Canadian asset managers have been acquiring private investment firms to try to stand out in a competitive market for high-net-worth clients and to fight back against diminishing fund fees.
While institutional investors have steadily increased their private investment allocations for years, interest is growing in the retail channel, particularly among wealthy clients seeking more stable or uncorrelated returns.
That’s led some fund companies to acquire firms specializing in private equity, private debt, real estate and infrastructure strategies.
John Valentini, president and chief executive of Fiera Private Markets, called alternatives a “high-growth area” for fund companies. Fiera Capital Corp. acquired alternative manager Integrated Asset Management Corp. (IAM) in 2019.
A report on the U.S. market this year from Javelin Strategy and Research found that nearly half (45%) of registered investment advisors plan to allocate 5% or more of client assets to alternatives in the next two years, up from about one in five who currently allocate that proportion.
Globally, alternative assets under management are expected to grow from US$12.5 trillion last year to more than US$23 trillion by 2025, according to U.K.-based alternative data analytics company Preqin.
The primary motivation for the IAM acquisition was to get a credit product in Fiera’s portfolio, Valentini said, and be a “one-stop shop” for both public and private markets.
Private investments also provide a new revenue stream for asset managers as index products from large ETF providers drive down management fees. Mutual fund inflows rebounded in 2021 but the longer-term trend has been declining sales, with the products outpaced by ETFs. Fee compression has also cut into fund company revenues.
“It’s putting a lot of pressure on the smaller [companies] that are more generalist, and they’re getting exposed and their revenues are shrinking,” said Georges Pigeon, partner, deal advisory, with KPMG in Montreal.
Alternative funds can charge higher management fees, including performance fees in some cases.
With private asset classes, “fee transparency may be a little bit less obvious because there’s a degree of complexity in the cost structure,” Pigeon said.
The competition also isn’t as clear. Active managers of public securities have to compete with index ETFs, Valentini said. “That doesn’t exist in private asset classes. You can’t invest in a beta of illiquid infrastructure; you can’t invest in beta of credit. You have to buy the active management.”
That management is more labour intensive — especially compared to some of the more basic public market strategies — and therefore more expensive, Valentini said: “You don’t just go to a Bloomberg screen and buy the assets. You actually need teams.”
Investors are willing to pay for the benefits of diversification, lack of correlation, inflation hedging or, in the case of private equity, superior returns due to the illiquidity premium, he added.
Bruce Cooper, CEO of TD Asset Management, said serving institutional clients was the primary focus when the firm acquired Regina-based Greystone Managed Investments Inc. in 2018 for $792 million. But TDAM is now offering alternative products more broadly.
“We’re looking to leverage those capabilities into the retail market in Canada, particularly the high-net-worth market,” Cooper said.
The deal has allowed the former Greystone team to launch products for which they previously had the capabilities but not the distribution heft, he said, such as a global real estate fund.
TDAM started offering hybrid public-private products for retail investors that blend the firm’s new capabilities with public strategies. The TD Greystone Real Asset Pooled Fund Trust, for example, combines illiquid real estate and infrastructure assets with publicly traded infrastructure and real estate investment trusts.
A pure real estate investment can take 12 to 18 months to enter and just as long to get out, Cooper said. “For a lot of clients, that’s a long time to wait. These hybrid vehicles with a liquidity sleeve mean you can get in right away and you can also get out.”
There are also two hybrid fixed income funds. The three funds are only available to TD Wealth Private Wealth Management clients.
“We thought it would be good to keep within the walls of TD for a period of time,” Cooper said. “We may not do that forever, but we thought it would be a good place to start.”
Fiera also uses its own private wealth channel, where clients invest in proprietary strategies, to distribute its private market funds. But the products are available to other firms, too.
“A primary reason private wealth clients come to Fiera Capital Corporation is because of our competitive offering in private market asset classes,” Valentini said.
Mackenzie Investments has been developing alternative strategies after acquiring, with Great-West Lifeco Inc. (GWL), a 49.9% non-controlling voting interest in Northleaf Capital Partners Ltd. in 2020. The firm has launched four alternative products for the retail market with Northleaf as the manufacturing partner.
The private credit, private infrastructure and private equity products are offering memorandum funds with minimum investments and early redemption penalties. But Mackenzie and Northleaf also launched a private credit fund that uses an interval structure to allow for quarterly redemptions of up to 5% of the fund’s assets. The fund combines exposure to private credit funds and fixed-income ETFs.
While Mackenzie is securing dealer approvals for the products across the country, fellow Power Corp. subsidiaries GWL and IG Wealth Management committed to investing a minimum of $700 million in Northleaf offerings over two years as part of the deal, including allocations to client portfolios within managed solutions.
Michael Schnitman, head of alternative investments with Mackenzie, said democratizing access to alternatives is important as fewer investors can fall back on defined-benefit pensions.
“This is about helping clients have access to the investment strategies that institutions and pensions have had for decades,” he said.
But explaining those strategies to clients — and advisors — can be a challenge. Mackenzie has a website for advisor education on alts and a dedicated sales team, Schnitman said.
Cooper said it’s important to prepare advisors accustomed to being able to make changes to portfolios whenever they want.
“These private assets are not meant to be traded,” he said.
Alternatives may only make up 10% of a portfolio, he said, but they’re “meant to be held for a long period of time.”
Integrating alts teams
Mackenzie has taken a hands-off approach in terms of integrating Northleaf. Schnitman said the firms have remained separate intentionally.
“We don’t intend to do anything to tinker with Northleaf,” he said. “They are a standalone organization and will remain that way.”
TD didn’t have an alternatives team when it acquired Greystone, Cooper said, so the mortgage, real estate and infrastructure group from Greystone basically stayed together and became the alts group at TDAM. The firm uses the TD Greystone branding on private asset funds.
There was more integration on the equities and fixed income teams. Former Greystone CEO Rob Vanderhooft became TDAM’s chief investment officer in 2019 but stepped down from the role earlier this year.
Pigeon said integrating the more entrepreneurial managers from private asset firms into larger corporations often requires adjustments on both sides.
“It may mean that employees of the acquired have to give up some aspects of the life they used to live,” he said.
At smaller firms, managers may have accepted a lower base compensation if it came with the possibility for a big payoff in a good year, he said. Larger organizations tend to provide more security with less upside.
“At the same time, these are people-based businesses and an acquirer can’t just go in and impose their culture,” Pigeon said. “There has to be a meeting of the minds.”
The partnerships can become interesting in cases where the acquired firm retains a large minority position or even a small majority, he said. In such cases, the smaller firm’s principals usually retain a stake in the business or, from the larger firm’s perspective, “a significant amount of skin in the game.”
Valentini said a lot of the integration planning happens in advance.
“When you integrate a business, there’s always change management, there’s always differences,” he said. “But when you’re targeting an acquisition, you make sure that it is the right target, that there is going to be a good fit within the organization.”