The Ontario Securities Commission’s proposal to provide retail investors access to private assets through a new fund vehicle could have adverse risks for institutional investors’ long-term investment goals, said the Pension Investment Association of Canada.
The OSC is mulling introducing a new fund category, the Ontario Long-Term Asset Fund, that would provide a pathway for retail investors in the province to access illiquid assets, such as private debt, private equity and infrastructure projects, which are already available to institutional investors.
In a letter to the OSC, the PIAC cautioned that retail investors must consider the long-term nature of private market investing, noting OLTF’s retail investors will have differing liquidity needs than that of institutional investors. It said increasing retail investors’ participation in the fund may require a level of liquidity that could reduce fund performance and increase private market fragility, particularly in fund outflows, in the event of a market downturn as investors rush to exit.
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“This, in turn, could make these vehicles less appealing to institutions without suitable redemption limitations. To mitigate this, fair terms and safeguards — standardized contribution and redemption rights proportional to ownership — are essential.”
It also noted that participation in the OLTF should remain elective for cornerstone investors in the province, adding if retail-focused vehicles are introduced, institutions would need to assess the impact of retail investors’ rights on the overall fund structure, particularly with governance, liquidity and valuation protocols.
“Institutional investors normally receive enhanced governance and lower fees, depending on the size of their investment. Therefore, large institutional investors would generally expect to retain an ability to negotiate financial incentives, like reduced fees, as compensation for the possible negative impact of frequent inflows and outflows from retail investors.”
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The association also expressed concerns about increasing the obligations or liabilities of cornerstone investors through these vehicles, noting they could expose them to fiduciary, financial and reputational risks. Clear boundaries and indemnification provisions should be in place to protect cornerstone investors while ensuring fair outcomes for all participants, it said.
As well, the PIAC found the proposed requirement to wind up a fund if redemption requests exceed 10 per cent for two consecutive years as overly restrictive and inconsistent with longer-term investment horizons associated with private market investment.
While the PIAC said it supports the OSC’s efforts to provide retail investors with access to private markets through a potential OLTF, it said this shift will introduce complex challenges that calls for a robust risk management framework that includes investor education and that ensures fair participation for all stakeholders.
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