There's risk and reward when it comes to alternative investments in turbulent times

Article content

There’s risk and reward when it comes to diversifying with alternative investments, whether it’s real estate, private equity, infrastructure, private credit or liquid alts, or a host of other opportunities beyond the traditional investment.

At the first live CFA Montreal event after a successful transition into online get-togethers, 300 participants across a diversified group watched four experts representing single-family offices, multi-family offices, endowment, and institutional investors/pension firms explain the unique challenges each organizational structure faces in harnessing these continually evolving opportunities.

Even though there was a consistently positive reception towards their virtual initiatives, CFA Montreal President Odrée Ducharme admitted the energy surrounding their first in-person meeting in two years was palpable.

The invited panellists to Alternative Investments: a conversation with family offices, an endowment fund and a pension fund were: Randall Birks, President and Chief Investment Officer for Birinco Inc. (a single family office); Catherine Jansen, CFA, Chief Investment Officer for Samara Multi-Family Office; Nelson Lam, Senior Vice-President, Equity and Alternative Investments with Trans-Canada Capital; and Sophie Leblanc, CFA, Chief Investment Officer and Treasurer for McGill University. The panel was moderated by Sam Reda, CFA, President – Maralex Capital Inc., Co-Founder and Chairman – AlphaCCO Software Inc.

It was a spirited discussion about the possibilities and pitfalls when dealing with alternative investments, where the returns make it an enticing and essential addition to any portfolio, but need to be approached with a level of expertise and awareness. They’re more complex and aren’t as actively traded, so they’re really viewed not as a be-all-end-all, but as part of a whole investing picture.

Representing single-family offices, Birks discussed the benefits of flexibility and speed from having less formal structure. However, the other side of that is usually limited resources vs. larger, well-staffed institutional groups. There’s a time allocation element where the potential return on a smaller investment doesn’t always warrant the effort to properly understand the risks.

There’s also a much more friendly and constructive attitude amongst single family offices. “We can share expertise,” he said of single-family offices, “we are not in competition for clients or, usually, capacity.”

But for single-family offices, investment strategies and opportunities are not always available because they can’t necessarily compete with larger funds for these finite spots.

Janson spoke to risk tolerance levels across families when dealing with multi-family offices. Families work with long-term vision in mind. Hybrid products similarly work with spreading out risk.

Janson compared it to a puzzle: “Families already have existing portfolios, so the puzzle is in place and the question we need to ask ourselves is what  alternative investments can be added to complete the picture.”

Leblanc noted that private investments take time, even for large organizations.

“Ninety per cent of the work goes into 25 per cent of the portfolio,” Leblanc said.

There’s also a wider variance in terms of success and returns compared to a traditional portfolio, where the returns tend to be in easily digestible percentages. With private investments, it’s not uncommon to have one investment skyrocket while another craters.

“Selection is so important – you can’t dump something if it’s not working because no one else will want it,” Leblanc added.

All four preached the need for liquidity when it comes to alternative investing. More traditional assets are liquid, while alternative investments may not, so there’s potential to be stuck with something that can’t be easily converted to cash.

For tax purposes, specialists are needed at every turn, because there are different tax concerns for each investment as opposed to standardized stocks and bonds.

“Tax makes a huge difference,” Birks said in whether or not he’ll approach an opportunity. Something that looks attractive on a gross basis may get bogged down by fees and taxes to the point where the upside potential is hardly worth the downside risks.

Lam heads the $7 billion TCC Alternative Fund, half of which is in niche investments, as he put it.

“You need to be savvy and you need to be experienced,” Lam said when dealing with alternative investments at such a scale. There’s also added risk in being too diversified, and losing focus on the bigger picture.

Having the right personnel to make these choices is where the big players have a decisive advantage, since it’s an expertise unto itself.

No matter if you’re a single-family office, multi-family office, endowment or pension, co-investing offers the chance to invest alongside a main fund and participate in potentially highly profitable investments without paying the usual high fees charged by a private equity fund.

Birks said it can serve as an opportunity to test drive a fund manager with less exposure. It can also cut down on research time as the manager provides you with a large volume of detailed analysis on the deal. You learn about the manager and their process, but also a company or industry.

When dealing with families or multi-families, there’s also the younger generations to take into account, who may do things differently than their elders.

As younger generations take the mantle of family investing, Environmental, Social, and Governance based investing or Impact investing will only become more important in an overall strategy. From the perspective of investors, it means doing more vetting with regards to which opportunities you’re choosing to invest in. It also potentially means passively eliminating certain sectors from your portfolio.

Leblanc said McGill “has more questions related to ESG in our due-diligence of external managers” these days. But when investing in Impact, there’s also the challenge of investing in companies who promise to transition, because even the best laid plans may go awry and perhaps a business you’ve invested in doesn’t make the necessary strides to address sustainable goals you originally bought into to prevent from compromising returns.

Birks added: “We look for good investments, and it’s opportunity-rich when it comes to the long-term benefit of humanity.”

This story was created by Content Works, Postmedia’s commercial content division, on behalf of PBY Capital Limited. The opinions and information provided in this article are solely those of the writer and are not to be construed as personal, legal, accounting, taxation, or investment advice, or as an endorsement of any entity.

PBY Capital Limited is a distributor registered as an exempt market dealer with securities regulatory authorities, servicing family offices and their professionals. For more information, visit: https://www.pbycapital.com.