Golden Girl Finance
Cora Pettipas, National Exempt Market Association
Posts (5)


Decivious: Questioning mainstream investment assumptions (Part 2)

April 11th, 2016 by

Busting myths about private investments, once and for all


Our lives are built on assumptions. Our investment portfolios are as well. The first part of this look at the top assumptions that negatively affect our net worth can be read here. In Part 1, we cover private vs. main stream investments and the 'safety' of fixed income investments. Now, let's investigate what we're often told about the markets, liquidity and the risk of private investments. 

Public Markets are Great at Providing Growth

The next assumption is clients should be invested in the public markets to create portfolio growth. If a retail investor invested in a low fee, high quality, major ETF following the TSX S&P composite index, then a client would have a total of $14,512 after investing a lump sum of $10,000 ten years ago. The annual return on this is almost 3.8%. Again, this amount excludes any inflation and taxation. Your reward for being invested in (large cap) Canadian public stocks over that past decade is just under 1 percent, inflation adjusted.

You may say to yourself: ‘yes, but we had a major financial crisis in that time period.’ That is correct, but it is also correct that we have one about every ten years, the previous ones being the tech bubble crisis (2000) and the savings and loans crisis (1987). In addition, the correction happened early in the ten year time frame (the numbers would look much worse otherwise), and these ten years have been an epoch of historically low interest rates, which theoretically boost corporate profits and stock prices. More interesting is the risk, on March 2, 2009, your hypothetical investment of $10,000 would have been worth $6,994.00 on your account statement, showing a drop of 30 percent in two years. As an investor, you have to ask yourself if you feel adequately rewarded with a 3.8% before tax and inflation annual return, with an investment that has the potential at any time to drop 30 percent? The interesting thing is that this ETF is classified as mid risk (also referred to as moderate or balanced).

If you are an investor with a moderate risk tolerance (as most people are) and choose to go with a balanced mutual fund, which basically mimics a 60/40 equity/fixed income long position, the performance was worse than the ETF option above. A quality big bank balanced fund would have yielded 2.8 percent over the last ten years, before taxes and inflation. The approximate downside risk of this is again 30 percent. The illustrations given here are not going to be ‘apples to apples’ for all client situations, but are simply intended to demonstrate that investors should question whether they are currently being compensated properly for the level of risk they have to take on in the public markets.[1] Investment goals, cash flows, risk tolerances, timelines and tax rates all need to be considered.

[1] This article uses two packaged products invested in one lump sum ten years ago to simplify the illustration. In addition, the ‘safest’ public market samples were selected, meaning domestic large cap investments in inexpensive retail products. Utilizing emerging market or small cap examples would have resulted in more risk, but is beyond the scope of this article.

Liquidity is Good

Liquidity is good. Liquidity has two aspects: that you can convert your assets to cash relatively quickly, and that the investment value will be preserved in the process. True liquidity has both aspects. Public markets are touted as having liquidity, but that is not always true. Liquidity exists for public markets for larger cap companies with high trading volume and slim bid ask spreads, in ‘normal’ market conditions. A thinly traded stock, or a financial crisis, negates a public stock’s liquidity, so public markets were never intended as a tool for liquidity. Exempt market products innately have much less liquidity as there currently are no advanced secondary markets. Some issuers put liquidity provisions in their products, but as the funds are spent on productive purposes, they are limited in redemptions to their own sinking fund constraints.

Interestingly, in our zeitgeist of increased debt and low savings rates, liquidity should not be valued in long term savings, or building of a client’s nest egg. The government policy of pension funds intuitively reflects this, as there are ‘locking in’ provisions on pension funds. The only two ways to unlock (get access) to your pension money immediately are if there is a nominal amount ($25,000 or less) in the fund, or there is a case of financial hardship. I know someone who only has one exempt market investment left in their RRSP, because that was the only investment they could not cash out early, as all the rest went to immediate consumption ‘needs’ like a new car. I also know clients who are only retiring because they had a forced saving defined benefit plan (a scarce luxury these days), because they would have spent the money on a bigger house and more toys. Forced savings works.

I am not saying liquidity is not needed for clients, quite the opposite. Every person’s finances ideally should have an emergency or opportunity fund where they can draw from when needed (that is not a line of credit). In addition, a portion of the RRSP should be liquid to income spread, or withdraw from in lower or non-income earning years to decrease tax bills.

