This has led some fund companies to acquire companies specializing in private equity, private debt, real estate and infrastructure strategies.
John Valentini, President and CEO of Fiera Private Markets, called alternative solutions a “high growth area” for fund companies. Fiera Capital also acquired the alternative manager Integrated Asset Management (IAM) in 2019.
Nearly half (45%) of licensed investment advisers plan to allocate 5% or more of clients’ assets to alternatives over the next two years, compared to about one in five currently allocating that proportion, according to a report on the US market published this year by Javelin Strategy and Research.
Globally, alternative assets under management are expected to grow from US$12.5 trillion last year to more than US$23 trillion by 2025, according to alternative data analytics firm Preqin, based United Kingdom.
The primary motivation for acquiring IAM was to get a credit product into Fiera’s portfolio, says John Valentini, and to be a “one stop shop” for public and private markets.
Private investments are also a new source of revenue for asset managers, with index products from major exchange-traded fund (ETF) providers driving down management fees. Mutual fund inflows have rebounded in 2021, but the long-term trend is down sales as commodities are overtaken by ETFs. Fee compression has also reduced fund company revenues.
“This puts a lot of pressure on smaller, more generalist companies, which are exposed and whose revenues are falling,” notes Georges Pigeon, partner, business consultant, at KPMG in Montreal.
Hedge funds may charge higher management fees, including performance fees in some cases.
With private asset classes, “fee transparency can be a little less obvious because there is a degree of complexity in the cost structure,” says Georges Pigeon.
The competition is also not so clear cut. Active managers of public securities face competition from index ETFs, says John Valentini. “That doesn’t exist in private asset classes. You cannot invest in illiquid infrastructure beta; you cannot invest in a credit beta. You must buy active management. »
This management is more labor intensive – especially compared to some of the more basic strategies in the public market – and therefore more expensive, according to John Valentini. “It’s not enough to go to a Bloomberg screen and buy the assets. It actually takes teams. »
Investors are willing to pay for the benefits of diversification, lack of correlation, inflation hedging or, in the case of private equity, the higher returns due to the illiquidity premium, he adds. he.
Bruce Cooper, CEO of TD Asset Management, reports that serving institutional clients was the primary focus when the firm acquired Regina-based Greystone Managed Investments in 2018 for $792 million. But TDAM now offers alternative products more broadly.
“We are looking to leverage these capabilities in the retail market in Canada, particularly the high net worth market,” summarizes Bruce Cooper.
The transaction allowed the former Greystone team to launch products for which it previously had the capabilities, but not the distribution clout, such as a global real estate fund.
TDAM has begun offering public-private hybrid products for retail investors that combine new firm capabilities with public strategies. The TD Greystone Real Asset Pooled Fund Trust, for example, combines illiquid real estate and infrastructure assets with publicly traded infrastructure and real estate investment companies.
A pure real estate investment can take 12 to 18 months to enter and just as long to exit, says Bruce Cooper. “For a lot of customers, it’s a long waiting period. These hybrid vehicles with a liquidity sleeve mean you can get in immediately and you can get out too. »
There are also two hybrid fixed income funds. All three funds are only available to TD Private Wealth Management clients.
“We thought it would be good to stay within the walls of TD for a while,” says Bruce Cooper. We may not be doing this forever, but we thought it would be a good place to start.”
Fiera also uses its own private wealth channel, where clients invest in proprietary strategies, to distribute its private market funds. But the products are also available for other companies.
“One of the main reasons private clients turn to Fiera Capital Corporation is our competitive offering in private market asset classes,” says John Valentini.
Mackenzie Investments has developed alternative strategies after acquiring, along with Great-West Lifeco (GWL), a 49.9% non-voting stake in Northleaf Capital Partners in 2020. The firm has launched four alternative products for the retail market with Northleaf as a manufacturing partner.
Private Credit, Private Infrastructure, and Private Equity products offer memorandum funds with minimum investments and prepayment penalties. But Mackenzie and Northleaf have also launched a private credit fund that uses an interval structure to allow quarterly redemptions of up to 5% of fund assets. The fund combines exposure to private credit funds and fixed income ETFs.
While Mackenzie is in the process of obtaining broker approval for the products across the country, Power Corp.’s other subsidiaries, GWL and IG Wealth Management, have committed to invest a minimum of $700 million in Northleaf’s two-year offerings under the agreement, including allocations to customer portfolios in managed solutions.
Michael Schnitman, head of alternative investments at Mackenzie, said it was important to democratize access to alternatives as fewer and fewer investors can fall back on defined benefit pensions.
“It’s about helping clients gain access to investment strategies that institutions and pensions have had for decades,” he says.
But explaining these strategies to clients — and advisors — can be a challenge. Mackenzie has a website to educate advisors about alternative funds and a dedicated sales team, says Michael Schnitman.
According to Bruce Cooper, it’s important to prepare advisors to get used to being able to make changes to portfolios whenever they want.
“These private assets are not meant to be traded,” he says.
Alternative products may only represent 10% of a portfolio, but they are “intended to be held for a long time”.
Integration of alts teams
Mackenzie has taken a hands-off approach to the integration of Northleaf. Michael Schnitman assures that the two companies have remained intentionally separated.
“We don’t intend to do anything to interfere with Northleaf,” he added. They are an autonomous organization and will remain so”.
TD didn’t have an alt team when it acquired Greystone, says Bruce Cooper, so Greystone’s mortgage, real estate and infrastructure group essentially stayed together and became TDAM’s alts group . The firm uses the TD Greystone brand for private asset funds.
Integration has been further enhanced within the equity and fixed income teams. Former Greystone CEO Rob Vanderhooft became TDAM’s Chief Investment Officer in 2019, but stepped down earlier this year.
Georges Pigeon explains that the integration of the more enterprising managers of private asset companies into large companies often requires adjustments on both sides.
“This may mean that employees of the acquired entity have to give up certain aspects of the life they used to live,” he summarizes.
At smaller companies, managers may have accepted lower base pay if it came with the possibility of a big gain in a good year, he adds. Large companies tend to offer more security and fewer benefits.
“At the same time, these are people-based businesses and a buyer can’t just come in and impose their culture,” says Pigeon. There must be a meeting of philosophies”.
Partnerships can become interesting in cases where the acquired company retains a significant minority position, or even a small majority, according to him. In this case, the small business leaders typically retain a stake in the business or, from the big business perspective, “a significant amount of skin in the game.”
According to John Valentini, a lot of onboarding planning is done in advance.
“When you join a company, there is always change management, there are always differences, he reports. But when you target an acquisition, you make sure that it’s the right target, that there will be a good fit within the organization. »