Leaders from Nicola Wealth explain how they vet products and balance portfolios to ensure their clients aren't swimming with the sharks
In 2021 the private debt team at Nicola Wealth was offered the chance to invest with a Hollywood financier named William Santor. The Canadian film producer was offering investment exposure to his movies, the kind of non-correlated exposure that many investors and institutions are now seeking in the ‘alternative’ sleeve of their portfolios.
The Nicola team did their due diligence and found enough to concern them about the fund’s structure and about Santor’s own personal life that they passed on the opportunity to invest. At the end of 2024, a Canadian court had frozen Santor’s assets amid allegations he had misappropriated at least $44 million and Santor himself was found dead in his Cayman Islands home.
The dramatic end of Santor’s life and career highlights one of the key drawbacks that many see in the growing appetite for alternatives or private assets: a lack of transparency. For financial advisors, traditionally trained in highly transparent and regulated public securities the question arises of how they can avoid the sharks while swimming in the inherently murky waters of private asset allocations.
“If you have a process for due diligence that lets you make sure, as well as you can, that something’s inappropriate then you can avoid those issues. But the amount of work that would have taken for our team four years ago to get to the point of being able to say no, is something that most advisors don’t have the skill or the time for,” says John Nicola, Chairman, CEO, and CIO of Nicola Wealth.
Robert Olsen, interim head of private capital at Nicola Wealth, used the example of the private capital investment opportunities that pass his teams’ desks in a given year. On balance, he says, over 90 per cent of those opportunities are rejected. Last year the Nicola team reviewed around 1,000 qualified deals and accepted 75 of them.
It takes skill and resources to execute on that kind of diligence, Olsen and Nicola explain. They note that even some of the big names in private asset management require diligence and a look under the hood. Specific teams within companies we view as institutions may not have the expertise required to execute on a proposed strategy. The private capital team at Nicola is 30 people, with another 130 managing their real estate strategies.
Olsen and Nicola do not necessarily think that private assets should be subject to the same disclosure requirements as public securities. Olsen notes that while many private assets can be less explicit than public securities they are not always less transparent. He notes the example of a closed-end upper-quartile GP/LP fund with 20 investors, which would typically offer full information on its underlying investments.
“As vehicles for investing in alternatives have proliferated to include private wealth investors, it is not practical or generally permissible to “publicly” provide the same level of disclosure on underlying investments to what could be hundreds, if not thousands, of investors,” Olsen says. “However, it is not difficult for great funds focused on retail investors to be transparent about their investment strategy, the types of investments they are making, and the parameters they have in place to ensure alignment with their investors.”
Olsen and Nicola explained how bad actors can still take advantage of investors, advisors, and even advisory firms via private asset vehicles. Nicola notes that many bad actors have been able to successfully construct vehicles with minimal disclosures and large ranges for metrics like maximum concentration, allowing them to “push the limits.” Moreover, they have seen an uptick in retail investor interest in alternative assets, potentially increasing the absolute number of people at risk of losing out to a bad-faith actor in private assets.
Nicola emphasizes that the risks in this space drive home the importance of working with a professional financial advisor to vet the alternatives sleeve. However, that advisor must themselves be qualified to evaluate these investments. Even at the firm level, teams can hire inexperienced professionals, limit their use of proper compliance, or even get caught up in the hype around some of these asset classes. There can even be conflicts of interest as advisors may be earning commissions on the sale of alternative products.
At Nicola Wealth, there are a range of safeguards against some of the bad actors and poorer quality investments that exist in the private asset space. Olsen and Nicola explain that they begin with an institutional approach, combining public and private assets roughly in line with the Maple Eight model used by leading Canadian pension funds. That approach hinges on diversification, which can also help control for other structural issues like liquidity. Perhaps most importantly, they pool client assets in the private assets they manage as a firm, creating a model that far more closely resembles a pension fund or a large institution.
“Besides the difficulty of actually getting true diversification and then the transparency issues, the idea finally getting to a point where your model as an advisor looks like the Canada Pension Plan or BCI is just a giant leap,” Nicola says. “It's so practically difficult for an individual advisor to do that. And the reason we are able to do it is because we're doing it as an organization. We're not doing it as an advisor. Essentially, we're running a $17 billion portfolio like it's a pension.”