Private Investments are High Risk

Exempt products are high risk. Exempt market products produce higher returns, around 6-12 percent, sometimes homeruns make 20 percent plus per annum. However, they can sometimes fail, so diversification is important. A more realistic classification of private investments would be from mid risk to high risk, but they are classified as ‘high risk’ no matter the fundamentals of the underlying investment.

This is because of the structural set up, as they are not offered to clients with a prospectus, they are offered through a term sheet or offering memorandum. I regret to take a short diversion into securities law, but it will be quick. It is important to note that a prospectus and offering memorandum have the same information, and a legal requirement to be accurate. However a prospectus is vetted by regulators for accuracy of the information contained in the prospectus. What is not vetted or assured by regulators is the soundness of the business plan of the Issuer (investment) or the returns (or lack thereof) after the prospectus is offered.

The exempt market portion of a portfolio is painted with the ‘high risk’ brush by default, so it is difficult to accurately build an asset allocation. Exempt market investments are ‘private’ and are not ‘marked to market,’ as there are no past statistics on how they do as a group, unlike public markets. In addition, there is no uniform rating system for debt, like there is for public company bond offerings. However, it is intellectually lazy to classify a Mortgage Investment Corporation (MIC) containing first mortgages in urban centers with skilled management as the same risk category as a leveraged condo development offering in a low demand area with inexperienced management. They do not have the same risk or the same potential return.

To sum up, this article is not trying to demonstrate that one product structure (private versus public) is better than another, it is just trying to demonstrate that broad generalizations are dangerous. Circumstances change and what worked as wealth building investment strategies in the past may not work in the future, and it is ignorant to think that they should. And even though it is a regulatory requirement, generalizing one whole class of product structures as ‘high risk’ will lead to inaccurately categorized products. As we accommodate to the new financial environment, the financial pioneers and innovators in industry will hopefully come up with more effective asset allocations for investors and more accurate risk classification systems for these portfolios, to better serve clients in these constantly changing times. Until this happens these misleading assumptions will continue to be propagated.


Decivious: Questioning mainstream investment assumptions (Part 1)

April 4th, 2016 by

Why the exempt market is misunderstood


Our lives are built on assumptions. Our investment portfolios are as well. But what if the assumptions are not serving investors anymore? To go against mainstream assumptions is not easy, and feels akin to swimming upstream in a stiff current when mass media and business legislation is biased against new ideas and innovation. The exempt market is an industry that challenges the assumptions of ‘modern’ portfolio theory and how one can best build their wealth.

Contrary to popular belief, the blow ups and losses of the public markets far outstrip the losses in the exempt market. It is funny how people will often say, ‘you should not invest more than 40 percent of your portfolio in the exempt market.’ It is true that investing has risks, but it would be just as easy to say, ‘you should not invest more the 40 percent in the public markets.’ This article is not trying to demonstrate that one product structure (private versus public) is better than another, it is just trying to demonstrate that broad generalizations are dangerous, or ‘decivious,’ meaning deceptive information that is obviously inaccurate if thought about critically - the media can try to convince us that the sky is pink, but we can take the time to look up and see for ourselves that it is still blue.

Private investments are inferior to main stream investments

The first assumption is that the exempt market has unhappy investors. Misrepresentation in the media is dangerous, as is holding on to antiquated beliefs propagated by them. It has been said if someone hears something four times they will believe it, and if they hear something six times they will repeat it as fact, a psychological concept called memory distortion.[1] In fact, this was recently published in the esteemed publication the Investment Executive, “OBSI has seen a rise in complaints involving securities in resources sector firms and received a handful of complaints, most of which involved suitability, from clients of portfolio managers and exempt-market dealers (EMDs), which are now also required to use the dispute-resolution service.” To clarify this confusing message, the exempt market has had a very low complaint ratio in the past eighteen months under OBSI, much lower than expected at only four complaints in total. The raise in complaints is under the other registrant categories.

