending, that’s pretty material because that can change a lot of ways, that businesses operate that can change a lot of ways around employment and, on, on either side of the border or including Mexico, both borders.

are the tariffs just a negotiation for other things or are they really a sort of structural shift around how the US is going to interact with the world, and that, that, sort of remains to be seen. I think the other thing that I think about around risks with the Trump administration is, potential unintended consequences of Elon Musk’s, Doge, department.[00:18:00]

I, understand that at a certain level, the desire to get efficiencies out of government, I think everyone has that desire. but I think it’s a bit dangerous to think you can implement the sort of rapid and extreme change the same way Elon whips his companies into shape in a big, far reaching tentacle of the government of the United States of America, and probably impossible for most people to understand what certain decisions, the unintended consequences down the road, the sort of ripple going across the ocean, that some of these things may have.

There’s also some immediate impacts, obviously, you shut down funding for things like it’s the list of agencies, organizations, whatever that uses this funding on a daily basis, that’s pretty far reaching. I think that’s actually a huge risk and maybe they won’t mean to cause some outcome. [00:19:00] but the government is not an Elon Musk private company, right?

It’s not going to react in the same way. opportunities, look, I think the opportunities are what, maybe I’ll say the business and investment community was thinking about, pre the last couple of months, which was, okay, could regulatory red tape decrease? could it become easier or less burdensome to, to do business?

could we see, certain actions around, the markets and banking that could free up credit a little bit, again, to boost, credit into the markets and the GDP growth and things like that. The more, said more generically, like the hope that Trump will be a business economic friendly president.

again, I’m giving somewhat of a generic answer because As of the first couple of months, it’s unclear where he is [00:20:00] on that front, and it’s a little bit, to get back to the uncertainty, not really clear what the objectives and sort of policy goals around some of this stuff are, but I think there’s still a, optimism that he will get there eventually.

Everyone knows he’s he watches the markets, he’s driven by things like that. that’s, I think, generically speaking, his outcome is he probably, definitely wants a incredibly healthy. economy and a very healthy stock market. So you would think at some point, some policy goals will show up to that.

Pierre Daillie: That is the, the feather he hopes to have in his cap. Yeah. it dovetails very, meaningfully into the whole discussion around alternative investments and, all, types of alternative investments in terms of complementing traditional portfolio. [00:21:00] this is the, part of the reason that alternatives are, increasing or rising in popularity is because they address, the volatility for one, and secondly, they address the uncertainty.

In terms of, the trends that are shaping the private equity space, for example, one of the areas that, That has become interesting is the use of continuation vehicles instead of selling assets. what are the conditions that are contributing to that? Why are more private equity firms using continuation vehicles instead of selling assets?

Ash Lawrence: yeah, you’re seeing a more than you normally would in terms of continue, continuation vehicle offerings out there today. I think the sort of more recent use of them and it started to slow down a little bit, but the more recent sort of, explosion of the use of them, it really does relate to the fact that monetizing assets [00:22:00] was difficult to do, limited partnerships in these private equity funds or whatever the sector happens to be.

But in these funds, we’re pressing for distributions. So what is a way to generate that? let’s take certain individual portfolio companies and see about rolling them into their own vehicle. You can let investors roll over that want to continue to element, and find other investors to invest with the same general partner, the same manager with this portfolio company.

And it creates, some level of liquidity. Really the, base of these vehicles, that sort of I saw over the course of my career, a lot of times it was fund life, right? There was a business that one of two things was occurring, and I’m being a little general in how I say this, but one, a fun life was ending, and there was a business that still had some level of value creation opportunity in it.[00:23:00]

And so between both the investors, our new investors, and the manager, it was more or less an effort to say hey, there’s more here. We could just sell it out, take our proceeds, and move on to our next bond. but are any of you interested in staying around to get this extra value out of it?

very legitimate statement to make. the other thing that the continuation vehicles were solving for investors was, investors have different pools, right? Private equity might fit into a higher returns, like a higher risk pool. There’s another pool that, again, I’ll generally call a core pool over here, a little more mature businesses, stable, thinking more about dividends or, cash flow distributions off the business.

And a lot of times when a private equity firm has done their first round with a company, it starts to resemble that other core, I’ll call a core profile. And again, when, through 2010 to [00:24:00] 2020, I’ll follow it. When a lot of LP investors were getting a lot of distributions and real needed to put that money back out again This was a perfect way to fill that core bucket.

I know the manager. I know the investment I’ve been invested in it the last five seven eight years. I can see the actual distributions that’s a perfect core investment for me And so they would roll it into a continuation vehicle with a different profile than maybe the legacy fund had those are really the tool, the, reasons around it.

