Private equity opportunity brings asset class to retail investors
Wealthsimple is partnering with LGT, the Liechtenstein royal family’s wealth management group, to bring Canadian self-directed investors exposure to the private equity asset class.
Wealthsimple Private Equity, the DIY investing platform’s third alternative investment offering, means that retail investors can access the kind of investments normally reserved for large institutions and ultra-wealthy individuals, including many of Canada’s pension plans which have been increasing their holdings in recent years.
Ben Reeves, Wealthsimple’s chief investment officer, says that PE has outperformed the public markets by an average of 4.75% since 2001 and is a good opportunity for some investors.
“I like it for a lot of our clients with long investment horizons because of the potential for high returns. From 2001 to 2023, private equity returned 10.5% vs. the global stock market’s 5.7%,” he explained. “Given the current economic conditions, going forward we estimate private equity to continue to outperform by about 3%, net of fees. Over a long period of time that extra 3% can improve outcomes considerably.”
But outsized returns rarely come without risk and the CIO is keen to point out the danger points for PE investors.
“Underlying companies are riskier than the broader market, and investors are compensated for taking on that risk. Also, private equity managers tend to use more leverage than typical companies, which increases returns and adds more risk,” he said.
Reeves also highlights that it’s not always easy to sell holdings in private equity quickly, presenting a liquidity risk for investors. With a lack of index funds, he says that it’s important to select the right fund manager.
Earlier this year the firm launched a private credit offering.
Mitigating risk
Wealthsimple’s new offering is overseen by a manager with a proven track record, uses below-industry-standard leverage, and the fund invests only in the secondary market at a discount or at market prices for new direct investment. Reeves says this mitigates the risk seen in potentially overvalued firms with high levels of low-interest debt.
The PE offering is not suitable or available to everyone though.
“We’re making Wealthsimple Private Equity available to clients with $100,000 or more in
deposits, a long enough time horizon to ride out volatility, and enough flexibility to deal with the fund’s relative illiquidity,” concluded Reeves.
