by Cora Pettipas
It is an astute idea to use alternative investments to enhance your portfolio, and there are many reasons why. Investors find it a challenge to attain a reasonable yield in this prolonged low interest rate environment, especially given that stock markets are at historical highs and commodities softening. Good solutions can be hard to come by.
This may explain the increasing popularity of the exempt market in Canada. It is the fastest growing portion of the capital markets; and according to a recent report by scholar Jack Mintz, accounts for an estimated 320 billion dollars raised between 2010 and 2012. The exempt market is where investors can purchase private (non-publicly traded) investments. It is called the exempt market because that is the label given by the Canadian securities regulators. It means exempt from a prospectus offering (which is generally the first stage of raising capital in the public markets).
As these investments, no matter the structure or type, are all deemed high risk by regulators, it is important to explore this world of private alternative investments carefully and strategically.
Here are some tips to new investors for investing in the exempt market:
1. Use a registrant. - A registrant is someone registered with your provincial securities commission to sell investments. In general, most investment fraud happens with non-registrants; so no matter what investment choice you make, you should work with a registrant to better protect yourself. Advisors and firms can be searched on the CSA registration database. Also, exempt market brokerages are listed on the National Exempt Market Association’s website.
2. Be proactive in the process. - Registrants are required to do what is called suitability analysis on each client before they make a recommendation to you. This is a combination of finding out the details of your situation and goals, being an expert on the products they offer, and then finding the right match. The more accurate information you give your Advisor (in this industry, they are called Dealing Representatives), the better the recommendations you will receive for your personal situation.
3. Do you qualify? - There is one additional step in the suitability process for exempt market investments that you will not find in other areas of financial services. Your Dealing Representative needs to determine if you qualify to invest in exempt market products, as the rules differ provincially. Currently, BC has the most flexible rules as anyone can invest, and Ontario has the most restrictive, where you have to be a millionaire to invest. Details of regions and their requirements are listed on exempteducation.ca.
3. Learn and ask questions - Like anything in life, you will get out of exempt market investing what you put into it. You need to educate yourself and ask questions. It is important to do your due diligence, which means looking into the investment, reading the materials and asking questions. Do not feel stupid doing this, due to legal, taxation, and accounting frameworks, not to mention innovative business models, investments can get very complicated! If you are not comfortable with the information given and the risks and potential returns of an investment, then pass it up. There will always be another great opportunity.
4. Start small – Currently, the exempt market has no established secondary market, so you cannot sell the investment quickly. Some products have liquidity provisions built in, but it depends on whether the issuer (provider of the investment) can honor them. In general, information dissemination is slower in this market and the procedures of managing an account are different. Some investors love this market and are avid investors, and others have no appetite for it. That is ok. No one size fits all. This is why it is recommended to start small and see how exempt market investments fit in your portfolio and overall investment strategy.
5. Diversify –It is hard to predict the markets and business conditions, one recent example being the steep downward trend of the price of oil. In June 2014, there were no experts warning of this happening, yet it has significant systemic ramifications for our economy. Many people try to predict markets, and it can be fun, but it is at your own risk. This is why diversification is so important, especially in the exempt market where the investments tend to be a single business, in a single location. It is also important to diversify outside of the public markets, and exempt market investments are a great solution for that.
In general, exempt market investments are considered higher risk and thus offer higher potential returns. They are definitely not one size fits all but offer some very interesting opportunities to invest in innovative business models, from long term care housing, student rentals, hotel developments, alternative energy, farm land, natural resources, leasing equipment, to diamonds. The variety in the exempt market is astounding and there are some excellent investment opportunities.