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Private Market Basics
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The Power of Private Markets
Private markets have helped investors boost returns, reduce volatility, and diversify investment portfolios for decades.
Private Markets
Traditional Portfolio
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Private Markets
What Are Private Markets?
When you think about investing, you probably picture stocks, bonds and ETFs trading on exchanges like the Toronto Stock Exchange. That’s the public market, it's the boomers investment strategy. Things have changed.
Private markets are where companies and assets are bought, sold, and managed outside public exchanges. You can’t buy them on your brokerage app. Instead, you invest through specialized funds managed by professionals.
Historically, these powerful investments have been reserved for high net worth & institutional investors. Meaining, retail investors like you have never had access to these investments.
Historical
Performance
Private equity, venture capital, real estate, and private credit, have outperformed the traditional 60/40 portfolio over the last two decades. Now, Canadians like you can access these opportunities once exclusive to institutions and ultra‑wealthy investors.
9.25X
more wealth at retirement
The Four Main Asset Classes
Private Credit
Loans to businesses or individuals outside traditional banks
Net annualized returns
9.54%
15 year
Private Equity
Investing directly in private companies & improving them
16.0%
Net annualized returns
15 year
Real Estate
Investing in existing properties and new development projects
Net annualized returns
9.39%
15 year
Venture Capital
Funding early-stage companies with high growth potential
14.8%
Net annualized returns
15 year
Why the Wealthy Use Private Markets
Canada’s wealthiest families and institutions don’t just use private markets for diversification - they do it because these investments have consistently delivered higher returns than public stocks over long periods.
Higher Returns
McKinsey reported that over the past 25 years, private equity has delivered a 13.4% annualized return, compared with 6.9% for the MSCI World Index.
Portfolio Diversification
These investments diversify beyond stocks and bonds, helping reduce the aggressive year‑to‑year volatility typical of traditional portfolios.
Greater Efficiency
Private markets have historically offered greater return for each unit of risk, similar to better miles-per-gallon with a car.
The 2024 J.P. Morgan Private Bank survey reported that 45% of the average portfolio allocation among the globe’s wealthiest families is directed towards alternative investments.
Why Invest in Funds Instead of Direct Deals?
You might hear about someone who invested directly in a friend’s startup or bought a rental property on their own. That would be considered a direct investment. So why use funds? For most Canadians, diversified funds are much smarter than single direct deals. Here’s why:
1
You’re Not Betting Everything on One Company or Project
The statistics on business failure are staggering. About 20% of new businesses fail within their first year. In the high-growth world of venture-backed startups, failure rates surged 60% year-over-year in 2024 amid tough economic conditions. When you invest directly in one company, you face “all-or-nothing” risk. If that single business fails, you lose everything. A diversified fund typically holds 15 to 50 different investments. When a few fail (which is expected), the winners offset those losses. This is the single most important reason to use funds.
2
Professional Teams with Decades of Experience
Top private funds employ teams of analysts, lawyers, and industry experts. Before they invest a single dollar, they spend months investigating. This due diligence process costs hundreds of thousands of dollars per deal. This is far beyond what any individual investor can afford to do properly. After investing, these managers take board seats, hire executives, negotiate supplier contracts, and guide strategy. This hands-on approach is a key driver of those superior returns we talked about earlier.
3
Better Deal Terms
Large, established funds have out of reach negotiating power. They secure protective provisions that individual investors can’t get. These funds get better liquidity preferences, anti-dilution rights, information rights & even board representation.
Why Private Equity Can Outperform Public Markets?
Let’s get into the math and mechanics. Why do private equity funds consistently beat the stock market by 3-5% per year? It’s not magic. It’s a combination of four specific return drivers that work together.
When you buy a public stock, you can sell it in seconds. With private equity, your capital is locked up for 7-10 years on average. You can’t access it even if you desperately need the cash.
Investors demand extra return for this loss of flexibility. Financial research estimates this “illiquidity premium” at 2% to 5% annually. This is the foundation of private equity’s extra returns. Think of it like a GIC versus a savings account. The GIC pays more because you agree not to touch the money for a fixed period.
The Illiquidity Premium
Private equity firms typically use borrowed money to buy companies. This amplifies returns when things go well.
Here’s a simplified example:
Without leverage:
- Buy a $100 million company with $100 million cash - Improve it and sell for $150 million
- Profit: $50 million = 50% return
With leverage:
- Buy the same $100 million company with $40 million equity + $60 million debt - Improve it and sell for $150 million
- Pay back $60 million debt
- Profit: $50 million on $40 million invested = 125% return
The debt magnified the return.
The Power of Leverage
This is where the real magic happens. Private equity managers don’t just buy companies and hope they grow. They take control and actively improve them. Research from firms like Bain & Company and Morgan Stanley shows this operational value creation has overtaken leverage as the primary source of returns in modern private equity.
Hands-On Value Creation
Private markets are messy. There’s no ticker symbol you can look up on google in 2.4 seconds. Information is limited. Each deal is unique and requires specialized analysis.
While most investors avoid this complexity, skilled managers can navigate it, finding undervalued companies and structuring creative deals. This inefficiency creates opportunity and extra returns.
Public markets are hyper-efficient. Millions of investors analyze the same publicly available information. It’s hard to find genuine mispricings. Private markets have far less competition. There might be only 3-5 serious buyers for a specific mid-sized manufacturing business in Alberta which increases the probability of underpriced advantage. Information advantages matter here.
The Complexity Premium
Greater Efficiency
Private equity has an expected return that is 44% higher than U.S. equities, but with 45% less risk as measured by the standard deviation of return. Similarly, private credit has an expected return that is 54% higher than high yield—bonds with 61% less risk. Plainly said - you earn higher returns with less risk. Given these metrics, it is not surprising that investors are increasingly looking to utilize private markets in their strategic asset allocation.
How much should I allocate to private markets?
Investment managers like BlackRock recommend supplementing your portfolio of stocks and bonds with up to 20% private market alternatives, while J.P Morgan reported in a 2024 survey that the wealthiest families in the word allocate 45% of their portfolios to alternative investments.
