#exemptmarket

Wall Street/Bay Street is no longer vastly controlled by the stereotypical ‘stripe suit, MBA educated, over-achiever’ taking the subway into downtown type.

Trading floors are no longer “floors”; they’ve gone digital and the people making moves in the market don’t actually need to be anywhere near the market. Individual investors equipped with nothing more than a trading account connected to their Ipad can collectively move millions of dollars in a matter of seconds based on something they just read about on twitter. Hedge Fund Managers hire eccentrically smart mathematicians and actuaries (like a super accountant) to calculate mathematical probabilities and employ sophisticated computer technology to make multiple trades simultaneously in an effort to expose short “windows” of opportunity.

What is the smart money doing during these volatile times?

Large pension funds such as OMERS (Ontario Municipal Employee Retirement System) who manage over 55 Billion dollars on behalf of over 400,000 employees and pensioner’s, are making moves into the private sector to avoid all the spikes and dips of the public markets. In 2004, the CEO Michael Norbrega made a (then) drastic move and announced his intentions to move from holding over 80% in public assets through the stock market to (over time ) creating a more balanced portfolio between public ( 53%) and private (47%) holdings. His reasoning was simple. He believed that the public capital markets were becoming too volatile for his fund to be able to make a consistent return on their investment.

In 2011 OMERS created a return just shy of 8% in their private investments such as real estate, infrastructure and private businesses; however they had a negative return of 0.22% in the public markets. All in all they created a blended return of approximately 4% solely because they had private investments in their portfolio.

What can you do?

Wayne Gretzky was once asked in an interview why he was so successful.  His answer “I skate to where the puck is going to be; not where it is now”. Using that analogy, I believe that most of us are chasing after the puck and missing existing opportunities along the way.

Take a page from the large successful investment groups out there and start exploring private opportunities. If you don’t have the time to immerse yourself in all the details (or don’t want too), I’d suggest working with people that are able to offer you alternative investments that are not tied to the public markets. In the investment industry these are called “exempt products” and are available to almost anyone in Western Canada through a due diligence document called an Offering Memorandum.

Large investment firms out there, like OMERS and CPP ( Canadian Pension Plan), are currently investing directly into opportunities that the majority of advisors cannot sell such as : real estate, infrastructure and private businesses because they see the stability, consistency and dependable returns that these types of investments can produce for their investors.

Arguably then, one can say that the original mass produced financial instruments that derived value from an underlying asset were stocks and bonds. Fast forward through the paper based, over the counter platforms to the 20th century to a time when capital began to flow freely and tech friendly stock markets to trade these derivatives of debt and company equity began to emerge. As technology found new ways to supercharge business, the financial world too found new, more progressive ways to sell themselves. Financial products became packaged and marketed in various ways; from mutual funds to funds of funds. Today these products are bought and sold globally at a dizzying pace in everything from dollars, yen, and pounds sterling. Entire organizations exist to service and speculate on these modern tools of finance and convenience.

At present, Canadians hold over 773 billion dollars in mutual funds (source - IFIC), over 49 billion in ETFs (Canadian ETF Association) and countless billions in other publicly traded financial instruments. Institutional investors and pension plans alike have also traditionally been very heavily invested in public securities.

But as Bob Dylan once said, “The times they are a changing.”

Pension funds, sovereign wealth funds and everyday investors are all voting with their wallets and billions of dollars are flowing out of the public markets, searching for refuge and stronger risk adjusted returns investing directly in underlying assets. Topping the list of reasons why investment capital all over the world is reducing its exposure to public markets include: market complexity, sensitivity and costs.

Reason # 1: The markets are complex

Investors and advisors alike are finding it increasingly difficult to assess where the actual investment capital is being utilized in many retail investment products. Stocks, bonds, mutual funds, segregated funds, ETF’s, forex investment funds, hedge funds, funds of funds etc etc. There are more publicly traded/listed/held product types available today than ever before and the vast majority of investors and advisors alike are ill equipped at determining what underlying assets are actually being acquired and how they create a return and mitigate risk. According to Investopedia mutual funds typically hold 100-150 stocks in each fund. Going one step further, many of those funds invest in other pools of funds, making it exponentially more difficult to review and even determine what the core assets that create value are. In 2004 Michael Norbrega CEO of OMERS pension plan and the man ultimately responsible for over 400,000 individual employee pension plans decided to shift nearly 50% of assets out of the public markets and invest them into select private offerings. His primary motive was to reduce their exposure to the volatility of the public markets and create more consistent income.With over 11Billion raised in private offerings (Exempt Market) in Alberta alone in 2012, groups like OMERS are not alone in their search for less degrees of separation between them and their investment holdings.

Reason #2: The markets are sensitive

Integrated communication technology has changed the game.Most retail investment products available today are reactive as much too systematic market risk (as was witnessed in the 2008 market crash) as they are to speculative news. For those social network experts out there you will recall the April hacking of The Associated Press twitter account where Obama was apparently injured during a bombing of the White House. The markets did not take this news lightly as it instantly triggered a burst of sell-offs and in a matter of minutes temporarily wiped out over 136.5Billion of wealth on S&P500 as people fled to cash for safety (Source – Daily Mail).

Reason #3: The markets are expensive

The costs of taking a company public and maintaining it have skyrocketed, eroding returns by passing these costs onto investors.The title of the September 2012 PriceWaterhouseCoppers gets right to the point “Considering an IPO? The cost of going and being public may surprise you”. The 32 page document also includes quotes such as  “87% of CFOs indicated that their firms spent more than $1 million on one-time costs associated with their IPO” and “On average, companies incur $1.5 million of recurring costs as a result of being public.”  Going public has become an increasingly more expensive proposition and with the steady declines in IPOs since 2007 the evidence is becoming clear that vast numbers of investors of all participation levels are looking for less layers of fees and more direct access to investment opportunities. The vast majority of these opportunities are private investments in direct, underlying assets.

Wayne Dyer was once quoted saying “If you change the way you look at things, the things you look at change.” Depending on where you are in the investment capital markets you would be wise to consider a change in perspective also. For investors and advisors, it means setting yourself up for success by being aware of the trends in the capital markets as the landscape is shifting faster than ever before. Don not get left behind; with billions of dollars flowing into private offerings it’s time to become informed. There are courses you can sign up for, people you can interview and most recently a website was launched with some of the brightest minds in the space ExemptEducation.ca. If you happen to be an entrepreneur, you do not need to go public to raise millions to expand your business. Save money and invest some time. Engage a firm that specializes in offering memorandum and market consulting services to learn if taking your enterprise private is the way to go.