A second example is the article that appeared recently in the well-regarded MoneySense publication called “Be Wary of Private Investments” which cautions “When Ontario became the first province to loosen restrictions for investing in private capital markets earlier this year, it opened the floodgates to millions who may not have qualified previously.” This is untrue, as they were actually the last province to gain a retail market, not the first. It goes on to say, “Few investors will hear about private capital market investments from their advisors, who may not be licensed or approved to offer them. But that’s probably a good thing, since many investors would be ill-suited for these products.” It is interesting that the article so definitively, yet vaguely, states that the exempt market is ill-suited for investors, but cannot first accurately describe the basic information about the space. The investor trend is towards holding some private product. It has been noted in the U.S. market, which tends to trend about ten years ahead of Canada, that retail investors have increased their alternative portfolio holdings to 10 percent, which includes exempt-type products.[2] It is also interesting to note this article had two big bank banner advertisements prominently displayed on it. It makes one question whether the mainstream media would be biased towards private investments, if the exempt space had large sums of marketing dollars for media, and the banks did not.

Fixed income is safe

GICs are safe. We hear this all the time. At the time of writing this, a five year GIC with my major bank was only 1.6 percent. This amount excludes any inflation and taxation. One rationalization in this low interest rate environment is that ‘it protects your principle.’ Inflation on prices, or more accurately: deflation of our currency, erodes these gains. In fact, if you believe the Consumer Price Index’s numbers, our flawed proxy for inflation, of 1.6 percent inflation[3] over the past ten years, all your gains are gone.

Most Financial Planners use 3 percent as an inflation adjustment to better reflect housing, energy and food cost increases that CPI does not accurately capture. If inflation is assumed to be three percent (and I think most people who track their expenses, especially their food bills, will agree it is much more than that) then the investor has an erosion of capital while their money is illiquid for five years. Also, if not in a tax preferred structure like a TFSA or RRSP, they are also losing up to half the 1.6 percent yield in taxes. You are actually paying for the erosion of your money while the banks can use it for free and lend multiples of it out to their clients to make money. I am not saying that this is a bad business model, just bad for the investor.

Other fixed income products, which have served investors so well in other decades, also fail to meet inflation. High quality government and corporate bonds currently pay around 2 percent, which does not keep up with real inflation, so the real value of a client’s principle is eroded in the long term. To attain higher yields, clients must invest in lower quality, or junk bonds where companies do not have adequate cash flows to cover these interest payments, so diversification is crucial.

Most likely, the real reason for the rising popularity of private investments is our low interest rate environment: as it leaves investors hungry for yield they used to be able to get from ‘safe’ investments that now erode their portfolio. The other issue with fixed income (or bonds) is that in a low interest rate environment like this, interest rates will normalize by increasing in the long term. When monetary policy forces interest rates up and pushes bond rates up, existing bond holdings will go down in value, further negatively effecting your overall portfolio. At this current time, bonds are riskier than they have been in the past, especially considering their lackluster returns at this time. 

We're just getting started...

In Part 2, we cover three more market assumptions that could be preventing you from reaching your true investment potential and give you some must-know exempt market tips. Keep reading for more myth-busting information!



[1] Referring to a study called Inferring the Popularity of an Opinion from its Familiarity

[2] Keith Black, CAIA presentation in Calgary March 16, 2016

[3] Bank of Canada CPI estimate



Could debt destroy your retirement dream?

June 9th, 2015 by

Why we should be talking about 'independence planning' instead


We have all dreamt of it, usually after a particularly demanding period of work. Cleaning off our desk, and departing indefinitely from the office, idealizing a permanent beach vacation (or functional equivalent). Retirement is defined as when a person ceases working voluntarily, as they have built up enough resources and income entitlements to do so. However, the new retirement will likely mean something else, whether it be partial retirement, career change, or retiring later.

Surprisingly, despite its intuitive allure, people can be resistant to actioning a retirement plan. Maybe it is because of the long timelines or picturing much more mature, possibly ailing, versions of ourselves. It is possible we have the fall back plan of their children taking care of them (or those future lotto winnings). I found it helpful to call the goal ‘financial independence’ instead of retirement in conversations with clients. As that is what it really is, a period in your life where you have the option, not the obligation, of gainful employment. “Freeing up the clock” as one of my former clients once described it.

Retirement reality check

However you prefer to conceptualize it, retirement planning is arguably the most challenging part of financial planning, and the current trends exasperate this. With timelines involved as much as fifty years or more, accuracy is questionable. As life is unpredictable, it is impossible to correctly forecast retirement using your plan assumptions.  However, if it is really an exercise in futility, then why should you retirement (or independence) plan? The outcome may not be what is projected, but you will benefit from the habit of saving and investing. Generally preparing for retirement will fortify your position and net worth, having a favorable general outcome for your circumstances. You will be better at dealing with life’s surprises and opportunities. You will be less stressed, more proactive. Also, if you update the financial plan periodically, the retirement plan will become more accurate the shorter the timeline gets; with the most intensive scrutiny needed three years before and three years after the projected retirement date.

