Private equity on retail investors' radar - Shirley Won

Private equity investing has always been a game for the super rich or the deep-pocketed institutional folks.

But it's now getting easier for Canadian retail investors to join the party in this hot - albeit risky - asset class.

Giant U.S. private equity players are going public - as Blackstone Group LP did with a splash last Friday - and others are poised to follow.

And more Canadian asset managers are launching funds that invest in unlisted or publicly traded private equity funds aimed at higher net worth for average investors.

Toronto-based entrepreneur Miles Nadal controls Artemis Investment Management, which last week began marketing Elite Private Equity LP.

It will invest in four U.S. private equity funds run by big-name players like Blackstone Group, Carlyle Group, Thomas H. Lee Partners and Clayton, Dubilier & Rice.

"Canadians haven't been able to access the big private equity firms historically," said Mr. Nadal, who is also chief executive officer of advertising conglomerate MDC Partners Inc.

"This is the first alternative investment opportunity to invest in some of the biggest brands in the world."

Mr. Nadal, who says he has his personal wealth invested in about 25 private equity funds, was able to secure a spot for the Artemis fund because he has invested with some of those players.

"I am very close to the management of all of them," he said.

Canadians are more aware of private equity as an asset class now that some of the U.S. players have become involved in Canada, through bidding for BCE Inc. or by taking stakes in domestic companies such as Shoppers Drug Mart Corp. and Masonite International Corp., he added.

In recent years, many private equity firms have been generating superior returns to public market benchmarks. Their managers can buy inefficient companies, manage them to drive up their value, and then sell them or take them public at a nice profit. With more money chasing deals these days, however, the home runs could be hard to come by.

Because the minimum investments for some private equity funds can be about $5-million or $10-million, this world has been accessible mostly to institutional players like pension and endowment funds.

"It really functioned like a private club for a long time," said Rick Nathan, managing director of Toronto-based Kensington Capital Partners Ltd.

Kensington Capital, a Canadian private equity manager, raised just under $25-million for its Kensington Global Private Equity Fund, which closed in April.

The fund is expected to open again later this year once the monies are invested.

So far, it has invested in private equity funds run by U.S.-based HarbourVest Partners LLC, and Nordea Private Equity, a unit of Swedish financial services firm Nordea AB.

"Roughly, 80 per cent of our money is going into funds, and the balance will go directly to companies," Mr. Nathan said.

In addition to the two private funds, Canadian investors also have access to Diversified Private Equity Corp., a publicly traded closed-end fund administered by Scotia Capital Inc.

That fund, which closed in March, is invested in the 10 largest publicly traded firms specializing in private equity in North America and 10 in Europe. The portfolio includes Toronto-based Onex Corp. and U.S. players like Apollo Investment Corp., and American Capital Strategies Ltd.

Had Blackstone Group being a public company at the time when the fund was marketed, it would have been included in the names.

"But this is a fixed portfolio," said Robert Fournier, analyst in investment banking at Scotia Capital.

"We are not changing any names going forward unless there is some type of corporate action or takeover," Mr. Fournier said.

"This was purposely done as a passive portfolio ... It's a low-cost way to get very broad exposure to private equity throughout the world."

Michael Banwell, president of Toronto-based financial planning firm Banwell Financial Inc., said that private equity has indeed become a "hot asset class," but it is not suitable for everyone.

"If someone is going to consider this, it should be part of an overall portfolio that is already broadly diversified ... around 10 per cent," Mr. Banwell said.

Morningstar Canada analyst Mark Chow agreed, saying there is "more risk" for investors, particularly with the private funds. "They are not as open and transparent as a mutual fund," he warned.

"The M&A activity is very hot now," Mr. Chow added. "Blackstone has gone public. Carlyle Group and KKR are thinking about it. They are coming out when they can get the best valuation. That is typically the top of the market."

Five ways to invest in private equity

1. Elite Private Equity LP

A Canadian fund that will invest in four U.S.-based private equity funds, including those run by Blackstone Group, Carlyle Group, Thomas H. Lee Partners and Clayton, Dubilier & Rice. Artemis Investment Management, a unit of Peerage Capital Inc., is making the private fund available until July 16 through an offering memorandum. The units are not redeemable, but investors will get distributions as the funds exit companies. Minimum investment is $25,000.

2. Kensington Global

Private Equity Fund

A Canadian fund of funds offered by Kensington Capital Partners Ltd. It closed in April, but could reopen later this year. The fund invests in private equity funds in Canada, the U.S. and Europe as well as directly in private companies. The fund is offered through a prospectus. Units are redeemable once a year. Minimum investment is $25,000.

3. PowerShares Private

Equity ETF (A-PSP)

The exchange-traded fund was listed last fall on the American Stock Exchange. It tracks the Listed Private Equity Index, a benchmark created by Denver-based Red Rocks Capital Partners. This is an index of about 30 publicly traded companies that invest in private equity.

4. Diversified Private

Equity Corp. (TSX-PEQ)

A closed-end fund that began trading on the Toronto Stock Exchange in March. The fund, administered by Scotia Capital Inc., is invested in the 20 of the largest firms specializing in private equity that are publicly traded in North America and Europe. The fund went public at $10 a share.

5. Stocks

Onex Corp., run by founder shareholder Gerald Schwartz, is the only pure-play private equity player on the Toronto Stock Exchange. U.S. buyout giant Blackstone Group went public last Friday on the New York Stock Exchange. Other major U.S. players, Kohlberg Kravis Roberts & Co. and Carlyle Group, may go also go public.