Private equity is the ownership of private companies. Money is typically invested in mature companies and industries, so the focus is on improving profits and operations.
Private equity investment funds look for companies that they believe are well-positioned to increase in value, buy them, make improvements to them over a period of time (often 5-10 years), and later look to sell them at a higher price. These funds typically consist of dedicated private equity managers, who are responsible for finding, improving, and selling companies, and their investors.
For investors with a long time horizon (4 or more years), private equity can be an attractive component of their overall asset allocation.
To start the process of creating a private equity account, follow these steps:
Log in to your Wealthsimple mobile app
Tap the Home tab at the bottom of your screen
Tap Add an account
Select the Invest in private equity menu option
- Answer the next few questions to create an application
Keep an eye on your email. Our team of fiduciary Portfolio Managers will review your application and email you to confirm your suitability, and if suitable, your maximum deposit amount, and next steps to fund your account.
Frequently asked questions
How should I think about private equity relative to other Wealthsimple assets?
We view private equity as part of an investor’s overall equity allocation, with potentially higher expected returns than public equities. Private equity generally performs well when the equity market is performing well, and generally underperforms when the equity market is performing poorly. This is, to some extent, in contrast to our private credit offerings: private credit tends to do well when inflation and interest rates are rising, while the economy is not under enormous pressure, and default rates are low. It’s also in contrast to other liquid asset classes like treasuries or gold, which tend to perform well in times of economic stress.
What are the main differences between this and the Wealthsimple Venture Fund?
The Wealthsimple Venture fund is a closed-ended structure investing in venture capital and growth equity funds; there are two key differences between that strategy and Wealthsimple Private Equity Fund:
- Wealthsimple Private Equity Fund is an open-ended fund, meaning there will be ongoing purchase and redemption windows, not a fixed fundraising window and expected fund life
- Wealthsimple Private Equity Fund will invest primarily in more traditional private equity structures, by purchasing stakes in existing funds and investing alongside new funds. Compared to venture investing (which focuses on start-ups), private equity tends to target more mature businesses with relatively stable cash flow. That's why we view the two private asset classes as complementary: they allow investors to gain exposure to various stages of business with different risk profiles.
What are the main differences between the private equity and the private credit funds?
Wealthsimple Private Credit Fund is an open-ended investment vehicle holding bank-syndicated loans and loans originated by Sagard, the fund’s manager.
The key difference between private credit and private equity is the exact financial instrument each is holding; private credit is a way of investing in a company’s debt, which offers a yield and slightly more protection in case of a bad outcome.
Private equity investors may invest in the same company as a debt investor, but they represent a junior claim and get “what’s left over” after the business has paid off its debt. Since this could be a much wider range of outcomes than debt, which is typically paid back at face value, equity is often viewed as a riskier strategy. It typically doesn’t offer a yield, so it may be more appropriate for growth-oriented investors.
How do contributions work?
You can add money to your Private Equity account at any time. It will get invested during the investment period (toward the end of the month). If you add money after the investment period, your funds will be invested the following month.
What are the redemption terms?
Because private equity is a relatively illiquid asset, we expect cash redemptions of up to 5% of the Fund’s value to be available to clients each quarter.
Redemption requests must be submitted at least 100 days before the end of a quarter (i.e., by December 21st for a March 31st withdrawal, if April 1st was the first day of a new quarter). The withdrawal request must be submitted by the last trading day prior to that day.
Redemptions will be subject to a settlement period of up to 100 days after the end of the quarter in which the redemption is requested.
In the event that total cash redemption requests exceed any cash redemption limits, we will allow clients to redeem their units in the Fund for cash on a prorated basis. Redemptions may be suspended in certain circumstances and may vary depending on the liquidity of the Fund’s portfolio. Redemption requests in excess of any cash redemption limit may be satisfied by the issuance of redemption notes, which are non-transferable.
Will you allow for emergency redemptions?
At this point we do not plan to make exceptions. We are taking a number of steps to make sure clients know and can tolerate the illiquidity of this investment, including a suitability check and a cap on the investment size.
How risky is it?
Equities are one of the riskier asset classes, and private equity is a high risk type of equity investing.
Investors also need to carefully consider the manager — some of whom may perform better (or worse) than the index as a whole. Top quartile funds have earned significantly more than public markets (ranging around 10%, with variance by year), while bottom quartile funds have actually underperformed public markets.
