Why Privatizing Part of Your Portfolio Is a Priority

Why Privatizing Part of Your Portfolio Is a Priority

Ash Lawrence, head of AGF’s new private capital business, discusses the growing importance of private assets in the ongoing evolution of investor portfolios.

Why was AGF Private Capital established earlier this year?

The goal is straightforward. We want to be one of North America’s top experts in private market investing and put that together in our broader client proposition with our public markets offerings. To build the foundations of that private markets business, we’re going to create an investment platform over the next few years that includes multiple private market strategies run by experienced managers within their respective asset classes that we bring into AGF’s asset management complex.  

How does AGF’s legacy ETF and mutual fund business complement that vision?

The broader AGF platform is hugely important. Not many alternative managers are in the same position to leverage the kind of knowledge and experience it affords in areas like product development, distribution and marketing. That said, structuring a mutual fund is very different than a private credit fund that, for starters, may have unique redemption and valuation characteristics. So, it’s crucial that our private market business has its own identity and skill set. In this way, we can work better with our manager partners to structure strategies, while also taking advantage of what AGF offers more broadly.

What is the advantage of having a private markets business in addition to AGF’s existing line up of strategies that still mostly invest in publicly traded securities?

There are several benefits, the first and most important of which relates to the changing appetite of our clients. It’s no secret that investors are allocating more money to private assets than ever before. In fact, by some estimates, the split between public and private is now close to 50/50 among the largest institutional investors in the world. So, if we want to serve clients across the full spectrum of assets they now demand, we need to be in the private capital business. On the retail side, the shifting allocations are in their early stages, but the sheer scale of incremental moves in allocation offers a huge potential growth opportunity for the firm. Assets under management in global private markets hit US$10 trillion in September 2021, representing a five-fold increase since 2007, according to Preqin, a financial data provider. Meanwhile, public markets, which are still far bigger but have grown more slowly, roughly doubled in the same period.

Why has demand for private market assets grown so substantially?

Alternatives – which include private market assets – serve numerous functions in an investor’s portfolio. For many, the primary goal is to provide uncorrelated returns to publicly traded stocks and/or bonds, which, in turn, can help reduce overall volatility in a traditional 60/40 mix. But often overlooked is the additional benefit of direct control that comes from owning shares in a private market investment.

For example, when a private equity firm invests in a company, they typically buy a 100% controlling interest, which allows them to influence the company’s direction in a way that is very difficult for even the largest public-market investors to do. This is especially true these days when it comes to contentious issues like environmental, social and governance (ESG) mandates. They may be necessary to implement, but require complete buy-in from shareholders to achieve.

Moreover, there’s an argument to be made that one of the reasons private capital tends to be uncorrelated to publicly traded stocks and bonds is precisely because of the direct control. In other words, private investors can hold their investments through an entire market cycle if they so choose, which only helps differentiate their returns and lowers market volatility in the process.  

Why are private markets still mainly the domain of institutional investors?

Institutional investors have been proponents of private markets for years, while retail participation has been much slower to catch on because of issues largely related to education and product structure. Still, businesses like ours are eager for that to change and a new wave of refined private market offerings that cater to the specific needs of retail investors could proliferate and lead to higher allocations among this group.

As such, we see retail as a relatively small opportunity near-term, but one that gets progressively larger in the mid-to-long term. In fact, one of the other reasons we created the private capital business is because of the “white space” for growth in the retail segment.

What structural changes might need to be made to make this happen?   

The underlying investments would still be private, but institutions are more comfortable locking up their money, whereas retail investors often demand more liquidity or want cash distributions while they hold an investment to maturity. Private investments that offer that do exist, but structuring yield-producing products has been difficult over the past decade because interest rates have been so low and more attention has been paid to capital appreciation products associated with venture capital and private equity funds.

Of course, that should change if today’s higher inflation, higher interest rate environment persists. For certain private real estate with shorter duration contracts, for instance, elevated inflation and higher rates should turn into higher distributions down the road.

What specific asset classes is AGF Private Capital focused on right now?

Our priorities are private credit and mid-market private equity because they both have large and growing investable universes that institutions are well versed in, and which retail investors are becoming more acquainted with over time. Specifically, private credit offers some attractive characteristics in the rising rate, inflationary environment we’re in, namely, returns correlated with rates, safety and the prospect of attractive distributions.  Additionally, we’re looking at potential opportunities with real estate asset managers. Despite some market adjustments in the near term largely related to interest rates, we like the asset class over the long term.

What is your outlook for private markets in 2023?

It depends on your investment style. For more conservative investors that are worried about inflation, infrastructure and private credit may offer some good opportunities. Real estate, as we alluded to above, probably warrants more caution right now due to the impact that rising interest rates is having on the asset class, but we could be looking at a value opportunity in 2023 and a good time to be putting capital to work. Unlike in public markets, it often takes longer for buyers and sellers in the private market to reach agreement when macro conditions adjust like they have over the past year, but in this instance, once they do, it could lead to a new value opportunity for investors.   

What about private equity?

Private equity valuations are only just starting to adjust downwards and are still doing so in a measured fashion after a period of being elevated. Yet, if there’s a trend to watch, it may be toward cash-flowing businesses, mainly because of the safety they provide, but also because of the yield. Multiples on cash flowing businesses have thus far held up well and there is a considerable amount of “dry powder” that was raised over the past year or two that is looking for a home. This will work to the benefit of more mature, resilient cash-flowing businesses. Meanwhile, if investors want to play it riskier, it may be a good time for venture capital. Asset managers in this space may find some great companies to invest in as capital has become so scarce over the past little while. Similar to real estate, this might yield some good opportunities over the next year if, again, you have dry powder to invest.