Retirement is a dying concept as there are environmental headwinds making planning and investing difficult for most households. The great depression generation with their steadfast savings style, (pro) pension reform, robust interest rates in the 80s, and prolonged lifespan in developed countries were the first generation to realize retirement as a cohort. Today, a mix of high debt, low interest rates, income instability, increased forecasted longevity, increased medical/long term care expenses, and a trend of reducing pension entitlements (public and private) make retirement planning more of a challenge. These trends will strain the ‘retirement’ of generations that follow even more.

'Til debt

The single greatest threat to retirement is debt. Retirees are accumulating more debt, and there is a trend of retiring with debt and/or working longer. A major Canadian bank, CIBC commissioned a study in 2012 by Harris/Decima which stated that 60% of retired Canadians have debt. According to Statistics Canada, the labor participation of Canadians fifty-five and above dipped in the mid ninety’s and has been progressively increasing since people are working longer. Why is debt the single biggest threat to retirement? Because households cannot accelerate with their foot pressing hard on the brakes.

That effectively is what debt does, it constricts cash flow because the household has already spent their future income. It is modern slavery.  Is it possible to have debt and save for retirement at the same time? Yes, but in our easy credit society, you have to have discipline and both cash flow and net worth needs to be trending positive. Also, people like to distinguish between ‘good’ debt and ‘bad’ debt. In isolation, all debt is bad debt. However, if you have to acquire debt, it should do at least one of the following things for you: be a tax write off, directly decrease expenses, directly increase income, directly increase net worth, or save you from undue hardship. 

In a recent report, the IMF identified Canada’s two main areas of economic vulnerability as an overheated housing market and our large household debt. Canada is not alone in this trend. According to another interesting report by McKinsey & Company, 80% of countries share the trend of higher household debt, 74% of the debt being mortgage debt. Canada also has the dubious distinction as one of the countries identified with possibly unsustainable household debt.

Back to basics

It is well stated that Canada’s population has a high level of ‘financial illiteracy.’ So much so, that Canada has dedicated resources to a financial literacy task force, branded a financial literacy month, and created a financial literacy database. Although well intended, these initiatives have been pure optics so far, and there has been no improvement yet in Canadian household fundamentals or policy to support it. In fact, it may contribute to a learned helplessness; clients find personal finance is too difficult, and then observe everyone is in the same situation.

I do not believe people are stupid, which feels like the implied assumption when you call a population financially illiterate. I have been in social settings in awe where I had people explain to me complex intricacies of consumerism. People are very smart, very capable of learning and retaining vast amounts of information – just ask them the stats on their favorite sports team or how to navigate a data plan. But our behavior is very biased by short term rewards, to the point where we may be throwing away their future. Debt accumulation offers instant gratification, investing and savings offers the opposite in the short term. I believe our policies are creating circumstances where people look financially illiterate, but they are actually being rewarded for their behaviors. Easy credit can look like no consequences spending. Our modern developed societies are built on separating the consumer from their money; it is short term gain for long term pain.

Dream beyond debt

Debt is rewarded and saving is punished. In Canada, like other countries, our interest rates are still at historic lows, it is actually more beneficial for households to increase their lifestyle through accumulation of debt, at interest rates that are effectively below inflation. Home ownership is considered to be one of the best ways of increasing household net worth, so households are paying more for the potential future privilege of attaining an inflated net worth promise. Plus, as many justify, if everything goes wrong, you still have a house to live in. Most people justify: ‘if you save your money, you make 2% and half is taxed. If you invest it, half could be lost like in 2008. How smart is that?’

As someone trying to improve your financial situation, you need to find strategies and habits to counteract these headwinds. And with mainstream articles like the recent coverage of the Fraser report normalizing debt, it is no small task. We need to find ways to plan to increase our cash flow stability. To make investing accessible. If the retirement goal is in fact unattainable, how do we best manage our debt and investment portfolios to increase our quality of life? How do we look at our investments, and related fees, differently in a low yield environment? Is it possible to look at alternative investments with higher risk but also better risk management strategies? Can we also look at our spending and cut the things that offer the least value to our life? Can we learn not to equate a ‘life’ with consumerism? As an objection to saving, I have heard clients say: ‘yes but you only live once!’ It can be responded that yes, you only live once, so why would you waste a life worrying about money?  You only live once, and that is why you need a nest egg!

