Chief investment officer lifts lid on thinking behind single-ticket strategy for private markets exposure
Recently, CI Global Asset Management took a crucial step to help individual investors get access to the benefits of private market investing.
Through its new fund-of-funds strategy, the firm is providing diversified exposure to venture capital and private equity, credit, infrastructure, and real estate through best-in-class alternative asset managers. The simple one-ticket solution is currently open only to investments by other CI funds; the firm plans to open it to accredited investors later this year.
According to Marc-André Lewis, executive vice president and chief investment officer at CI GAM, it’s a solution whose time has come.
“[During] the 10 years that brought us to 2020, listed equities went climbing almost straight up. Investors who went beyond bonds and equity didn't get much reward for diversification,” Lewis says. “I think collectively, it lowered the perceived importance of diversification.”
With the ultra-aggressive rate hiking of central banks last year, bond yields and borrowing costs went up, credit spreads widened, and valuations for equities went down. It was a rude awakening for investors in the public markets, who are now taking a closer look at alternatives diversification.
The case for diversification is even clearer in the context of possible recession. While a prolonged downturn in the economy can weigh on both public and private company’s earnings, Lewis says public company valuations are more vulnerable to investor sentiment; with the ability to sell stocks at the click of a button, investors in public stocks have the potential to move markets and share prices at much faster speeds than the fundamentals necessarily justify.
“People often say illiquidity is bad, but one advantage is that it can prevent you from overreacting,” he says. “What seems to be a defect actually becomes an advantage in periods of panic.”
Private companies also benefit, Lewis says, from having more freedom to invest in operational efficiencies. Unlike listed companies that are driven by quarterly results and their impact on stock valuations, operators in private companies can take a more long-term view to increasing their enterprise value. The result: a smoother ride towards potentially enhanced returns over time.
On the private credit side, he says investors can also benefit. By lending to entities that banks don’t deal with, largely for regulatory reasons, fixed-income investors can access a different source of yield. The increased risk private credit managers take on by lending to those entities allows them to charge an extra premium.
Over the last few years, CI Global Asset Management has forged relationships with Harbourvest, Adams Street, and CBRE, allowing them to offer clients exposure to those names on a single-manager basis. But with its new multi-manager strategy, Lewis says the firm can build a diversified “bouquet” of private assets based on what it believes are the important dimensions for good risk-adjusted returns.
“The most important element is due diligence. These are more complex types of instruments and strategies,” he says. “Advisors often raise that this is something they don’t feel fully equipped to do.”
The private markets space, Lewis adds, tends to exhibit wide performance dispersion between successful and unsuccessful managers. That dispersion also has a tendency to persist over time, so “good” managers are likely to build long track records of performance.
At the same time, those managers tend to be big firms with limited appetite for relatively small investments from individual investors. By pooling its funds and having the ability to offer its solutions in one ticket, CI GAM can muster a bigger scale and provide access to what it believes are better managers.
“I don't think there is a single silver bullet … There's not a single type of instrument that is magic, and will solve everybody's needs,” Lewis says. “But diversification is the only free lunch in markets, and private markets offer an interesting addition to the toolbox for investors.”