The rise of retail: accessing private markets

Over the past decade, Canada has witnessed a notable shift in capital markets as more companies opt to stay private longer. There has also been an increase in going private transactions involving private equity buyers. These trends reflect the appeal of private fundraising avenues where companies can maintain greater control and avoid the scrutiny and costs associated with operating in the public markets. However, the fundraising environment in both the private and public markets witnessed significant declines in 2023 and 2024. To date there have been limited signs of recovery.

In the first half of 2024, private equity fundraising totaled $365.75 billion across 704 funds globally, marking a 20% decline compared to the same period in 2023. Amid this challenging fundraising environment, private asset sponsors continue to seek diversified sources of investment. Historically, the private asset landscape, including private equity, private credit, infrastructure and real estate, has been dominated by institutional investors. This is largely due to the significant barriers to entry that exist, including large minimum investment requirements and investment illiquidity.

In Canada, more pathways to private asset investing have become available to the mass affluent and other retail investors over the past few years. This “democratization” of private asset investing is reshaping the investment ecosystem, making once-exclusive opportunities more accessible to a broader audience. This evolving trend in Canada points to a more inclusive era of private asset investing, aligning with global movement toward broader participation in private market investments.

For investors, integrating private assets into portfolios has become essential for achieving a balanced, risk-adjusted return, emphasizing the importance of alternative investments in modern financial planning.

Access through intermediation

Given the fundraising challenges faced by fund sponsors and the other market forces noted above, sponsors are developing ways to provide expanded access to alternative asset investments to the retail investor channel. We saw a proliferation of such offerings from fund managers in 2024. Intermediation has continued to provide a mechanism for retail investors to obtain access to private assets.

Generally, any offering of securities in Canada must be made through a prospectus or in reliance on a prospectus exemption. The most common prospectus exemption relied upon is the “accredited investor” exemption. In Canada, “accredited investors” are permitted to invest in private assets because they either meet specific financial criteria that demonstrate their capacity to bear the higher risks associated with these types of investments, or they have the requisite investment qualifications to make such an investment. Accredited investors include individuals who, together with their spouse, have C$1 million in financial assets, or C$5 million in net assets, or have an income exceeding C$200,000 individually, or C$300,000 with a spouse in each of the past two years. These financial thresholds imply that accredited investors have the financial sophistication and resilience to absorb potential losses associated with investing in private markets. Many retail investors do not meet these financial thresholds and, therefore, do not personally qualify as accredited investors. However, there are other means for retail investors to meet the necessary qualifications to achieve access to private investments.

Accredited investors also include registered or exempt international advisers and dealers acting on behalf of a fully managed account for a client. “Fully managed” means the adviser/dealer has full discretion to trade in securities for the account without requiring the client’s express consent to a transaction. The adviser or dealer is deemed to be purchasing as principal and is presumed to have the necessary sophistication to determine the suitability of the investment for their clients. Although a retail investor may not meet the financial criteria to be an accredited investor in their own right, the involvement of a professional and regulated investment decision maker provides an alternative route to alleviate the policy concerns associated with such investments. The intermediary is expected and required to consider the totality of a retail investor’s personal and financial circumstances to assess the suitability of a private investment.

For investors, integrating private assets into portfolios has become essential for achieving a balanced, risk-adjusted return, emphasizing the importance of alternative investments in modern financial planning.

There has been significant growth of private asset fund distribution over the past two years. Private fund sponsors continue to work with bank-owned and independent dealer and wealth management channels to provide access for their private asset products to these platforms, and to make them investment options for registered representatives managing client assets.

Similarly, prospectus-qualified Canadian public investment funds, including exchange-traded funds, can provide an indirect route for private asset investing by retail investors. There are several primary impediments to private fund investments by Canadian public investment funds. These include a 10% limit on investments in illiquid assets by mutual funds, or 15% in the case of non-redeemable investment funds. Further, public investment funds are prohibited from investing in private funds that meet the securities law definition of “investment fund”. This prohibition captures funds that are redeemable on demand at net asset value (NAV) or that do not invest for the purpose of exercising or seeking to exercise control, or being actively involved in the management of the issuers in which the fund invests.

Securities laws also prohibit funds from purchasing securities that, by their terms, require a contribution in addition to the payment of the purchase price. This type of structure requires special structuring to provide for capital calls.