Plan for independence instead

This article is not intended to provide the solutions for every situation to engrained social expectations of retirement planning (or financial independence) that have major headwinds due to the current economic landscape. It is meant to provoke discussions about how we can create opportunities to enhance our standard of living through a form of ‘independence planning.’ The concept of retirement may be antiquated, but working in a modern form of indentured servitude through household debt with the unrealistic hope of retirement as the light at the end of the tunnel, is just plain tragic.

Do not let yourself be a victim.  



Why you need a well-structured exit strategy in private placements

March 10th, 2015 by

Which way to the exit, please?


“How can you tell you are speaking with a skilled broker?” my former mentor, a wealth management executive and brilliant woman, asked with a gleam in her eye. I stated I did not know. “Simple,” she said, “they have an exit strategy for the investments.”

She went on to elaborate that choosing investments was the easier part, knowing when to exit the particular stock or portfolio strategy was a lot trickier. This conversation early in my career had a deep impact on me, as evidenced in that I remember it in detail many years later. When speaking about a client’s portfolio, an advisor needs to include a discussion about exit strategies and portfolio growth expectations. Doing so inevitably reduces the emotion of the client in portfolio management decisions.

In the public markets, there is a robust secondary market for most stocks as exchanges are structured to enhance liquidity. Even in the mutual fund world where fees and products are structured to be invested in passively on the retail level, the portfolio manager needs to be cognizant of an exit strategy with the assets. The ‘buy and hold’ mentality on the retail level may be why there is very little overt focus put on exit strategies in the public investment world.

Exit strategies in the private market

In the exempt market, this conversation is even more important, but it happens much earlier in the process. Issuers need to be cognisant of exit strategies when they are building an investment product, as the exempt market has a very limited secondary market and product redeem-ability can also be limited. Also, a properly structured exit strategy will make the private placement more attractive for exempt market dealers (EMDs) (and thus get it in the hands of investors) as they sift through the multitude of offerings that come across their desk. If an issuer wants to be placed on an EMD’s shelf, competition is fierce and the issuer needs to have more than a viable business plan.

This is not to say that an issuer should pander to investor fancy. If the sweet spot for investors is a three-year timeline, it should not be structured that way unless it makes sense for the business plan. If the timeline would be better suited at six years, then the security issuance should be structured as such. This is all in the under-promise, over-deliver mentality - it is better to have a structure that is a little out of favour with the investor early on than have investors panicked down the road when their money is tied up and their advisor is foretelling that they could have their money delayed or, even worse, lose their entire investment.

  • Understanding an exit strategy

An exit strategy is how the issuer plans liquidation or divestment of the underlying asset. The exit, or sometimes called harvesting strategy, is the third and final stage of the main business stages of a private issuance, after the product in and development stages. The exit phase should be explicit in the business plan as well as the offering memorandum. The exit strategy will either be in stages, or alternatively, where the investors exit all at once. This stage is very important to the dealing representatives, and their clients, as this strategy directs the timeline and potential returns on the investment, which needs to be matched with the client’s know your client (KYC) parameters.

  • Protecting investor interests

Studies by David Newton ( have shown that the majority of all formal business plans by entrepreneurs name ‘going public’ as their exit strategy. Even though the finance world literature focuses on the remote possibility of going public as the most prominent strategy for growing a venture into a ‘legitimate’ business, there are other successful methods of achieving an exit. Other exit strategies for an issuer are: the acquisition, the ‘earn out,’ the debt equity exchange, and the merger. The acquisition is when another business takes over the issuer’s venture. The ‘earn out’ is when the issuer is making significant cash flows from operations and buys out the investors. The debt equity exchange is where debt holder investors are offered equity shares in the business and investors become profit participants through dividends. The fourth strategy is the merger, where two companies with significant synergies merge into one and become one business unit. The key for exempt market issuers is to structure the exit as an arm’s length transaction to a third party, to protect investor interests.

