The Ontario Securities Commission has faced calls to make private markets easier for retail access.Melissa Tait/The Globe and Mail
David MacNicol is president and portfolio manager at MacNicol & Associates Asset Management.
Private investments are increasingly being marketed as the next frontier for retail investors. What was once largely reserved for institutions and ultra-high-net-worth investors is becoming far more accessible through lower investment minimums, simplified fund structures, and products offering periodic liquidity.
A recent iCapital Canada survey found that nearly half of Canadian advisers allocate roughly 10 per cent to 30 per cent of client portfolios to private markets, while almost half expect to increase those allocations over the next 12 to 18 months. Regulators have also been under pressure to broaden access to alternative investments, particularly as pension funds and institutional investors continue growing their exposure to private assets. In Canada, the Ontario Securities Commission has faced calls to make private markets easier for retail access, while globally firms such as Blackstone, Apollo and KKR have openly identified the retail market as an opportunity for expansion.
As a matter of course, investors are always looking for better returns. In a bull market, the search for higher returns and diversification can lead investors towards increasingly unfamiliar investments. The post-pandemic retail investor renaissance has already seen the mainstreaming of special purpose acquisition companies, initial public offerings, crypto investments, and various other unconventional ways to invest. Increasingly, the once untouchable world of private equity, private credit and real estate has become the next area attracting retail capital.
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What has made private equity particularly appealing is not just the promise of higher returns, but the way these investments are now being presented to a broader group of investors. Lower minimums, simplified structures, and redemption windows have been introduced to make these otherwise illiquid investments feel more flexible than they actually are. Retail investors are increasingly being encouraged to view private market exposure as simply another portfolio allocation, not something that is fundamentally different from a stock or an exchange-traded fund.
The reality is that private markets function very differently from traditional public markets. Exits depend heavily on financing conditions, buyer demand, and broader economic conditions that investors, especially smaller ones, have little control over. More importantly, when conditions tighten, which are periods when investors likely need liquidity more, the ability to generate liquidity in these investments can quickly disappear.
In those environments, the disconnect between investor expectations and the underlying structure becomes clear. Managers are then forced to make a difficult choice: Sell assets at unattractive prices or restrict withdrawals to protect the portfolio. More often than not, the choice is the latter, leaving investors with far less flexibility than they initially assumed.
A recent Globe and Mail article highlighted the experience of investors in a Canadian private equity fund that, after years of strong performance, halted redemptions amid a broader slowdown in private markets. Investors who believed they had access to their capital found themselves facing the prospect of being locked in for an extended and uncertain period. This event does not appear to be isolated either.
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The current strain in private markets has seen redemption halts at several funds including Blue Owl Capital, Apollo Global Management, and Starwood Capital, among others. While these types of situations are not necessarily signs of systemic crisis, they highlight the reality that liquidity in private markets can evaporate precisely when investors want it most.
What is often overlooked is that this is not the breakdown of the system. Private markets were intentionally built around long-term capital commitments and limited liquidity, particularly during times of stress. Part of what creates the appearance of stability in private markets is the absence of daily pricing seen in public markets. This is precisely where the meaning of ‘risk’ needs to be reconsidered. In public markets, risk is often associated with price volatility. In private markets, however, risk is more closely tied to temporary loss of control over one’s capital. Investors may not be able to raise cash, rebalance portfolios, or respond meaningfully to changing market conditions when liquidity dries up.
None of this means that private markets are inappropriate for retail investors. In fact, broader access to the private market may ultimately prove beneficial for investors seeking greater diversification and longer-term opportunities beyond traditional public markets. But as these products continue moving further into the mainstream, investor education becomes increasingly important.
Investors need to understand not only the return potential, but also the structural realities of these investments, particularly around liquidity and time horizons. Private markets can play a valuable role within a diversified portfolio, but only when investors fully appreciate that illiquidity is not a flaw in the system, but one of its defining features.