Prime Quadrant Access LPs – In Search of The “Easy Button"™

Capital

Note: The “Easy Button” is a Registered Trademark of Staples Inc.

Those who know Prime Quadrant well will tell you that we are fans of broad and thoughtful diversification. In fact, this is core to the first pillar of our Investment Principles.

We have always recommended that families invest in this way as diversification remains the only “free lunch” (1) in finance, helping investors improve returns while reducing uncertainty.

And even if investors are not interested in a free lunch, broad diversification seems like the best defense against the potential for a significant shift in market conditions in today’s environment. Consider the following:

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Source: World Bank, Bank of Canada, and Statistics Canada (Canadian Perspective)

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Over the last 20 years, the trend has been towards lower growth, much lower interest rates, and higher debt. And this has occurred with governments and central banks intervening in capital markets in ways and degrees we have never seen before.

We are not “macro” investors (2), and we know as much about the future as any other investor (i.e., we don’t know much about the future). However, it feels prudent right now to build portfolios that can weather any looming shifts in market conditions – such as a sharp rise in interest rates or inflation (or both).

And how does broad and thoughtful diversification look? Well, for families fortunate enough to have institutional amounts of capital, diversification goes far beyond the typical “diversify your equity and fixed income” approach to which most investors and their advisors are limited.

Wealthy families can pursue a brand of diversification that the world’s most sophisticated capital allocators choose – one that meaningfully incorporates other so-called “alternative” asset classes such as private credit, private equity, real assets, and other diversifying strategies.

So, if including these alternative asset classes is the way to build better portfolios, why doesn’t everyone with sufficient capital do it?

As anyone who has followed this path will tell you, the answer is that it’s not easy and requires more effort than a traditional approach. There are many challenges one must overcome to be a successful investor in alternative strategies:

  • Investing in alternative strategies can be resource-intensive – adding complexity, additional administration, and often multiple tax jurisdictions.
  • There is significant performance dispersion – between strategies and managers and between vintage years. (3)
  • High “friction” – fees tend to be high for alternative strategies (especially good ones) and building and maintaining exposure to strategies that call investors’ capital over time often results in higher allocations to cash or other lower return assets.
  • Investing in alternative strategies requires economies of scale – the best managers are often located outside of Canada, have high minimum investment thresholds, and are often closed to new investors.

Despite these headwinds, over the years, Prime Quadrant and the families we advise have rolled up our sleeves and embraced alternative strategies. We have also recommended a discipline around position sizing that means multiple allocations to these strategies – with a corresponding magnification of the challenges. To put it politely, our clients would not accuse us of putting the Easy Button™ in front of them!

So, we decided it was time to take a cue from Staples’ marketing department and focus on making it easier to build and maintain a fully diversified portfolio with alternative strategies. Over the last couple of years, we have developed a handful of “Access LPs” which are pooled funds that each focus on a specific alternative asset class.

These five Canadian Limited Partnerships provide actively managed exposure to top-quality global managers. Each Access LP focuses on one of the following asset classes: Private Equity, Venture Capital, Private Credit, Real Assets, and Diversifying Strategies. (4)

The Access LPs address many of the challenges outlined above. We expect that using these vehicles to build and maintain diversified portfolios will provide:

  • Simplification - centralized decision making, simplified building blocks for portfolio construction, and Canadian tax reporting.
  • Improved execution – more consistent private market exposure and less capital call administration by aggregating individual commitments.
  • A sharper focus on risk management and performance – centralizing manager selection and vintage diversification and improving access to top-quartile managers.
  • Group purchasing power from scale - greater leverage to negotiate fee concessions, expanded reach to difficult-to-access opportunities, and improved terms and access to co-investments.

Notably, Prime Quadrant will earn no management or performance fees on allocations to these vehicles by families that pay us on a retainer basis. Our motivation here is not commercial.  These families will continue to pay us to advise them on best investment practices and opportunities (not based on any investment decision that they make). We hope that the Access LPs make it easier for our families to allocate to investments that are suitable for them. And, if a family wishes to continue allocating to individual strategies directly, that is just fine.

It is unlikely that broad and thoughtful diversification will ever be entirely simpatico with the Easy Button™ for all the reasons we’ve outlined here. And while we believe the Access LPs help mitigate many of the challenges associated with investing in alternative strategies, we are also convinced that Rob Arnott got it right when he said: “In investing, what is comfortable is rarely profitable.”

Good investing to you…

References

(1) Attributed to Harry Markowitz, Nobel Prize laureate.

(2) A macro investor bases her investment decisions primarily on the overall economic and political views of various countries and/or on macroeconomic conditions.

(3) “Vintage” is a term that applies to “closed end” funds that raise capital over a defined time period and are then closed to new investors. The vintage of a fund is the year it raised capital. Depending on market cycles and conditions, some years or vintages may prove to be better than others – so it is usually best to diversify by vintage.

(4) Diversifying Strategies include various hedged and trading / arbitrage-oriented strategies. They are designed to be less reliant on traditional financial markets for their performance.

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