Despite outperformance from public markets, Danny Popescu remains committed to an alts allocation strategy
Private assets have lost a little bit of shine. After dominating pubic assets in terms of growth during a period of near-zero interest rates, the shift towards higher rates has been damaging for some private asset classes. Namely private equity and real estate have underperformed public equities and some public fixed income assets in recent years. One wealth management leader, however, has reiterated his belief in a private asset allocation for the building and preservation of wealth in the long-term.
Danny Popescu is the CEO of Harbourfront Wealth Management, a firm that has long prided itself on offering clients some element of private asset exposure to complement their public equity and fixed income holdings. Popescu told WP some of why he built a firm to offer that allocation, what it’s done for clients up until now, and why he thinks these assets can still perform in the long-term.
“We realized a long time ago that Canadian investors, unfortunately, are limited in the way that they can invest. Traditionally they have been limited to two asset classes: stocks and bonds, while there were many more assets available to institutional investors, including private equity, real estate, private credit, infrastructure,” Popescu says. “When we launched our firm 10 years ago, there were probably already about 160 investment dealers, and we knew the industry didn’t need any more investment dealers. But we did this so we could bring institutional quality alternative investments to the retail space.”
Popescu highlights the asset mixes of notable private investors like CPP Investments, which hold a roughly 60 per cent allocation to some form of alternatives. He notes that given the considerable volatility attached to stocks, bonds alone lack diverse enough drivers to function as a means of risk mitigation while still driving returns. He sees alternatives broadly as valuable diversifiers and sources of risk offset.
CPP Investments and other institutional asset managers can hold such massive allocations to alts because they don’t have the same liquidity requirements as an ordinary investor. Popescu acknowledges this and notes that Harbourfront has built alternative funds available to its clients which offer greater liquidity. Their private credit and private real estate funds have 30-day liquidity, while their private equity fund has 90-day liquidity. At the same time, by pooling assets these alt funds are better able to access assets that may have a higher investment barrier.
Popescu does not advocate for a one size fits all approach to alts allocations. He leaves that to the discretion of clients and their advisors. He says that some clients may end up with 40 or 50 per cent allocations to alternatives, but each client will have a unique mix. Popescu even argues that retiring clients, who may on the surface need greater liquidity in their investments, should look at alternatives because they come with less volatility than public assets.
Of course, recent times have taught us that alternatives are not a monolith. Harbourfront themselves divide alternative allocations between private equity, private debt, and private real estate. Of those three asset classes, the current rise in interest rates has been a headwind for private equity and private real estate. However, Popescu emphasizes that private credit presents some interesting prospects in this environment.
Most private credit lenders offer variable loans, which mean that investors are collecting more income in today’s higher rate environment. While higher rates may come with higher default rates, well chosen lenders should not overextend and should have the capacity to manage those risks. He believes that some adjustments in private asset allocations may be required given the headwinds some asset classes now face, but he also believes strongly in these asset classes. He notes that private equity is already starting to become more active as M&A deals pick up again following the dearth of activity post-2022. Real estate, too, may face headwinds from borrowing costs, but certain asset classes like multifamily housing also have massive tailwinds from extremely constrained supply.
As some analysts and investors declare the end of alternatives or cite some periods of underperformance as a reason for wholesale reallocation, Popescu is doubling down and arguing that this industry needs to keep educating itself and its clients on private assets.
“Most clients haven’t been sufficiently educated by the industry, so most clients aren’t immediately saying that they want alternative assets,” Popescu says. “A lot of the higher net worth ones might be, but most Canadians are not asking for this, not because they shouldn’t have it, but because they simply don’t know.”
