For the rich, private equity has its appeals

TORONTO (Reuters) - High-net-worth Canadians are cozying up to private equity these days, attracted to bountiful returns over the long-term while shielding themselves from bouts of volatility in the public stock markets.

Private equity investment across a range of business sectors has rebounded in recent months mainly because of safety is no longer paramount. The wealthy have regained a measure of confidence as the global economic recovery gains traction, something that's essential of investments that can't be cashed in for years.

"We have healthy public markets and we still have low interest rates so my sense is that 2011 will be the strongest year we've seen since the peak of the last cycle," said Rick Nathan, managing director of Kensington Capital Partners Ltd, a leading Canadian private equity investor.

The number of deals done in Canada rose 7 percent in 2010 and investment climbed to at least C$4.9 billion - the first increase in three years, according to Canada's Venture Capital & Private Equity Association, or CVCA.

That's no surprise to Nathan, who runs the C$51 million Kensington Global Private Equity Fund. He said that looking back through data, the two or three years coming out of a recession have historically brought the strongest returns to private equity investors, as high-quality companies look to do deals at reasonable prices.

He has seen a wave of interest from wealthy individuals, on top of pension funds and asset managers.

"People who are in a position to allocate, say, C$250,000 to private equity are definitely more interested than they have ever been in the past in our experience."

LIQUIDITY IS A NEGATIVE

He said private equity investments are usually kept at around 10 percent of an individual's portfolio, so the client would need C$2 million to C$3 million in investable assets to comfortably get involved.

That's because once clients lock in their investments, they can forget about touching the capital for the extent of the lockup period, which can vary from 7 to 15 years.

To be sure, those timelines and the sums involved tend to exclude retail investors who can only commit sums in the tens of thousands of dollars.

"Liquidity is a huge factor here, in fact, that would be the largest deterrent to our clients," said Shona Stone, head of investment product and services at UBS's Canadian operations.

The firm requires private equity investments of C$250,000 at a minimum.

Individuals, or their advisers, can invest in PE funds, which form limited partnerships with private companies.

UBS, however taps top-tier outside firms that directly invest in private companies in deals that would not be otherwise available for investments from private individuals.

"The minimums are usually C$50 million, C$100 million, and more, so UBS approaches them with these types of ticket sizes, and that allows them to break it down to smaller amounts for private investors," said Julien Favre, a private wealth manager and head of UBS's ultra-high-net-worth unit in Central Canada.

UBS classifies high-net-worth clients as those with between C$2 million and C$50 million, and ultra-high-net-worth clients as C$50 million and above.

It recommends that clients only invest 5 percent of their assets in private equity, due to the low liquidity, so they would need at least C$5 million in assets to invest.

PAYOFFS CAN BE SUBSTANTIAL

While the lack of cash flow can be daunting, the potential payoff can be substantial, often in the upper teens to low 20 percent range.

"Private equity has the ability of delivering the highest expected returns of any asset class," said Favre.

The expected returns on individual transactions within private equity partnerships are multiples, aiming for say a five or 10-times return, Favre said. Some fail, of course, increasing the risk factor, while others hit their targets. The winners allow the investment to deliver the high returns.

"These investments don't move in the same direction as equity markets," said Stone. "It acts as a diversification and a way to decrease volatility in a client's portfolio."

Private equity deals allow the client to take part in the growth of any sector or geography. Stone said one of the hottest sectors for private equity investments right now is in energy, with Canadian oil sands companies figuring prominently. Private equity managers are also seeing more opportunities in emerging markets like India, and especially China.

($1=$0.98 Canadian)

(Additional reporting by Pav Jordan)