Managing Your Money

A few weeks ago I received a text message from a friend (and client) who was in Florida. Our conversation went something like this:

Him: Is ‘Chick-Fil-A’ listed on the stock market?

Me: No, it’s private.

Him: I want to invest.  How can I invest?

(Now, I don’t know anything about ‘Chick-Fil-A’, I’ve never eaten there as I’m not a fan of fast-food, but he’s peaked my curiosity on this. So I continued…)

Me: Why do you want to invest?

Him: It’s packed all day!!!  Line-ups in all of them. Drive-thrus full all day. How can I invest???

Me: Buy a sandwich or some chicken nuggets! ; )

Unfortunately, it’s not as easy to invest when a company is private, but it’s becoming increasingly more accessible. There’s more and more talk about private equity recently and many people are wondering why, and want to understand what it is.

So, first off, what is private equity? To begin, let’s clarify what ‘equity’ is. Equity can have different meanings depending on the context, so for the purpose of this article, we’ll consider equity to be ‘ownership’. In respect to your home, let’s say your home is worth $800,000, with a mortgage of $200,000. That means the bank owns $200,000 of your home, and your ownership, or ‘equity’ is $600,000.

When you own shares or stocks in a company, they represent your ownership. That could be in your own personal holding company, or any kind of company. Now don’t think that because you own a couple thousand shares in the Royal Bank, that you’re going to start sitting in on management meetings. Your 3000 shares represent an ownership so small that it’s not worth mentioning, but it’s still ownership, or equity.

Generally when people talk about stocks, they’re talking about public equity, or stocks that trade on the public stock markets. Private equity is also owning shares, but in companies which are not publicly traded, or not listed on the public stock exchanges. Private equity shares are often owned by family and friends, private equity or venture funds, and/or private investors. Access to private equity is far more limited than public equity. Some specialized investment firms, such as Richardson GMP, offer multiple options to access private equity, and also do much of the due diligence in evaluating them.

Private equity fits into the asset allocation category of “alternatives” which also includes real estate, venture capital, commodities, etc. Now before you start thinking, “Hey, this is too risky for me!” it’s important to recognize that there is a wide scope of alternative investments that ranges from the very conservative to the very risky. Like with any investment, the key is choosing one that fits with your objectives and risk tolerance level.

So why are private equity and alternative investments important? Investors own private companies generally for the same investment reasons as owning public companies – to benefit from the growth of the company. Private companies, big and small, represent the large majority of the corporations in Canada. Private equity and alternative investments are a great way to diversify your portfolio, and lower the risk beyond the traditional ways.  One of the main reasons to diversify your investments is to reduce correlation, or the degree to which investments move in relation to each other. Private equity tends to be uncorrelated to the public stock market, thereby reducing risk and volatility. There is far less emotion in private equity investing, which is one of the hardest things to anticipate or deal with in the public markets.  For these reasons, private equity generally enhances portfolio returns when positioned and carefully chosen.

Many of these reasons explain why the Canada Pension Plan (CPP) and many other large pensions and institutional investment managers have significant allocations in private equity, real estate, and other alternatives. In 2005, the CPP held only about 4% in alternative investments. Since then, they have increased their allocation to nearly 50% of the entire portfolio, with the largest amounts in private equity and real estate. The CPP Investment Board’s purpose as described the 2017 Annual Report is… “to help Canadians build financial security in retirement. CPPIB’s long-term objective is to invest the Fund assets to maximize returns without undue risk of loss”. In discussing their investment strategy, they go on to say… “We have made a major commitment to capitalize on our comparative advantages by investing in private markets. Over the long term, many private markets are expected to provide better net returns than the nearest public equivalents.”

There are tons of private investment opportunities out there, from more well-known companies like SpaceX and McCain foods, to less known companies like Touch Bistro, and Lise Watier. There are private real estate companies, mortgage lenders, and private equity funds. Like anything else, there are good ones and bad ones. They range from very conservative investments to very speculative, just like in the public market. Understanding the risks is key. Private companies don’t have the same reporting requirements as public companies so it’s not always as easy to get information, though some are extremely transparent. The costs may also be higher than with traditional public investments, partly due to the more difficult ease of access.  And it’s very important to understand the liquidity conditions of a private equity investment.  While some allow easy accessibility, many don’t. Private equity requires even more due diligence than investing in public stocks, so it’s preferable to buy through an investment firm who does this due diligence on their end.

Private investing is not always easy to access. Some investment firms have limited options, and some have none. The more availability a firm has to private investments, the more objective and knowledgeable the advisors are likely to be. Some investment firms, as mentioned above, are more specialized in private and alternative investments, and are likely to have a much broader range of both products and risk levels for you to choose from. The purpose of this article is not to recommend that you go out and buy private equity, but that you explore it as an option. While adding private equity to your portfolio can reduce risk, increase returns, and give you a better overall portfolio, make sure you ask lots of questions and know what you’re getting into. Private equity and alternative investments are not for everyone, nor are they accessible to everyone.

Special Note: Please contact us to receive an invitation for our upcoming presentations on Private Equity and Alternative Investing.  514-981-5796 or

Lynn MacNeil, F.PL. Vice President, Investment Advisor, is a Financial Planner with Richardson GMP Limited in Montreal, with over 20 years of experience working with retirees and pre-retirees. For a private financial consultation, or more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at 514.981.5795 or

The opinions expressed in this article are the opinions of Lynn MacNeil and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Richardson GMP Limited, Member Canadian Investor Protection Fund.