Revealing the secrets of the private markets

Updated regulations in Ontario’s private capital markets are allowing investors in the province to access private real estate investment vehicles that offer lucrative returns

Until recently only accessible to high-net-worth and accredited individuals, Ontario’s exempt markets have been subject to a policy change that enables advisors and exempt market dealers to offer their clients a whole host of new investment opportunities.

Prior to the policy adjustment, investors had to either have $1 million of net financial assets, earn a gross income of $200,000 a year ($300,000 with a spouse) or have a net worth of more than $5 million. Now, individual retail investors can invest up to $100,000 a year into exempt markets ($200,000 with a spouse).

“The old regulations were a real restriction of choice – I look at this as a greatopening up,” says Greg Romundt, president of Centurion Asset Management. “This represents an opportunity for investors of modest means to get involved in a broader range of investment choices that were previously restricted. That’s having a big impact.”

The opening up of the exempt markets is also proving to be a significant positive for Canadian entrepreneurs, who now have better access to capital. An entrepreneur who once would have had to relocate to Silicon Valley now has a much greater chance of raising capital here in Canada. Not only is this a boost for small business owners, but it’s also a positive for the overall economy, which will benefit from increased job creation and tax revenues.

“For advisors, the changes to the exempt markets rules provide new ways to add value to client portfolios,” Romundt says. “Giving investors access to products they clearly want, but don’t have experience with,  creates opportunities for advisors to cultivate relationships and differentiate themselves from the crowd. If you are an advisor who is only selling mutual funds or standard funds, it is going to get much harder to justify your existence.”

The updated regulations have also given advisors and investors in Ontario the ability to invest in some private real estate investment funds and real estate investment trusts [REITs] that offer attractive yields. For an investor who wants diversification away from the stock market, but does not want go it alone in property investing or development, investing in a real estate fund is an attractive proposition. But without access to the private markets, investors searching for diversification were previously forced to buy publicly traded REITs.

“The problem with buying publicly traded REITs is that you are getting an investment that has the same volatility and correlations as the stock market,” Romundt says. “Investing in a private, professionally managed fund gives you the opportunity to get large-scale diversification, stability and hands-free professional management. For an investor looking for diversification away from the stock market, a private REIT is a great option.”

Private real estate investing can play an integral role in enabling advisors to guide clients toward their primary goal: building low-volatility portfolios that provide reasonable returns. According to Romundt, the modern investor doesn’t want a 20% return followed by a 30% loss the next year. They simply want a reasonable distribution and sustainable long-term capital growth.

“That’s one of the things that private real state market investments can bring to an  investor – the ability to sleep at night,” he says. “Often, when people talk about volatility, they say it gives you the opportunity to buy cheap, but that is never the way it works. Retail money almost always buys at the top and sells at the bottom. With the Centurion Apartment REIT and Centurion Real Estate Opportunities Trust, we are targeting annual distributive yields of around 7% and capital growth of 2% to 5% per year.”