  • Why an exit strategy is vital

Exit strategies are a vital component of a private offering; so important in fact, that popular industry opinion holds that the majority of issues currently facing the industry have to do away with inappropriate or undefined exit strategies. In the past, some issuers were so focused on getting the capital into the company that the execution of the business plan was secondary - let alone planning properly for the exit of the project.  Therefore, inappropriate terms and conditions were agreed to (or offered) by the issuer simply to appease the public’s sentiment on appropriate terms for their funds.  The result of this planning method are now becoming apparent, as many short term offerings have simply run out of time to execute their initial business plan.  This is not to say that the original business plan was flawed, but simply that their timing did not prove accurate.  

What are the EMDs looking for in an exit strategy?

In our current exempt market environment, EMDs can cherry pick the very best offerings for their product shelves. What does an EMD look for in an issuer exit strategy? The main points that were highlighted by industry experts include: back up plans, low conflict of interest, investor recourse, and explicit, realistic goals of investor compensation. “When we look at a prospective offering that we may consider representing to the marketplace, we first look for a sound business plan and model that ideally offers a number of potential exit strategies.  An issuer who contemplates a number of potential strategies is far more likely to be prepared to changing market conditions over the course of the investment term,” explained Rick Unrau, President and CEO of Pinnacle Wealth Brokers, one of the largest EMDs in Canada.

Darvin Zurfluh, founder and Executive Chairman of Pinnacle adds, “At Pinnacle we want a well-defined timeline, with experienced managers that have done the model before.  An exit that has no conflict of interest. Many issuers in the past have offered to buy out the project on exit (or sell it to a related company) but this leaves too many conflicts on the table.  We like to see one to two back up plans as we all know that things don't always go according to plan. Investors should get to vote on any exit that was different than the original plan. If the issuer doesn't follow through on their exit plan, an EMD would like to have some recourse. This could mean giving up some of their equity or reducing their management fee.” The issuers exit strategy is an important risk attribute and is factored into the due diligence the EMDs use to assess an offering: it includes taxable nature of income and timelines of funds returned to investors. 

What are common exit strategies?

In the Canadian exempt market, there are various exit strategies issuers use, especially with the varying business plans and strategies in play. The common strategies used vary depending on the growth stage of the investment, sector and type of offering. “It really depends on the type of investment, whether it is a company that is operational and growth-oriented, a development or business model with a finite lifecycle, or an income investment. Operational/growth oriented companies will likely exit by being acquired by a larger company or in fewer cases going public. A development project generally has a term in which the capital is deployed and then returned, or sometimes the project will be purchased by a larger entity. For income oriented investments, we have generally noticed a preference to having a redemption feature in which the fund will return the capital to the investor, either through cash flow, new investment or by selling assets,” adds Kyle Jacober, one of the founders, and Vice-President of Sales at Raintree Financial Solutions, another Canadian EMD.

What are some best practices for an exit strategy?

An issuer is ultimately looking for investors to provide the funds to establish and grow their business idea. Competition is fierce for investment dollars, so issuers need to be cognizant of what EMDs are looking for in an exit strategy when building their business plan and drafting their OM, to ensure best practises. “Everyone involved must identify that even though a particular date on the calendar may be a great guideline for liquidating, a particular point in the business plan is really the target that everyone aspires to,” explains Curtis Potyondi, President of Prestige Capital Inc., “Therefore, a proper exit plan should look for a business plan that is executable and defining points whereby take-out events can occur.  This builds in a common objective for participants while holding management accountable for reaching milestones.”

The exempt market could benefit from best practises for structuring an exit strategy for their business and have it explicitly stated in offering memorandum clauses. However, there is an innate conflict between the exact defined timelines the EMDs and DRs would like to see, and the real world circumstance that market results cannot always be timed and predicted even with the most astute planning. The recommendation from Potyondi is key; to add or integrate business milestones, not just pure timelines into the planning of the exit.

  • When in doubt, plan ahead

Planning ahead is very important, as is finding a balance of utilizing the proactive strategic planning of the business plan with reactive changes due to economic and external circumstances. To complement this planning, a management that adheres to strong preparation of documentation and reporting standards can be invaluable in a successful exit. “Best practices would dictate that an issuer very clearly define their project lifecycle and multiple exit strategies. It is critical that the issuer not overcommit on timing nor set expectations with subscribers that cannot be met,” suggests Rick Unrau.

