Private equity has become a steady presence in portfolios in Canada and around the world. Large pension plans, sovereign funds, and insurance companies have been investing in private equity for years to seek higher returns and diversification away from public markets.
In this article, Wealth Professional will explore what private equity is, how it works, and the risks it involves. We’ll also look at who controls private equity in the country. Experienced financial advisors can use this as a tool to educate clients while also keeping abreast of the latest news!
Private equity refers to ownership interests in companies that are not listed on a public stock exchange. Instead of buying shares on a market like the Toronto Stock Exchange (TSX), investors commit capital to a private fund or similar vehicle.
That fund then buys positions in operating companies, often with the goal of improving their operations and selling them later at a profit. These companies can be:
Private equity is part of the wider private markets universe. This includes:
Most private equity investing happens through pooled funds. Usually, the set-up starts with a private equity firm setting up a limited partnership or similar fund. Then, institutional investors and high net worth individuals commit capital to the fund.
The fund manager draws that capital over time, buys positions in private companies, and later sells those positions. As investments are sold, proceeds are returned to investors, often over a period of 8 to 12 years.
Here’s why private equity wants to invest in wealth managers.
Yes. Canada has an active and growing private equity market. Private equity firms invest in Canadian and global companies from offices in places such as:
Large Canadian pension funds and other institutional investors also commit meaningful capital to private equity through in‑house teams and external managers. These funds usually raise money in the exempt market and invest in privately held businesses rather than companies listed on public exchanges.
For financial advisors, this means that your clients are operating in a market where private capital is well established, not something experimental or marginal.
There is no single body that controls private equity in Canada. Instead, it sits within the wider Canadian capital markets system, which is overseen by securities regulators in each province and territory.
These regulators are coordinated through the Canadian Securities Administrators (CSA), an umbrella organization that works to harmonize rules across Canada.
Canada does not publish an official ranking of private equity firms. Still, there are a number of institutions that are widely recognized as major players with substantial private equity activities and Canadian roots. Here are five of them:
Private equity is a large and established part of the private capital market. One can describe Canadian private equity as anchored by a mix of global firms and mid‑market specialists, with activity across:
For your clients, this means private equity is not just something happening abroad. There is a sizeable pool of capital operating in Canada, influencing mergers and acquisitions as well as ownership of private companies.
Private equity carries several types of risk that financial advisors in Canada need to understand before discussing it with your clients. Check out these five risks below:
Private equity interests are hard to sell. Standard private equity funds often run for 8 to 12 years. Plus, interests trade only in a secondary market where pricing can involve discounts and longer processes.
Illiquidity tends to be most painful during market stress or when investors suddenly need cash.
In a classic fund, capital is called over several years and returned as investments are sold, which introduces timing risk for cash flows. Investors must keep liquid reserves ready for capital calls and accept that distributions can slow during weaker exit markets.
Private equity transactions often use borrowed money to finance acquisitions. Academic work on leverage shows that borrowing can amplify returns but also leads to more extreme outcomes.
This is especially true in downturns, because leveraged investors can be forced to sell into falling markets. In private equity, this means that if a portfolio company underperforms, the combination of business risk and leverage can lead to larger losses than in an unlevered structure.
Because portfolio companies are not traded on public exchanges, valuations rely on models and comparisons. However, they are updated less frequently than public prices.
Research on private investments notes that this lower valuation frequency can make returns appear smoother. However, it can also leave investors less certain about the true value of their holdings until exit.
Industry reports highlight that performance spreads between private equity managers are wide. Some managers deliver strong risk‑adjusted returns, while others underperform public markets. Your clients’ outcomes depend heavily on which managers and funds are chosen, not just on the asset class label.
For conversations with your clients in Canada, it can help to emphasize that private equity should be considered only after their core, liquid portfolio is in place. You can also stress that any allocation should reflect their ability to accept illiquidity and variability in outcomes over many years.
Learn about the importance of private equity due diligence in this linked article.
Institutional investors in Canada turn to private equity for several reasons:
When you explain these motives to your clients, it reinforces why they see so many headlines about pensions and asset managers increasing allocations to private markets.
Private equity is not suitable for every investor. It might be suitable for:
For clients with shorter horizons, limited liquidity, or low tolerance for capital loss, indirect and liquid approaches might be more appropriate as starting points. These can be listed private equity or diversified funds that include private strategies.
Your clients are hearing more about private equity in the news. This is especially true as large institutions, global managers, and local funds announce deals and fundraising milestones. When the topic comes up, you can:
Using plain examples helps. For instance, you can compare a private equity investment to owning part of a mid-sized private Canadian business for ten years.
This ownership has limited liquidity, which can help your clients understand both the opportunity and commitment.
Private equity is a large part of institutional investing in Canada and globally. Assets under management (AUM) have grown quickly over the past two decades. Canadian private capital markets also continue to attract attention from both domestic and international managers.
For your clients, private equity can offer higher return potential and new sources of diversification. It can also provide access to private businesses. At the same time, it introduces long lock-up periods and cash flow complexity. It can also have higher fees and reliance on manager skills.
So, when you ground every client discussion in realistic expectations and Canadian regulatory realities, you can guide your clients better. You’ll be able to point them to choices that support their financial plans, whether private equity should be in their portfolios or not.
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