I think more recently it’s picked up for the, sort of lack of ability to do traditional sales because of the market, but need

Ash Lawrence (2): for distributions to, your partners.

Pierre Daillie: Yeah. Very interesting. they, allow investors to roll over or exit and, provide liquidity and also allow them to have the option of retaining promising assets.

Ash Lawrence (2): That’s right. Yeah.

Pierre Daillie: Now, another thing that, that has. come to pass. [00:25:00] How, are stricter banking rules in Canada affecting the private credit market or private debt?

Ash Lawrence: Yeah, this, is, one of the themes that we’re operating around with our private debt strategy. And, really what we’re seeing in, Canada, and I won’t go into all the gory details, but the implementation of Basel 2, Basel 3, and at some point Basel 4, I think has been delayed.

which is effectively, in simple terms, creating, capital buffer, increased capital buffer requirements, our larger banks. And in Canada, our larger banks are 80, 85 percent of the lending market. even what might seem additional small requirements on them. has this effect, coming out to the market on lending requirements.

That is probably, you can probably tie that change in [00:26:00] the US to the great financial crisis, right? And then credit in the US really started picking up in those post financial crisis years because the banks had these capital requirements and tests that were done and things like that. And it just restricted credit, the right choice at the time coming out of the, financial crisis.

And then what happens in, in Canada is that means banks are now prioritizing where they’re going to provide credit. And they think about it in two ways. Where can I provide credit that has a smaller capital requirement for me, tends to be larger, tends to be investment grade, and then add to that, where can I provide credit where from a business perspective, I have broader revenue generation opportunities.

borrowers that also, finance themselves in the capital markets, whether it’s debt or equity, and require the bank to help them do that for fees, issuances, ratings, things like that. And that tends to favor much lower, [00:27:00] much larger companies and much larger loans. And so you end up with this segment of mid market, lower mid market in Canada, that arguably are bankable credit.

They have banking relationships. They wore lending to them. But in this new environment, they’ve just, they’ve moved down the priority list. And so that now they’re looking for credit. In fact, like in our strategies, we do see references, referrals coming over from banks, right? They care about their clients.

They just have these restrictions or constraints on them now. and if you, if they have relationships with other lenders and They trust them, they’ll shift their clients over to them. The other thing we’ve seen is, we’ll make loans to, businesses that then implement a business plan or complete the M& A transaction, integrate the firm, and then when they’re through that, their credit profile has changed in some of those measurements the bank has to do, and the bank will come back.

And in many cases we’ll be, we’ll [00:28:00] refinance out the private debt lender as well. so it is having a big effect here. We think there’s probably a little more to flow through, again, depending on what happens with the Basel IV requirements. and like I said, I think Canada, 80, 85 percent is the larger banks.

In the US, it’s almost flip that now, like almost vice versa. I don’t think we’re going in that direction, but like I said, small changes in our very large banks are actually significant sums of potential lending deployment for other lenders in the market.

Pierre Daillie: Yeah, I think, it’s interesting because it’s happening at the, at the, large borrower, at the corporate borrower level.

but it’s also trickling down into retail banking where, you’re seeing the same thing happening with, mortgagees going to the bank to refinance their mortgage and the mortgage says, sorry, you don’t, you can’t, [00:29:00] you’re not meeting our requirements. You’re going to have to go to a private lender or a private mortgage.

and it it’s microcosmic, right? It’s a, it’s the same things happening at the corporate level, but it, but that, that makes for a huge. opportunity set for private debt. It does,

Ash Lawrence: yeah. And, specifically in Canada as well, it’s not as competitive to provide that private debt.

because oftentimes, especially the loans that, that sort of we focus on, they’re of a scale and size that doesn’t justify US lenders coming across the border, setting up operations, etc. Maybe you’ll see them come across for very large loans. but if you operate in the space where it’s just not efficient for those type of private lenders, there’s not a whole lot of competition in the market.

That obviously is a benefit to the most obvious, which is alpha generation. [00:30:00]

Pierre Daillie: Yeah. I’m just thinking, it’s interesting, to look at, we talk about private, we’re talking about private equity, among other things. and then I just want to come back to the private debt, but, always the illiquidity premium is a subject of conversation.

