For investors seeking out alternative opportunities in today’s unpredictable investment environment, Canada’s exempt market could be the answer. Previously only available to high net-worth and accredited individuals, a change in regulations earlier this year opened the markets to qualified investors in Ontario. In an age where strategic diversification is key, savvy investors are increasingly looking to opportunities presented by the exempt markets.
“Even the most seasoned investors are having difficulties in the traditional markets these day,” says Craig
Skauge, president of the National Exempt Market Association. “For years, we’ve all been believing that rates would go up, but we’re still in a low interest rate environment. We have an aging population who anticipated getting some yield from their portfolios in their retirement years, but it’s just not there in the traditional places.”
The rise of the exempt market can be put down to a couple of factors. Firstly, businesses and individual investors are losing faith in the idea of going public: many business owners have figured out that being listed comes with myriad issues, such as living by a quarterly reporting cycle and prohibitive issuing costs.
“Also, investors have lost faith in the integrity of the market structure and are willing to trade liquidity for stability in exempt market products,” Skauge says. “People have been trained to have a portion of illiquidity in their portfolios - in buying Canada savings bonds and GICSs - but those investments do not pay enough interest anymore.”
“Investors are used to having money locked up for a period, so the idea of doing that in the exempt market is not totally foreign. Transparency in exempt markets has increased and investors’ comfort levels are growing.”
The backbone of the exempt market is real estate securities including property backed debt securities, non-listed REITs, development opportunities and traditional land banking. The exempt market is also starting to see movement in the factoring of receivables, leasing, agriculture and funding of small businesses. “As the awareness of these exemptions grows amongst the business community, the range of products we see continues to broaden,” Skauge says.
Although, Skauge doesn’t believe in putting an entire portfolio into the exempt markets, he does see better yielding products compared to the public. “That’s what most investors are seeking right now,” he says. “Also, the exempt markets are more flexible and can tailor their offerings to investors a little better.”
Skauge urges Canadian advisors to be proactive in getting informed about the exempt markets. “The amount of opportunities in this space is growing daily, so this is an area advisors should considered getting licensed in,” he says. “The appetite for products offered over the years is declining and investors will be seeking alternatives. It’s better for an advisor to be proactive rather than get caught off guard when their client looks to transfer their portfolio.”