[vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern” padding_top=”10″][vc_column][vc_column_text]When it comes to investments, typically there are two commonly held goals:[/vc_column_text][unordered_list style=”circle” animate=”no”]

  • protect wealth already created;
  • add to that wealth for the future.

[/unordered_list][vc_column_text]From these two goals, strategies can be developed around investments that, as best as can be determined, make safe the wealth we already have while looking to build upon that wealth for tomorrow.

Specific to adding wealth for tomorrow, a well-diversified portfolio looks to segment investments by escalating degrees of “risk and reward”. The objective is to attempt to evaluate investments on their potential for reward, whether the probability of the projected reward coming to fruition, or in the potential to multiply the original investment. It is critical to manage or mitigate the associated risks or, at the least understand them in the context of the entire portfolio.

Whether managed as an individual or under the guidance from a professional advisor, often portfolios include investments in securities of publicly traded companies. These might be a direct investment in single listings, or in the form of a fund, consisting of a selection of securities. A diversified fund approach is a strategy employed to help off-set the risk from a loss or under performance from any one or more companies and thereby improve the probability of delivering a reliable return. However, the approach may mitigate the potential for exceptional returns from another company or companies within the fund as those returns are off-set by the under performers.

More and more we are seeing investors include investments in privately held companies in their portfolios, along with those traded as a public listing [In 2016, US $1.7 billion was invested in venture capital-backed Canadian companies[1] . This has been a strategy deployed for many years by Pension Plans, Endowment Funds, Family Offices and High Net Worth investors. Historically, investing in privately held companies, or private investing {see post on Equifaira blog, “What is Private Investing?”} took place through private equity or venture capital firms. With minimum investments to participate in these institutional firms often being prohibitive to the average investor, private investing was historically for the already wealthy.

However, National Instrument 45-106 (NI 45-106) from governing Securities Commissions in Canada {see Equifaira post, “The Exempt Market – What is it?”} provides exemptions for privately held companies to offer equity or other forms of securities in their companies to individuals through private placements. These offerings from privately held companies are exempt from the time, cost and restrictions of filing a prospectus, while allowing qualified investors the opportunity to consider and participate in private investing through this instrument.

Some general considerations between public versus private investing are:[/vc_column_text][unordered_list style=”circle” animate=”no”]

  • Historical performance and financial reports for publically traded companies are filed and are available in the public domain per regulation requirements, where-as issuers of exempt market securities are not required to provide continuous disclosure to investors. Financial statements can, however, often be obtained upon request from private companies.
  • Detailed future business plans are contained in the publicly filed company prospectus for publicly traded companies. While a form of business plan will be included as part of an offering memorandum, not all exemptions require the provision of a business plan. In those cases, a request to the private companies may be made for a business plan, but there is no obligation for a private company to provide one.
  • Equity purchased as stocks in publicly traded companies can generally be readily sold at market prices through public exchange (NYSE, TSE, and NASDAQ as examples). There are established secondary markets for exempt market securities such as the TSX Private Markets[2]. However, many private companies have not listed on such private exchange. Securities purchased in private companies are largely illiquid and can only be redeemed if there are liquidity provisions for each private offering. Some companies offer liquidity for a fee.
  • While share prices of publicly traded companies are certainly influenced by the company’s individual performance, either for the positive or the negative, they are also often influenced by the overall market sector the company falls under, and more broadly by influences of national and international economics. This is known as stock market volatility.
  • Share prices of privately held companies are more predominantly influenced by the individual company performance or the sector in which they operate, independent of unrelated broader market influences. Since private companies’ shares do not generally trade on any public exchange, they typically are not as readily influenced by general economic data or things such as research reports published by investment firms, or market news.
  • Privately companies with the intent to create a liquidity event {see post on Equifaira blog, “What is a Liquidity Event?”} hold the potential for investors of an initial public offering (I.P.O.) or a trade sale, merger, or acquisition. While publicly traded companies can be acquired, the potential gains associated with an I.P.O. have previously transpired for new investors considering public investments.

[/unordered_list][vc_column_text]Investors are typically more aware of public markets and publicly traded securities hence the term “public”. Private companies and private placements of their securities are less commonly understood by the average investors. However, in an article published by Bain & Company’s Private Equity practice[3], the internal rate of return for the 12 months ending June, 2016 on private equity funds globally was 6% compared to an apples-to-apples metric developed by investment advisory firm Cambridge Associates of 4% for the S&P 500.[/vc_column_text][/vc_column][/vc_row][vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern”][vc_column][vc_empty_space][vc_separator type=”normal” color=”#dddddd”][/vc_column][/vc_row][vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern”][vc_column][vc_column_text][1] Financial Post, January 25, 2017 “Canadian Venture Capital Funding Bucks Global Trend and Holds Steady in 2016

[2] About TSX Private Markets

TSX Private Markets is a dealer-to-dealer voice-brokered service, complemented by an informational website that facilitates the raising of capital and secondary trading in the Canadian exempt market. TSX Private Markets is operated by Shorcan Brokers Limited, a wholly-owned subsidiary of TMX Group and a registered Exempt Market Dealer with over 35 years of experience as an inter-dealer broker.

[3] Forbes, March 14, 2017 – “Private Equity Returns Still Outperform Public Markets”[/vc_column_text][/vc_column][/vc_row][vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern”][vc_column][vc_separator type=”normal” color=”#dddddd” up=”15″ down=”15″][vc_empty_space][/vc_column][/vc_row][vc_row css_animation=”” row_type=”row” use_row_as_full_screen_section=”no” type=”full_width” angled_section=”no” text_align=”left” background_image_as_pattern=”without_pattern”][vc_column width=”1/4″][vc_single_image image=”381″ qode_css_animation=””][/vc_column][vc_column width=”3/4″][vc_column_text]About the Author

David Graham is a founder, partner and director of Equifaira Advisors. Inc. He is a senior financial services executive with over 27 years of experience where he held positions ranging from an equity trader for Yorkton Securities to Vice President of Sales, Western Canada for Fidelity Investments Ltd. Along his career path, he held the positions of Director of Sales for Industrial Alliance Mutual Funds and Investment Advisor with Scotia Wealth Management and RBC Dominion Securities. David held the position of Vice President, Investor Relations at Luvo, Inc. He holds a Bachelor of Business Administration from Simon Fraser University. David is a registered exempt market dealing representative.[/vc_column_text][vc_empty_space][vc_row_inner row_type=”row” type=”full_width” text_align=”left” css_animation=””][vc_column_inner][button target=”_self” hover_type=”default” text=”Disclaimer” link=”http://blog.equifaira.com/no-advice-marketing-disclaimer/”][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row]

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