How to Invest in Private Equity in Canada

Private equity involves investing capital into companies not listed on a public stock exchange, making it distinct from traditional stock market investments. While often associated with large institutional investors like pension funds, there are specific avenues for individual investors in Canada to gain exposure to this asset class. This article provides guidance on how to approach private equity investments within the Canadian market.

Understanding Investor Qualifications

Accessing private equity investments in Canada typically requires meeting specific criteria, most notably qualifying as an “accredited investor.” The Canadian Securities Administrators (CSA) sets these standards to ensure that individuals engaging in private securities offerings possess a certain level of financial sophistication and the capacity to absorb potential risks. For an individual to qualify, they must meet one of several financial thresholds. This includes having net financial assets of at least CA$1 million, either alone or with a spouse, where financial assets include cash, securities, and deposits, net of related liabilities. Alternatively, an individual can qualify by having a net income before taxes exceeding CA$200,000 in each of the two most recent years, or a combined income with a spouse exceeding CA$300,000 for the same period, with a reasonable expectation of maintaining that income in the current year.

Another pathway to accredited investor status involves having net assets of at least CA$5 million, either individually or with a spouse. These criteria are defined under National Instrument 45-106 Prospectus and Registration Exemptions. Beyond these financial qualifications, private equity funds often impose high minimum investment thresholds, which can be significantly greater than investments in public markets. These minimums further restrict access, generally requiring substantial capital commitments, making private equity unsuitable for most retail investors.

Pathways to Private Equity Investment

Individual investors in Canada can gain exposure to private equity through several distinct practical avenues. One method involves investing in “listed private equity,” which refers to private equity firms or their portfolio companies that are publicly traded. Such an approach allows investors to buy shares through traditional stock exchanges, offering a more accessible entry point for the general public.

Another avenue is through private equity “funds of funds,” which are investment vehicles that allocate capital across multiple underlying private equity funds. This strategy offers diversification across various private equity managers and investment strategies, potentially with lower minimum investment requirements than direct commitments to individual private equity funds. Funds of funds also provide professional management and curation of underlying investments.

For broader retail access, some specialized retail-oriented private equity funds or structured products may be available in Canada. These vehicles are designed to provide individual investors with exposure to private equity, sometimes with more manageable investment minimums or through structures that offer different risk-return profiles.

Additionally, exempt market dealers play a role in facilitating private placements, which involve direct investments in private companies or funds without a prospectus. These opportunities are generally offered under specific exemptions from prospectus requirements, though they typically still require investors to meet accredited investor status or other stringent conditions. Exempt market dealers connect eligible investors with private investment opportunities.

Key Characteristics of Private Equity Investments

Private equity investments possess fundamental characteristics that distinguish them from public market investments. A primary feature is illiquidity, meaning capital committed to private equity funds is locked up for extended periods, often ranging from 5 to 10 years or even longer. Investors have limited or no ability to redeem their capital early, reflecting the long-term nature of private company growth and the time required for successful exit strategies. Investors must therefore be prepared for their capital to be inaccessible for a significant duration before realizing returns.

Private equity funds commonly employ a “2 and 20” fee structure, although variations exist. This structure typically involves an annual management fee of approximately 2% of committed capital, covering the fund’s operational expenses. Additionally, fund managers earn a “carried interest,” which is a share of the fund’s profits, usually around 20%, once a certain return threshold for investors has been met. This performance-based fee aligns the interests of the fund managers with those of the investors.

Another distinguishing feature is the concept of “capital calls.” Investors commit a total amount of capital to a private equity fund, but the fund manager does not draw down the entire amount upfront. Instead, capital is requested incrementally over time through capital calls as investment opportunities arise or operational expenses need to be covered. This means investors must be prepared to provide funds when called upon, typically within a short timeframe, such as 10 to 14 days.

Private equity investments offer less frequent and less detailed reporting compared to publicly traded securities. This reduced transparency is due to the private nature of the underlying companies, which are not subject to the same rigorous disclosure requirements as public companies.

Navigating the Investment Process

Once an investor understands the qualifications, pathways, and unique characteristics of private equity, the next step involves navigating the practical investment process. Identifying suitable private equity investment opportunities can occur through various channels. Investors might connect with financial advisors or wealth managers who specialize in alternative investments, as these professionals often have access to a curated selection of private funds or direct investment opportunities. Exempt market dealers can also provide access to private placements and connect investors with companies seeking capital outside traditional public markets. Some dedicated online platforms also exist that list private investment opportunities for eligible investors.

Regardless of the sourcing method, conducting thorough due diligence is a fundamental step before committing capital. Due diligence involves a comprehensive evaluation of the fund manager or the direct investment opportunity. This includes scrutinizing the fund manager’s track record, assessing their investment strategy, and evaluating the expertise of their team. For direct investments, a detailed analysis of the target company’s financials, operations, legal standing, and market position is essential to identify potential risks and align with investment objectives.

The formal commitment to a private equity investment involves a subscription process. This typically requires signing a subscription agreement and other legal documents that outline the terms of the investment, including the committed capital and the conditions for capital calls and distributions. Following the initial commitment, investors participate in capital contributions by responding to capital calls issued by the fund manager. As the fund exits investments, investors receive distributions of capital and profits over the fund’s lifetime. Ongoing monitoring of private equity investments involves reviewing periodic reports from the fund manager, which provide updates on the performance of the underlying portfolio companies and the overall fund.