And, I think with equities, I think, advisors are long term, possibly, definitely they’re concerned about valuations these days. but there’s so much of the market is not as highly valued. if you start to venture into the lower beta, lower beta stocks that have less valuation, But the, always the big, like equity seems to be a, standard. It’s something that, like I’m always going to be in equities. I’m always going to own equities. Whether I own private equity is going to be a matter of how I decide [00:31:00] to, exploit the illiquidity premium that, that comes from private equity.

and of course it has its, it has the benefits of lower volatility. It has the benefits of a higher, longer term returns. And, the potential for higher, longer term returns, but the big nut to crack in a portfolio these days seems to be the volatility in the rates market. What do I do with my fixed income portfolio?

Where can I find a field of opportunity? And, as we just talked about, as you just pointed out, Ash, is that, the opportunity set in, in, in private fixed income or private credit is, widening. It’s not narrowing. it’s gotten bigger. And that’s definitely something that’s worthy of a lot of consideration.

And you can see that’s also the reason why the private credit market is growing the way it is, and it’s expected to. And then, that [00:32:00] last tier of uncertainty that everybody wants to try and address is, the uncertainty that we’re in right now, for example, seems to be causing a lot of consternation, I, where can I move some of my allocations where, I’m not going to be a victim of That uncertainty or, that volatility or that drawdown, that actually takes advantage of that drawdown.

and then the next question that follows on that is, okay, I want to do that. Where do I go, right? and who, who do I invest my capital, my allocation to absolute return or alpha or hedge funds? Who do I go with? And, with so much, concern and, money, therefore capital flowing into multi strategy [00:33:00] hedge funds, are there trades?

that are becoming crowded and are there other, are there other ways to look at this question?

Ash Lawrence: Yeah, I think, and that’s certainly, a topic that a lot of commentary has occurred on over the last 18 months, 24 months, and certainly there’s a lot of multi strat capital that is concentrated in some very large top 5, top 10, funds.

look, the short answer is yes, there are crowded trades out there. The, risk around them is really, for the most part, downside risk. And to understand it, you have to understand how, these funds operate. and as people may know, in the markets, you don’t always have [00:34:00] clarity on whether the person down the street.

Is into the same trade that you are, right? You can’t, you can sometimes guess, but you can’t really see what everyone else is doing. but with multi strategy funds, oftentimes, like they are very focused on risk and that’s a good thing. but sometimes, if something gets triggered, a risk threshold, that gets triggered, they will very quickly cut their losses and de lemur and get themselves out of a trade.

That can have unintended domino effects, if it’s of such a scale that it starts to shift the market around a little bit, pricing, whatever the case may be. maybe the hedge fund down the street that also has a large position is now getting there, is now seeing, their trader get triggered in terms of, okay, you need to de risk that now.

And this can have this sort of cycling effect, in the market. [00:35:00] I think you’ve seen some commentary from, folks in government agencies saying there might be systematic risk here. I’m not really the right one to opine on that, but it’s certainly that’s the fear that people have is that there could be these.

Large scale, market movements that just trigger things, and, a domino effect. The, other way it could get triggered is, remember, multistrats are managing a portfolio. So they may see something occur over here, and that requires a shift in the risk levels across other areas of their portfolio, or their multiple strategies, which could trigger them to do something in a market here, even though this market is fine.

If you have a huge position and you’re like, I need to de risk over here because that’s where the leverage is and I need to de leverage because something happened over here. You could then trigger this market that was otherwise, going along its, its regular course.

Yeah. [00:36:00] it’s one of the reasons to be honest that, New Holland Capital’s strategy appealed to us. a tenant of how they are thinking about their strategy is. to focus a lot of their capital in what they call capital constrained opportunities. So those larger players that are creating this situation that, folks are concerned about, they’re not operating in a lot of these strategies that New Holland’s operating in because they’re capacity constrained.

You can put, a couple hundred million dollars to work. You can’t put 3 billion to work in this opportunity. There’s not enough scale to it. and so they tend to stay away from those trades that are creating these, this commentary in the market. It also means they’re not competing, around those for talent that operates in those areas as well.

[00:37:00] so we’re, we are conscious of it and, I think whether it was a sort of primary factor or secondary factor did impact us a little bit in how

Ash Lawrence (2): We’re looking in this space for, for a partner and affiliate to operate.

Pierre Daillie: Yeah. And for the, for the advisor or the allocator or the family office that’s looking, or, institutional investor that’s looking for these types of multi strategy funds, they don’t want, they want to make sure that when they do that, it’s, advisable to make sure that when they do that, that, those trades in the, in, in, a multi strategy portfolio don’t resemble the trades they already own.