Beyond company and manager risk, private equity investors have limited liquidity, meaning that they can’t sell on the open market the way that they can with a public stock. This may be a source of return, but it also means that they can’t get their money back when they want it. Also, private managers may delay selling companies when they believe that valuations are low, which could align with when investors want to sell.
Specifically for Wealthsimple’s private equity, investors will also be subject to currency risk. However, this is no different than other international ETF investments with us.
Private equity investing is not for everyone. Our team of advisors will get to know you to determine whether you are a good fit for this product.
What are the fees?
Along with the standard Wealthsimple advisory fee, the investment with LGT will have a 1.5% management fee and, subject to a minimum rate of return of 8%*, a 12.5% performance fee. Historically, private equity has delivered net of fee returns well in excess of the stock market, and have been an attractive source of wealth building for wealthy investors and institutional investors.
*The performance fee is based on the realized value of each of the private equity investments made by LGT’s fund, on a deal-by-deal basis.
Will I be able to use my RRSP or TFSA to invest in this fund?
Yes, you can use both non-registered accounts, as well as your RRSP or TFSA. your registered accounts.*
*TFSA and RRSP eligibility is subject to the Fund obtaining “mutual fund trust” status under the Income Tax Act (Canada).
Is there a minimum investment requirement?
Yes, there is a minimum of $10,000. Once you’ve contributed the minimum $10,000 to the fund, you can make smaller, subsequent distributions.
How will fund performance be reported and how frequently will it be updated?
Fund performance will be reported monthly, with a roughly one-month lag. So, performance as of December 31, 2023 will likely be available sometime in February 2024. We anticipate passing along quarterly updates about performance and underlying holdings.
What kind of performance can I expect?
Historically, private equity has performed similarly to public-market equities, but with a degree of outperformance. We would caution against extrapolating the same degree of outperformance into the future, since private equity indices are not investable and the future may be different from the past. For reference, however, the degree of historic outperformance relative to the stock market has been over 4%.
Why are you comparing the performance of public and private equity?
We include public equities as a point of comparison to private equity because many investors are significantly allocated to the stock market, and may find a comparison between the two types of equity investing to be useful.
Many investments in private equity have the goal of earning higher returns than the public stock market, so the relative historical performance is a useful comparison to make. The long-term outperformance of private equity investing makes some of the difficulties of implementing those investments–including illiquidity, higher fees, and dispersion of returns–a worthwhile tradeoff for some investors.
The private equity benchmark reflects the realized net of fee returns of all of the funds in the Preqin database over the time period indicated, weighted by the amount of capital deployed. The public equity benchmark is MSCI World Net Total Return Index.
There are some major practical differences between public and private equity investing that should be considered when comparing the two indices, primarily that the PE benchmark is not investable in a single investment. While it is easy to get exposure to public equity index performance through low-cost index funds, private equity is only available through specific funds that invest through specific managers, and so cannot provide the returns of the index. There is high dispersion of returns between managers, different timing of capital deployment, and different fee structures.
Has the "higher for longer" rate outlook impacted the expected return profile of PE investing?
Yes and no. The interest rate outlook affects all assets. To the extent that those rates have increased the yield on all risky assets, private equity has “gotten cheaper” and expected returns should be higher. That has not shown up much in private equity performance, however; it is possible that there is a delay in the pricing flowing through, or that performance would have been even higher if rates hadn’t increased.
There is also the possibility that rates will continue to rise, putting more pressure on the economy and private equity portfolio companies. Since many private equity investments use leverage to boost equity returns, rising rates can eat into returns, since required interest payments go up and eat into profits.
That said, there is nothing fundamentally incompatible about higher rates and private equity. It was still an attractive strategy when rates were higher in the 1990s and 2000s. Timing the markets is hard, so it’s not easy to say whether or not this is a tactically good time to invest in private equity.
Does Wealthsimple Private Equity Fund benefit from the current investments of LGT, or only into future investments?
Wealthsimple Private Equity Fund will invest in new deals done by LGT. However, some of these deals will be in secondary private equity transactions, or private equity funds which have existed for some time and are being sold to a new owner. In that sense, Wealthsimple Private Equity Fund will have exposure to previous vintage years of private equity, as well as making new investments alongside other funds through private equity co-investments.
Does Private Equity qualify as a Halal investment?
No. There is quite a bit of leverage in private equity, and that is pretty limited in halal investment. Additionally, we cannot guarantee that prohibited industries will be avoided.