This is Globe Advisor’s weekly newsletter for professional financial advisors, published every Friday. If someone has forwarded this newsletter to you via e-mail, or you’re reading this on the web, you can register for Globe Advisor, then sign up for this newsletter and others on our newsletter sign-up page. For more from Globe Advisor, visit our homepage.
Private equity had a challenging year because of the softening economy and increased interest rate environment. Steve Balaban, chief investment officer at Toronto-based Mink Capital, says in this scenario, private equity valuations aren’t as high, which will most likely lead to more defaults.
But the sector isn’t all doom and gloom. Globe Advisor spoke with Mr. Balaban, who has taught a new private equity course at the University of Waterloo for the past decade, recently about his overall outlook for private equity and how it needs to be regulated.
Looking ahead to 2024, where do you see private equity headed?
Most of the world’s companies are private. There’s a lot of money that has been raised and not yet spent.
Private debt has actually benefited from this environment. In a private debt transaction, you have the ability to take over the asset, which you don’t have as much in private equity. Private debt has been able to mitigate that downside when there’s a default as opposed to just being in private equity, where the returns would go down because you have higher interest rates to pay when it comes to buyouts.
Looking ahead, we might see more unique structures with private equity … more specialty and tactical opportunities type deals. For example, we may see structures based on the interest rate and on what’s going on in the economy.
There isn’t a regulation standard for private equity. What are the key issues here?
The industry needs to get investors to understand fully what they’re investing in. More education and more transparency are needed. With private equity, you can’t buy a company right away because it’s private. So, in private equity funds, you have committed capital and invested capital, and it’s really how to translate that into an actual return for an investor. The U.S. Securities Exchange Commission (SEC) is trying.
What changes does the SEC propose for private equity regulation?
In August, the SEC came out with a 600-page document on private-equity regulation. I’ll zero in on three main things in the document.
One is the requirement for more disclosure. And it’s going to be interesting how this is going to play out because, with more disclosure, there are more costs for private equity firms. Over the long term, this will benefit larger firms versus smaller firms. So, you’ll see fewer people leaving private equity firms to start up their own, which might hurt the bargaining power of investors.
The second issue is the side letters in the industry, which give preferential treatment to certain investors about what information they share. That has been a challenge in the industry and the SEC has been trying to level the playing field.
The third part was about getting an extra independent opinion when it comes to secondary transactions. The challenge with these independent opinions and these valuations of private equity funds is they are hired by the private equity firm. So, we need more details on how this is going to work in practice.
– Deanne Gage, Globe Advisor reporter
This interview has been edited and condensed.
Must-reads from Globe Advisor this week
Why tax-loss harvesting need not be a year-end crunch
Although portfolio managers have until Dec. 27 to execute year-end tax loss harvesting strategies, some say the last-minute selling of individual stock positions to offset capital gains is poor practice. While there’s a natural temptation to sell “losing stocks” to capitalize on the tax savings, portfolio managers who do so could be missing out on a big opportunity, says David LePoidevin, senior portfolio manager and senior investment advisor with LePoidevin Group at Canaccord Genuity Wealth Management Canada in Vancouver. “Statistically speaking, the worst time of year to sell your losers is between the middle of November and middle of December,” Mr. LePoidevin says, noting that the Stock Trader’s Almanac calls the period “the only free lunch on Wall Street.” Deanne Gage reports.
Why it’s important to set up targeted business plans for the new year
As the holidays approach, many advisors are finetuning their business plans for the coming year. While writing a business plan is common, some go about it incorrectly by just drafting a document that ultimately ends up on an office shelf gathering dust. That’s because the document lacks focus or the goals are too cumbersome to manage. Christian Battistelli’s business plan is focused on a three-year target, broken out into goals and objectives for the next 12 months with specific measures and action plans spelled out for every quarter. All the information is digestible on just one page. Deanne Gage has more.
Why this $1.1-billion money manager is bullish on the markets for 2024
While some investors predict doom and gloom for financial markets next year, money manager Ryan Lewenza feels optimistic for stocks and bonds. “We’re bullish,” says the senior financial advisor and senior portfolio manager, private client group with Turner Investments at Raymond James Ltd. in Toronto, who invests exclusively in exchange-traded funds. Mr. Lewenza is anticipating a “soft landing” for the North American economy in the weeks ahead, alongside a series of interest rate cuts from central banks. Brenda Bouw asks what he’s been buying and selling.
How to deal with the financial repercussions after the sudden death of a loved one
Most people will experience the death of a loved one at some point in their lives, and financial advisors can help them navigate the ensuing financial and emotional fallout of estate planning. But what if the death happens suddenly? The family will often need several days or weeks to process its loss. If the deceased was a client, advisors can gather the important documents such as wills, powers of attorney for property and personal care, as well as insurance policies and have them ready for the executor and surviving family members when needed. Deanne Gage provides some action points.
What you and your clients need to know
Investors, this is how fast those comfy returns on cash will drop in the years ahead
One of the many financial oddities of 2023 was that you could earn a respectable return in your investment portfolio while taking on virtually no risk. The return on cash, as defined by the payout from T-bills and short-term corporate borrowing, was 5 per cent in late 2023, a recent TD Economics report says. The average return on cash following the 2008-09 global financial crisis was 0.8 per cent, while the average for 2020 to 2022 was 1.8 per cent. Historically, cash has been a trash asset class. If you hold cash in money market funds, T-bill funds, high-interest savings account exchange-traded funds or investment savings accounts, what’s your exit strategy? Rob Carrick has more.
Loyalty programs are ruthless. Here’s how to keep your points from expiring
Canadians love their rewards programs, but keeping track of them all can be difficult. Over 90 per cent of Canadians have joined at least one loyalty program, with the average being more than 12, according to data from one big bank. With all those loyalty programs on the go, a key challenge is to keep the accounts active. Not doing so risks having your points expire, and that’s like leaving money on the table. As a points collector, you should always be in the mindset of earning and burning your points. Not only do you not have to worry about them expiring, but you’ll also avoid any potential devaluations to the loyalty program. Barry Choi explains.
Nine Canadian fund managers offer their top picks and portfolio advice for 2024
This past year brought welcome relief to money managers who had endured a distinctly awful 2022, when almost every investment under the sun got burned. While 2023 was choppy overall, stocks and bonds have mounted a powerful year-end rally. Victory signs are emerging in the fight against inflation, even as major developed economies avoid descending into a deep downturn. This was not what many had envisioned for 2023. A recession had seemed almost inescapable owing to one of the fastest central bank tightening cycles in history, with the inverted yield curve – when short-term bonds offer bigger yields than longer-term ones – sending a clear and ominous warning. Darcy Keith provides more details.
– Globe Advisor Staff