In our previous post, we discussed Warren Buffett’s “too hard” pile — the discipline of passing on investment opportunities that are difficult to understand, evaluate, or explain.

That principal shapes many of the investment decisions we make for client portfolios.

Over the past several years, a number of investment structures have grown increasingly popular within the wealth management industry. These often fall under the broad umbrella of private market investments — including private equity, private credit, private real estate, and mortgage funds.

While these strategies can play an important role for some institutional investors, we have generally chosen not to allocate client capital to them.

Our reasoning is fairly straightforward.

Valuation and the Illusion of Stability

One of our primary concerns relates to how these investments are valued.

Public investments are marked to market continuously. Prices fluctuate daily and investors see those movements in real time.

Private market investments operate differently. Valuations are updated only periodically and are often based on internal models, appraisals, or manager estimates rather than active market transactions.

The result is performance histories that appear remarkably smooth — sometimes showing years of steady positive returns with very little visible volatility.

That stability can be appealing. But it raises an important question: are the underlying assets truly that stable, or are the valuation practices simply masking the volatility that exists in nearly all investments?

Liquidity Risk

Liquidity is another important consideration.

Many private market funds restrict investor withdrawals, particularly during periods of market stress. In recent years, several large funds have limited redemptions or gated investors entirely when withdrawal requests exceeded available liquidity.

These situations are not theoretical. High-profile examples have occurred across a range of private real estate and private credit funds.

For investors who believed they had periodic liquidity, these restrictions can come as an unwelcome surprise.

In our experience, many retail investors underestimate just how illiquid these structures can be.

Timing and the Retail Investor

Another concern relates to timing.

Private market strategies are now being widely marketed to retail investors following more than a decade of strong performance. That raises a natural question: are investors being invited into these strategies at the beginning of the opportunity set, or near the end of an unusually favourable cycle?

When strategies become widely accessible after long periods of exceptional performance, caution is often warranted.

Existing Real Estate Exposure

For many of our clients, additional exposure to private real estate may be unnecessary.

Families living in Vancouver often already have significant exposure to the real estate market through their personal residences and other property holdings. Adding more real estate exposure through private structures can concentrate risk rather than diversify it.

In many cases, clients already have more than enough real estate exposure embedded in their balance sheets.

Private Credit and Loss Recognition

Private credit strategies present another consideration.

Unlike publicly traded bonds, where market pricing forces losses to be recognized quickly, private loans can sometimes be extended or restructured rather than written down.

In some situations, loans may simply be rolled forward rather than recognized as losses.

This can delay the appearance of credit problems, but it does not eliminate the underlying risk.

Fees and Incentives

Fee structures are also worth examining.

Private market investments frequently charge higher management fees than traditional public market strategies, and many include performance-based fees.

These arrangements can be asymmetric. Managers participate in upside performance, but investors may not fully recover those fees if long-term results ultimately disappoint.

Over time, these structures can significantly reduce the returns investors ultimately keep.

Closing

None of this suggests that private market investments are inherently flawed. For certain institutional, and ultra high net worth investors they may serve specific strategic purposes.

However, most individuals and families are not like institutions. Liquidity, transparency, and flexibility tend to matter far more for household portfolios than they do for pension plans or endowments.

Understanding those differences is critical.

In our next post, we will explore the increasingly popular idea that individual investors should adopt an “institutional” approach to investing — and why that concept may not be as practical as it first appears.

If you enjoy these perspectives and would like to explore a relationship with our team, we would welcome the opportunity to connect.