Yeah, Yes, that is

Ash Lawrence: true, which is, quite hard to do because, transparency is, sometimes difficult and, there’s legitimate reasons, proprietary strategies and things like that. [00:38:00] you don’t always get a lot of clarity on where some of the multi strats are focusing a lot of their capital,

Ash Lawrence (2): but again, trade secrets, whatever you want to, whatever you want to call it, which is a legitimate reason, for that,

Ash Lawrence: but you are, correct.

I think at some points over the last few years, there was probably quite a bit of mag seven exposure in some of the multi strats driving the performance, the same as the equity markets. The correlation may not have been low as. Yeah, it still wouldn’t be high, but maybe not as low as people might want.

and again, if you wouldn’t see it, as long as times are good, it’s fine. What you’re worried about when you’re constructing a portfolio is what happens when things are a little bit off center.

Pierre Daillie: there’s times, obviously, we’ve seen them when correlations, when all correlations go towards one.

And, ideally that multi strategy, allocation. isn’t one of those. That’s right. And so I think that, [00:39:00] that’s what I’m getting from you, which is that the recognition that, that capital constrained opportunities are not, definitely not crowded trades that, that are going to be subject to some of those knock on effects or, domino effects that, that can arise, during a time of, when, liquidity is pressed.

Ash Lawrence: I think that’s right, yeah. People need to make sure they’re, picking managers that are implementing strategies that are consistent with the investor’s objectives.

Pierre Daillie: How do you, balance, as alternatives become more and more accessible, how do you suggest balancing between liquidity and long term returns?

Ash Lawrence: Yeah, I mean that, that is very much going to be dependent on the profile of the investor. there are things like you could go completely illiquid in private markets and do drawdown close ended vehicles. You could go semi liquid. So there’s some flexibility there. I [00:40:00] would say, regardless of whether you’re in a semi liquid, interval fund, those type of things, any investor should still have a relatively long term horizon on a private markets investment.

And this is different than, say, a multi strat hedge fund, which is a little more underlying liquid, but. A lot of the private market strategies, private equity is an example, that takes time to create value in companies, and you really need to live it out over a longer term horizon to get the full benefit of what it was you signed up for to begin with.

but where I started was, look, there’s a big difference in how much of a portfolio a pension fund can have locked up in long, I’ll call them longer horizon, private markets, investments versus, you know, retail investor has 100, 000 of savings, of long term savings. arguably, [00:41:00] the smaller investor at that level really shouldn’t have much locked up.

In times of crisis for the investor, forget the markets for a second, that liquidity could be really important to them. For a pension fund, they know their long term liability profile. They know the premiums coming in. They’re not like They have very sophisticated models to make sure they can meet all their obligations.

So when they’re going up to 30 or 50 percent, that is a very rational, thought out decision by them, and they don’t need that capital in the near term, just because of who they are. And then there’s everything in between, from high net worth, to family offices, to foundations, and each one of them is going to have a different objective depending on what the ultimate use of that capital or that money is.

the one thing I will say in general, like when you’re talking about retail or high net worth, for the most part, unless you’re a large [00:42:00] family office, we’re not talking about shifting huge proportions of your portfolio into private markets or, alternative strategies. It’s more of a having some of the features in your portfolio that can behave differently than your typical stocks and your typical bonds in most cases.

Equities are still gonna be like the, biggest piece, maybe not a majority anymore, but the biggest piece of most of these people portfolios and most, retail advisors we talk to like equities is still the largest piece of the book. And the question becomes, is that enough liquidity for your clients?

again in Canada, on average, one or 2 percent of your typical, across, retail advisors is maybe in both liquid and non liquid alternatives. from the seat that I sit in, I don’t think it’s unreasonable for that to go [00:43:00] to five, for that to potentially start to push up to 10, depending on profiles.

That’s what we’re seeing

Pierre Daillie: in the US that’s exactly right. We’re seeing five in the US right now, right?

Ash Lawrence: That’s right. And I think expectations there are that will go to 10. But that requires to, that’s a lot of assets. So it requires, a nice, measured shelf of products for that capital to go to.

What it will also require is, people understanding the different segments of each of those sectors. So I mentioned earlier some of the, large cap US credit, funds, whereas we used to look at them as competitors to our Canadian, private debt fund. We’ve seen the Retail Advisor evolve, and now we talk about it as it’s a companion.

Like, why can’t you have two private credit that do two different things in your [00:44:00] portfolio? The same way you have stocks in different sectors that are going to behave differently. we’re starting, that, that is part of this evolution we’re seeing as People are allocating more, they have more opportunity to diversify around alternative strategies and alternative managers.

I think that’s a benefit for everyone, to be honest,

Ash Lawrence (2): investors and advisors like ourselves, or managers, I should say.