  • Keeping management focused

In the exempt market, issuers should be cognizant of what the market desires to see in an exit strategy. DRs and EMDs are most privy to that information as they are closest to the investor. Adhering to best practices outlined here, and avoiding policies that bury investor interests are highly recommended to create a product that EMDs want on their shelf, as well as an outcome that will have investors wanting to reinvest in future projects. A great exit plan should be explicit enough to keep management focus on the business and planned exit, but flexible enough to withstand external environmental roadblocks. The structure of the security and the timelines provided should be based on projected business milestones, not just investor preference. The OM should set up a compensation model that limits agency risk as much as possible; with a realistic compensation model that pays the investor first and is set up to also protect them first. This way, investors know the direction of the business  - and the way to the exit.



6 tips for novice investors for investing in the exempt market

December 19th, 2014 by

Why you should tread carefully with alternative investments


As mentioned in other great articles on this website, it is an astute idea to use alternative investments to enhance your portfolio, and there are many reasons why. Investors find it a challenge to attain a reasonable yield in this prolonged low interest rate environment, especially given that stock markets are at historical highs and commodities softening. Good solutions can be hard to come by.

This may explain the increasing popularity of the exempt market in Canada. It is the fastest growing portion of the capital markets, and according to a recent report by scholar Jack Mintz, accounts for an estimated 320 billion dollars between 2010 and 2012. The exempt market is where investors can purchase private (non-publicly traded) investments. It is called the exempt market because that is what it is called by the Canadian securities regulators. It means exempt from a prospectus offering (which is the first stage of raising capital in the public markets).

As these investments - no matter the structure or type - are all deemed high risk by regulators, it is more important to explore this world of private alternative investments carefully.

6 tips for new investors looking to invest in the exempt market

  1. Use a registrant

A registrant is someone registered with your provincial securities commission to sell investments. In general, most investment fraud happens with non-registrants; no matter what investment choice you make, you should work with a registrant to better protect yourself. Advisors and firms can be searched. Also, exempt market brokerages are listed on the National Exempt Market Association’s website.

  1. Be proactive in the process

Registrants are required to do what is called suitability on each client before they make a recommendation to you. This is a combination of finding out the details of your situation and goals, being an expert on the products they offer, and then finding the right match. The more accurate information you give your advisor (in this industry, they are called Dealing Representatives), the better the recommendations you will receive for your personal situation.

  1. Do you qualify?

There is one additional step in the suitability process for exempt market investments that you will not find in other areas of financial services. Your Dealing Representative needs to determine if you qualify to invest in exempt market products, as the rules differ provincially. Currently, BC has the most flexible rules as anyone can invest; Ontario has the most restrictive, where you have to be a millionaire to invest. Details of regions and their requirements are listed here

  1. Learn and ask questions

Like anything in life, you will get out of exempt market investing what you put into it. You need to educate yourself and ask questions. It is important to do your due diligence, which means looking into the investment, reading the materials and asking questions. Do not feel stupid doing this. Due to legal, taxation, and accounting frameworks - not to mention innovative business models - investments can get very complicated! If you are not comfortable with the information given and the risks and potential returns of an investment, then pass on it. There will always be another great opportunity.

  1. Start small

Currently, the exempt market has no established secondary market, so you cannot sell the investment quickly. Some products have liquidity provisions built in, but it depends on whether the issuer (provider of the investment) can honor them. In general, information is slower in this market and the procedures of managing an account are different. Some investors love this market and are avid investors, and others have no appetite for it. That is ok. No one size fits all. This is why I recommend starting small and seeing how it feels in your portfolio.

  1. Diversify

Despite what the experts say, it is hard to predict the markets and business conditions; the fast downward spiral of oil is one recent example. In June of this past year I do not remember a single expert warning of this happening, yet it has systemic ramifications for our economy. Many people try to predict markets, and it can be fun, but it is at your own risk.  This is why diversification is so important, especially in the exempt market where the investments tend to be a single business. It is also important to diversify outside of the public markets, and exempt market investments have great solutions for that.

Forget one-size-fits-all

In general, exempt market investments are higher risk and thus offer higher potential returns. They are definitely not one-size-fits-all but offer some very interesting opportunities to invest in innovative business models, including long-term care housing, student rentals, hotel developments, alternative energy, farm land, natural resources, leasing equipment, and diamonds. The variety in the exempt market is astounding and there are some excellent investment opportunities.

Good luck with your inquiries, and I hope it has many prosperous outcomes for you and your portfolio.