Are retail investors ready for the private-market portfolio revolution?

SVP and portfolio manager highlights how firm has positioned itself well for the next big movement in retail investing

Are retail investors ready for the private-market portfolio revolution?

As investors and advisors become increasingly interested in diversifying their portfolios beyond public markets, the investment management industry is going through a new product revolution, according to one industry leader.

“Our industry is always progressing,” Krystian Urbanski, SVP and associate portfolio manager at Bridgeport Asset Management recently told Wealth Professional. “There’s always a movement. And I think the next movement for retail is to private equity.”

Urbanski recalled different waves of product innovation that came over the decades. Starting from the ‘80s boom in mutual funds, the industry has seen interest explode in different global regions including Latin America, followed by tech-sector exuberance and a rush into principal protected notes and hedge funds. That gave way to the most recent renaissance in ETFs, which up to now shows no signs of stopping.

The latest trend of innovation, he said, is in private markets. He pointed to AGF Investments and Mackenzie Investments, which have been launching mutual funds that offer access to private markets through managers with solid pedigrees and notable track records in private credit and private equity. Recently, BMO and CI also launched their own private-markets funds that include exposure to private equity, real assets, infrastructure, and private credit.

“The actual private equity market is $13 trillion worldwide. The only problem in the past you needed literally millions of dollars to get in,” Urbanski said, noting how PE has traditionally been open only to ultra-high-net-worth investors, pensions, or institutions. “Now there are companies like Bridgeport that are truly bridging the gap.”

According to Urbanski, Bridgeport has access to the world’s top pension portfolio managers in the world on the PE side. By putting them together into one multi-manager pool, the firm gives more retail investors the chance to get true private equity, real estate, infrastructure, and traditional investments in their portfolio.

“It’s the same diversified asset class structure as the Canada Pension Plan, or the Yale or Harvard models of endowments,” he says. “But now we’ve brought it down to every single person in Canada with a decent RSP portfolio. … Depending on what structure you buy, you can go as low as $50,000.”

While most private equity portfolios include two or three strategies, Urbanski says Bridgeport has PE portfolios spread across 19 managers with 11 strategies. On the private income side, it has 32 managers that run unique strategies, including rail car leasing, residential real estate, storage facilities, and music royalties.

Among its PE managers, he highlighted Brookfield Asset Management. The alternative investment titan offers a wide gamut of strategies far outside the reach of the typical retail investor, including some requiring a minimum investment in the neighbourhood of $300 million.

“It’s a truly pension-style strategy,” he says. “The only reason we have access to it is because our founder John Fisher, started in the business early and made all these connections.”

Within Bridgeport’s portfolio offerings, Urbanski says investors can diversify across different dimensions, including public and private markets as well as global markets. With access to 11 private strategies, it creates additional diversification by spreading investors’ exposure across different risk metrics.

“In 2022, we saw different markets around the world go down from -12% to -18%, while private equity portfolios managed 8.5% after fees,” he said. “The standard deviation on those varies; for example, the TSX historically has exhibited a standard deviation that’s anywhere from 13% to 16%, while private equity portfolios showed a standard deviation of 2.9%.”

For retail clients, Urbanski said, the potential benefits include private equity’s lack of correlation to public markets, and the downside protection it offers. But one of the biggest drawbacks, he said, has been lack of liquidity as PE strategies have traditionally been structured as closed-end funds: compared to ETFs that can be bought or sold within the day, and mutual funds where the transaction pushes through the day after, investors in PE funds have to stay invested for five to seven years in many cases.

“Once you buy into closed-end funds, you can’t get out until they say you can,” he said. “For the majority of retail investors, locking their pension into their RSP for that long without any access to it is simply not an option, even for a PE portfolio with exposure to good, legitimate companies.”

Bridgeport has constructed its private portfolios as funds-of-funds. Rather than daily liquidity, they offer quarterly liquidity by including a 15% to 20% sleeve of low-correlated public investments that can be easily taken out.

“When dealing with us, you can build a true one-ticket, pension-like solution that’s very easy to actually present to the client,” Urbanski says. “It’s very difficult to use the term ‘proven’ in our business. But if you research the history of the Yale model, you’ll see it has a solid record of performance compared to the market. Since inception, it’s returned 13.7% on average, and it has grown from $1 billion to $33 billion in 20 years.”