Pierre Daillie: What are your thoughts on why, what are your thoughts specifically on why investors should consider alternatives, especially in a, the environment we’ve had? When stocks have performed well, because that seems to be a dilemma that investors have, which is, I’m perfectly happy with the mag seven driving 55 percent of the returns.

Ash Lawrence: so here’s what I, here’s what I would say to that. And, I think you’re right. I think people will look at returns levels, 10 years, look at, some of the [00:45:00] inflation and things like that have occurred. They’ll look at, what’s going on with Trump administration and tariffs and that.

That can all sort of people can all come to their own conclusion about what that means for equity returns going forward and 60 percent of us will be wrong. Yeah. that’s just like we will never, we’ll never get that. oftentimes the way I think about it is it shouldn’t really matter what you think the markets are going to do or not.

What, really I would suggest the objective is. is to build a resilient portfolio, right? A portfolio that, can capture a decent amount of sort of the up capture, the upside, so that you’re not feeling like you’re losing out on a whole lot. Maybe not to the extreme levels, to your point, you don’t need to concentrate yourself in the Mag 7 to get all of that return.

But also, and this is the part, on the flip [00:46:00] side, build a portfolio that Minimizes or mitigates or does a good job, around downside capture, right? And oftentimes, especially with equities, like yes, you may get pretty good upside capture in good times, but you get all the downside capture as well.

So how do you build a portfolio that over a long period of time is going to minimize some of the downdrafts? minimize a lot of volatility, give you a bitter, a bit of a more steady over time portfolio, but still feel like you’re getting decent returns. regardless of what sector you pick, alternatives, whatever, you’re not going to get that from one or two sectors.

You’re going to need to build a portfolio of things that have different reactions in different markets, of things that have different return profiles in different environments. even private equity and equities. I think folks, when [00:47:00] private equity was still on its very buoyant time period and beating out equities, there was a lot of commentary about that, like, how are your valuations so high?

now they’re actually going in, opposite directions. Your S& P index is quite high, while it’s doing better now, but while private equity was not doing as well. I didn’t hear a lot of arguments about the fact that they weren’t the same then. But, nonetheless. Yeah, you don’t like to look at a piece of your portfolio and see that maybe it’s not performing when another piece is, but that may be actually what you want over a long term.

I know that this area is maybe not doing as well now, but I’m buffered because I’ve got this other piece of my portfolio over here that is doing well in this area. And if you really want to build that type of portfolio, at least some portion of it is going to have to be in some area of alternatives.

whether it’s liquid alternatives, whether it’s things like private equity and private debt, [00:48:00] whether it’s more hedge fund type strategies, especially when some of them are actually designed to do that for a performance. So I think it’s less about, trying to predict equities or the suggestion that maybe they won’t do as well in the future and more about just.

Portfolio construction.

Pierre Daillie: Yeah. I think what you’re saying is that is really at the heart of this, longstanding luck skill debate, Which is that, this idea that we can, that any one of us. Can, set a vector in our portfolios and, make a, one dimensional or two dimensional bet that we’re going to get it right.

The odds are against us, but the skill, debate, the skill side of that debate is that is, is what you’re talking about, which is, focused on resilience, focus on having. A [00:49:00] multitude of assets that have different correlations to one another and different time dependencies, attached to them so that, when, those.

when those times come, when markets are under pressure, you have that risk balance, at the allocations that we’re talking about, where we’re talking about, the average Canadian allocation being somewhere around one to 2 percent and the US allocation being around as much as five right now, and maybe rising towards 10 over the next five years.

The interesting thing about that is that, okay, it might not look like the Yale endowment when you’re done with that move, but at least your risk adjusted return, your, return profile of your portfolio will have moved slightly to the left in terms of risk and slightly higher in terms of return.

That’s right. That’s right. That’s the whole point,

Ash Lawrence: right? That is the whole point. and to be like, that does take time, especially in the advisor community for them to get familiar with these things, for them to [00:50:00] understand how they. operate in a portfolio, how they impact the portfolio. So I think what you see now in Canada is there are obviously some advisors out there that are well down, the sort of portfolio construction phase, but there are an awful lot that are still at that.

Okay. I’m going to explore private equity or private credit. I’ll, invest a little bit of capital. I’ll watch it for a few years. I’ll see how it impacts the portfolio, what it does when other things in my portfolio are moving and then I’ll. Increase it over time.

Pierre Daillie: Ash, it’s been really terrific to have you on and to catch up with you and, to get your incredibly valuable time and insight today.

Thank you so much. Thank you. I really appreciate

Ash Lawrence: it. It was a great [00:51:00] conversation.