We continue to see actively managed Canadian public investment funds seeking private asset investments but facing significant constraints.

Fund structuring and proliferation of open-ended private asset funds

The approach to private asset fund structuring continues to evolve. One strategy sponsors may adopt to provide retail access to underlying funds is to create feeder funds. These funds aggregate commitments from smaller investors who are, in turn, invested in traditional closed-end “finite life” private funds. These feeder funds are managed by the sponsors and their affiliates as part of an overall fund program, or by a third-party service provider. The investment will generally be subject to the normal features of a closed-end fund investment. In that structure, investors make capital commitments drawn by the sponsor over time, the capital is invested and managed, and the portfolio is eventually liquidated with funds being returned to investors. This generally occurs over a 10- to 14-year cycle.

Over the past few years, sponsors have been exploring ways to gain access to the retail channel and address the issue of having capital locked up for such a long duration. This has led to a shift away from the traditional commitment-based, finite life private fund model to so-called “evergreen” or “open-ended” fund structures. For many years, funds have been established to invest in alternative asset funds set up as evergreen funds. These have principally been in the real estate and infrastructure areas. However, in recent years, many fund sponsors have been successful in launching open-ended funds targeted to the Canadian retail investor. They have also been able to extend their use to include private equity, private credit and other types of alternative assets.

In the evergreen model, the fund does not have a finite life. From the fund sponsor’s perspective, this is attractive as it obviates the need to raise significant capital commitments every few years. An evergreen fund has permanent capital to invest and no deadline to return those funds to investors. This leads to fewer constraints on the timing of making and disposing of investments. Investors buy into the fund at current NAV, and the fund operates in some respects like a mutual fund, albeit with more limited opportunities for investors to redeem out of the fund.

Given the underlying portfolio holdings of private funds holding alternative assets, liquidity is one of the principal challenges of evergreen funds. Other challenges include the fact that the underlying assets are often illiquid and that the assets can be difficult to accurately value for purposes of determining NAV. In addition, the assets often will not generate income that can be used to provide funding for redemptions. A forced sale of assets to generate proceeds to fund liquidity will often run counter to the fund’s investment thesis, which is focused on long-term enhancement of value.

Despite these challenges, sponsors have developed various alternative structures to facilitate investments by retail investors. They have generally marketed these products on a basis that there will be limited liquidity, recognizing that a prudently structured portfolio of an investor can include a portion allocated to investments with a longer-term time horizon and less liquidity.

For funds that are able to qualify as mutual fund trusts, these products also can  be held in registered accounts such as tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs). This provides access to an even greater share of the retail investor channel.

Looking ahead to the future of private funds

Regulators have recognized the potential benefits to both investors and fund managers of facilitating greater access to investment opportunities in private assets. This is demonstrated by the Ontario Securities Commission’s release in October 2024 of Ontario Securities Commission Consultation Paper 81-737 Opportunity to Improve Retail Investor Access to Long-Term Assets through Investment Fund  Product Structures [PDF]. The consultation proposes to introduce a new category of Canadian public investment fund designed to make investments in long-term illiquid assets. It is difficult to predict whether this regulatory initiative will result in new product offerings, given that this is currently an Ontario-only initiative, and the proposal contemplates that such funds will not be listed or traded on a marketplace in Canada. However, if it gains traction, it has the potential to expand the universe of investment options for Canadian retail investors.

In addition, in the 2024 federal budget, the Canadian Department of Finance invited submissions on whether and how to modernize the investment rules applicable to registered plans such as RRSPs and TFSAs. The government signaled an openness to potentially expanding the pooled investment products that qualify as qualified investments beyond mutual fund trusts.

The Canadian Venture Capital & Private Equity Association was one of the voices [PDF] making the argument that private equity and venture capital funds should be permitted in registered vehicles. This was on the basis that such expansion would “significantly enhance investment options for sophisticated investors, providing greater access to assets that are well-aligned with long-term retirement savings strategies. Additionally, it would expand the pool of investment capital available to fuel the growth of Canadian companies.” Changes to the Canadian tax regime of this nature have the potential to unlock further capital from the retail channel.

The Canadian experience is paralleling developments in the U.S. and elsewhere. The democratization of private asset investing is a global phenomenon, and we anticipate that it will accelerate and continue to evolve in 2025.