with David Kaufman
1. You are known as one of Canada’s foremost experts on alternative investments. How long have you been using private investments as part of your portfolio strategy for clients?
Westcourt was originally created in 2009 as a buy-side due diligence shop in the alternative space. In the early days our primary focus was real private equity and real estate. Although we’ve now significantly increased the breadth of our coverage, private investments are still at the core of what differentiates us from other advisory firms.
2. What has investing in private investing done to help your clients meet their wealth accumulation and income goals?
The defining characteristic of private investing in our view is that it provides investors the opportunity to trade liquidity for higher returns. We don’t pretend that these investments, if they were listed, wouldn’t be subject to the same volatility as their public counterparts, but rather we simply don’t care. Since our essential job is to be overpaid for risk, we believe that the inclusion of privates in a well-diversified portfolio allows us to achieve this.
3. Can you describe your investors’ general sentiments about private investments?
Many of them arrive at our doorstep expressly asking, for alternative yield, which virtually requires private investments. Others are more sceptical at first because they have, historically, been taught that a liquidity-at-all-costs portfolio is the only prudent approach to asset allocation.
Either way, once they understand the risks and opportunities associated with the best private investments (since there is no shortage of mediocre investments on either side of the public/private fence), they embrace the notion leaving with not the question of ‘whether’ but rather ‘how much’ to purchase.
4. In your opinion, what is the ideal portfolio allocation in our current economic environment?
It entirely depends on the long-term objectives of the client coupled with their real-time cashflow needs. The only two things that I can safely say make no sense today are, first, allocating 50-60% of a portfolio to unhedged equities with an objective of living off of the growth during any defined term of less than five years, and, second, having any meaningful portion of your portfolio sitting in unhedged bonds.
This first approach can lead to a death spiral when investors are required to take out capital to live on during a falling market, thus making the amount of risk required to take with the lower remainder higher, and the situation is much worse if one falling year is followed by another.
The second – straight up bond investing – just doesn’t make sense at a time when interest rates are near zero and more likely to go up than down over the long-term. As I have often said, investors are left with virtually zero returns (and that’s before inflation!) after paying hefty taxes on paltry interest on corporate or government bonds are victims of the shift in recent years from ‘risk-free return’ to ‘return-free risk.’
None of this applies, however, to someone with a long-term view and no need for real-time distributions from their portfolio. They should, in our opinion, be highly allocated (at least 60% if not 70%) to equity risk, both public and private, since, over time, equity risk will return more than less volatile investments.
To sum it up: people who have no problem with long-term illiquidity and no need for cash should consider large allocations to private equity and public equity. People who need real-time distributions should consider reducing their equity exposure and consider private yield investments. No one should consider holding any meaningful exposure to government or corporate bonds, unless they are literally ‘parking’ the money there for another purpose.
5. You work with very high net worth clients, some of Canada’s most successful families. Do you think investing in private investments makes sense for more average investors?
Yes for sure, but with one important caveat: while one shouldn’t overestimate the need for liquidity in their portfolio (and therefore ought to take advantage of the private markets, especially for yield), they mustn’t allow themselves to become over-allocated to illiquid investments either.
A client with $50M can easily have half of their portfolio tied up in private investments for 3-5 years, since the other $25 million will be available should they need access to quick cash. They can confidently say that they will never need more than $25 million in short order.
A client with, say, $1 million of investable assets, however, couldn’t possibly claim (in the absence of, say, a very high-paying job or expectation of inheritance etc.) that they will ‘never need’ $500,000 of that million, meaning that allocating 50% of the $1 million in privates in this case would probably be unsuitable.
Finally, a client with $300,000 would have to be even more careful about tying up their money for extended periods of time. This doesn’t mean that they should turn their back on private investing, but rather that, in circumstances such as these, they choose the more liquid privates that suit them rather than the more long-term ones.
6. Do you have any advice for investors that may not be ultra-high net worth, but may want to try investing in private investments?
In recent years, the regulations around the issuance and distribution of private investments have evolved significantly. This primarily affects what are known as Exempt Market Dealers, or EMDs. As with all regime changes in any industry, some EMDs have evolved with the times and others have been slow to adopt new approaches to modernize their product and service offerings.
There are now many highly-qualified EMDs across the country and I would recommend that ordinary investors spend the time to find one who is reputable and go for an interview.
I would then advise these investors to spend a lot of time getting to know the EMD firm, since the likelihood that the investments they will be shown by that firm will be of high quality is greatly increased if the firm itself is also of high quality.
This requires a bit of heavy lifting on the part of investors, but it’s your money and if that doesn’t deserve doing some extra homework then I don’t know what does!
7. Is there anything you would like to add about the modern exempt market and private investing in general?
One important thing, and it actually applies not just to the modern exempt market but to all investing: don’t be wowed by marketing and don’t be intimated by your Advisor. Try to gain a basic understanding of what you’re being shown and appreciate the risks that come with it.
This doesn’t mean that you must gain a detailed understanding of every moving part, but you also shouldn’t blindly accept every utterance from an investment professional as gospel.
It’s harder to take this responsibility upon yourself, but no one cares as much about your money as you as you do, so it’s part of your job!