Most private investments are illiquid, requiring capital to be invested for lengthy periods.stevecoleimages/stock
A spiralling trade war and deteriorating growth expectations have rattled financial markets and investors, with some seeking shelter in private markets.
“Getting exposure to assets and asset classes that aren’t represented in broad equity or bond indexes – and are therefore not subject to daily mark-to-market volatility and frequent valuation – can serve as a volatility dampener,” says Aaron Young, executive director and head, client portfolio management, as well as fixed income portfolio manager at CIBC Asset Management.
Most private investments are illiquid, requiring capital to be invested for lengthy periods. Funds may also be subject to “gating,” which is when fund managers limit redemptions after requests hit a certain limit.
“It needs to be understood that this is not a source of liquidity – you need to find that elsewhere,” Mr. Young says.
While that’s often not ideal for most small investors, CIBC Asset Management is among several Canadian asset managers that have partnered in recent years with private market giants such as KKR & Co. Inc. and Ares Management Corp. to create fund structures aimed at combining access to private assets with greater liquidity.
Mr. Young argues that private markets make it easier to endure short-term volatility, stabilizing portfolios.
“It’s hard to ignore my fixed-income or equity portfolios if there’s a mark-to-market drawdown, but that doesn’t get reflected in the private markets as quickly,” he says.
“Which is one reason why we say it’s a truly fundamental way of investing. You can see through that noise to ask, ‘Is there a long-term impairment to how this business can operate or do we see a way through?’”
Colin Lynch, managing director and head of alternative investments at TD Asset Management Inc., says private markets have proved their worth over the past five years. That period included high inflation, rising interest rates and the COVID-19 shutdowns of ports, airports, transportation infrastructure, offices and retail outlets.
“Throughout all that, private markets delivered on their objectives,” Mr. Lynch says.
S&P Global pegs total portfolio holdings tied up in private assets and debt at US$15-trillion globally, up from US$10-trillion in 2021. Private equity accounts for more than half, but private credit and real assets such as commercial properties, infrastructure and utilities are also growing fast.
TD Asset Management offers private markets exposure primarily in domestic and global commercial real estate, infrastructure and private credit.
Private credit loans are often structured with floating or variable interest rates, meaning the interest owed by the borrower adjusts up or down as short-term interest rates change.
Mr. Young says it stands to reason investors in U.S. private loans should see an additional yield pickup compared with Canadian private debt if policy rates in Canada continue to shift downward as expected.
If tariffs persist, private equity is another area to pay attention to, Mr. Young says. Many smaller firms, particularly in the service sector, derive revenue from one region and will be less affected by trade disputes.
Find quality managers
Victor Kuntzevitsky, an advisor and portfolio manager with Stonehaven Private Counsel, part of Wellington-Altus Private Counsel Inc., in Aurora, Ont., points to the “dispersion” of performance between private market asset managers.
While money managers in public markets tend to have relatively uniform performance records, private managers’ outcomes are more varied.
“The really good managers performed very well, and the worst managers performed, well, really badly,” he says. “As allocators and investors, we should spend as much time as we can conducting due diligence on asset managers and the funds themselves.”
There have been high-profile negative outcomes for some Canadian investors who allocated money into private funds, most notably the collapse of Bridging Finance.
Mr. Kuntzevitsky is constructive on private assets amid the current uncertainty. Further out, into 2026 and beyond, he sees a lengthy runway for private funds to gather assets stemming from regulatory changes expected to occur under the Trump administration, which would allow U.S. 401(k) retirement accounts to allocate assets to private markets.
Those accounts represent US$8.9-trillion, according to the Investment Company Institute, creating the potential to release “massive” flows into private market funds, Mr. Kuntzevitsky says.
“Lobbyists in the U.S. on behalf of major global private asset managers are working very hard, and there’s very high odds and expectations that those regulations will be lifted,” he says.