This is the second in a series of articles in our special report on alternative investments in Canada. To see all the articles, click here.
Alternative investments have perhaps never been more accessible. But for family offices, teaming up in this space can offer even better opportunities to access higher quality investments and diversify risk.
In the not-too-distant past, alternative investing was largely reserved for pension funds, endowments, foundations and large single-family offices, says Jeff Noble, director, private wealth family office, with BDO Canada LLP in Toronto.
Due to their diversification benefits, these strategies—among them private equity, private credit, hedge funds, real estate, infrastructure and commodities—are being rolled out across broader wealth management channels and are becoming core to more investment portfolios. And interest is only expected to grow in an uncertain market.
“Alternative investments are almost at a point now that they’re not alternative,” says Noble.“Barriers to entry are lower. So, to get into what might be arguably the better, higher value opportunities, you still need the bigger cheque.”
Indeed, many family offices find that to access higher quality opportunities and managers and spread risk, a cooperative arrangement can be beneficial, whether via direct investing, co-investing or funds.
In the private equity space, for example, Campden Wealth and RBC’s 2024 North America Family Office Report found that while 83 per cent of family offices own private equity investments, the way they invest is evenly split, with 41 per cent investing directly—either as a passive shareholder or an active manager—and 43 per cent preferring to hold funds or funds of funds.
Co-investments, those made alongside a private equity manager, were chosen by 12 per cent of families, and 4 per cent acquired positions in the secondary market.
Diversifying risk
Over the past year to 18 months, Noble has seen more interest from families exploring opportunities to team up with each other to invest in alternatives, partly driven by an increase in liquidity events.
“Sharing of risk is becoming something more important because we have more and more people coming into, not necessarily new wealth, but significant liquidity that needs to be deployed,” he says. This might be because they’ve sold an operating company, a piece of real estate or a farm, or received an inheritance.
“Now, they’ve got to start taking different kinds of risk with their money, so if they find some friends who are in the same boat, they can make decisions together,” he adds.
While ultra-high-net-worth individuals and families may have long investment horizons—often spanning a few generations—and may be willing to invest part of their risk budget in more illiquid asset classes, Noble says they do not have an unlimited timeline.
As such, he says, families need to make different decisions than pensions and endowments, which are investing in perpetuity.
Alternative investments are almost at a point now that they’re not alternative.
Jeff Noble, BDO Canada
With direct or co-investment in alternatives—whether through a real estate opportunity, a private company or a credit fund—families are taking more risk than with a pooled vehicle, in exchange for more control, the hope of better returns and lower fees, Noble explains.
In addition to spreading this risk, families who invest together also benefit from sharing their financial, administrative and time resources.
These arrangements, he says, are sometimes driven by collaborative investment counsellors or intermediaries offering integrated service models. But they are often led by family members, especially in cases where they have expertise in a certain sector, research or analytical capabilities.
For families who do decide to invest together, says Noble, it is essential to have strong governance in place regarding decision making, expectations about distributions, risk and how to manage requests to exit or buy in.
Stephen Harvey, chief investment officer with Sagard Wealth in Toronto, says this type of co-operation is more common among larger family offices. These families also often have enough expertise and resources to build their own portfolios of alternatives.
For mid-size and smaller family offices, he says, the ability to access multiple managers in this space is challenging.
“Some of these funds may have a $5 million minimum,” he says. “In order to diversify, you might need 10 private equity allocations, for example, so you’re talking about $50 million. Not many families have that to put to work just in that part of their portfolio.”
Instead, he says, these clients need one-stop shop solutions, which is where pooled vehicles that offer multiple exposures can be useful.
This is the approach his firm has chosen when it comes to alternatives. In the private equity space, for example, clients invest in a fund that provides a diversified blend of investments and faces several managers.
“Maybe you’re getting access to managers that you can’t access because you’re not hitting the minimums,” he says, “but inside of a vehicle that’s commingled, you can get exposure to that structure.”
By investing in alternatives via a pooled fund, he says, a manager selection expert can underwrite risk on both the investment and operational sides. Investors also benefit from economies of scale, which, although there is an extra layer of cost, can also result in the lower fee basis of institutional share classes or increased customization, says Harvey.
“This is a great way for us to bring the best to our clients, and, collectively, they’re better off than individually,” Harvey adds.
Economies of scale
For Samara, a multi-family office founded in Montreal in 2021, investing in alternatives through a grouped approach was the idea from the start, says chief investment officer Catherine Janson.
The firm created its own limited partnership structures to pool clients together so they can access funds with a minimum investment of US$10 million and up, on average, within infrastructure, private debt and private equity.
“On the U.S. side, within infrastructure, it’s not rare to see $10 million, and I’ve even seen some minimums at $25 million,” says Janson.
“For clients who have assets under management of $20 million to $100 million—that’s the sweet spot of our clientele—if they invest directly at $1 or $5 million levels into a fund, it then becomes very hard to be properly diversified across asset class, managers and vintages.”
Ultimately, says Janson, client strategies aim to mimic the diversification and access to products that large pension plans provide in the alternatives sector.
“That’s where the pooling becomes essential if you want to be able to be as diversified as these institutions,” she says.
With illiquidity often a concern in some alternative investments, this model can also offer a type of built-in secondary market and more flexibility for investors.
Higher quality access
As the market evolves, an interesting trend, Janson says, is that many institutional investors are at capacity in their allocations to alternatives. As such, managers have been increasingly turning to family offices and have been more creative in launching products with lower minimums to allow smaller families to gain access.
“In the past, when I started researching a lot of funds that were proposing infrastructure investments, they had very limited families within their investor base. But that has definitely been an asset class that’s been growing a lot within family office’s allocations,” she adds.
Indeed, says Harvey,the result of the rapidly growing interest in alternatives is that the large Canadian pension funds have unintentionally created more access to higher quality investment managers.
“There are investment managers rolling through Toronto every week, because they’re in town to see those big Canadian pension plans, or Montreal or Edmonton,” he says.
“Everyone in Canada is getting that benefit of the quality of those institutions,” adds Harvey. “It rolls through to the high-net-worth family office scene.”
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