A Value Approach to Investing in Private Assets

A Value Approach to Investing in Private Assets

When you walk through the front doors of our office you will notice a cartoon that has hung on our wall since Bill Wheeler & Murray Leith founded the company in 1982.

The picture depicts a lone sheep politely picking his way back through a crowd of peers who are blindly stampeding over a cliff (“Pardon me!”), and acts as a constant reminder that you need to be cautious when an area of the market becomes popular. Warren Buffet’s famous quote captures this fundamental rule of investing perfectly: “Be fearful when others are greedy and greedy when others are fearful” – and go with the flow at your peril.

This ethos has guided our investing for the past 40 years in balanced (traditional equity and bond) portfolios and more recently, private assets.

What Private Assets Best Complement a Balanced Portfolio, and How to Choose a Provider?

We began looking at private asset opportunities for our clients over six years ago to better understand how they might fit within a traditional balanced portfolio. The modeling work and research we conducted concluded that infrastructure provided the most complementary characteristics to a typical publicly traded investment portfolio, followed by private real estate, and then private debt. Our analysis in these areas is also supported by our experience covering listed real estate (REITs) and infrastructure companies for decades – including Brookfield Asset Management back when it traded as Brascan.

While we felt infrastructure was a good fit for our clients, we were mindful the asset class had been attracting significant interest in recent years and competition for these investments had increased dramatically. In an area that has become very competitive for deals, we felt it was critical to find a partner that was not primarily competing on price, and could access deals due to competitive advantages among their peers. Of the providers available, we found there were only a handful with the expertise, resources, and team to truly add value to the projects in which they were investing.

We launched our first private asset strategy in March 2019, the Leith Wheeler Infrastructure Fund Limited Partnership I which provided our clients access to the Brookfield Infrastructure Fund (BIF) IV, a closed-end fund with a 12-year lock-up. Brookfield was selected for the following reasons:

  • Experience: Owner and operator of real asset businesses for over 100 years.
  • Opportunity Set: Past success and global reach allows them to look across regions where they have a local presence for opportunities.
  • Strong Track Record: Total return focus in which they can buy, improve and sell assets, as opposed to most other infrastructure funds that buy and hold relying on income yield alone.
  • Price Discipline: Careful about price paid for any asset, which we believe makes returns more resilient to rising interest rates. Value investing provides a margin of safety.
  • Resources: Utilize 30,000-strong workforce to improve projects. Size allows them to be the majority owner of most projects and better control outcomes.
  • Alignment: Management invests significantly alongside their fund investors.

We followed up this successful launch with an open-ended infrastructure fund, the Leith Wheeler Infrastructure Fund II Limited Partnership in late 2019 which invests in Brookfield Super-Core Infrastructure Partners (BSIP).

Most recently, we launched our Private Asset Fund (PAF) to provide investors exposure to a variety of private asset classes, such as infrastructure, real estate, private debt, and mortgages. The PAF selectively deploys cash into strategies when we determine the investment opportunity is right, anchored in our own Value philosophy. The fund has made an initial commitment to infrastructure which we expect will get invested over the next several quarters, however we are currently approaching other areas with caution. As in public market investing, price discipline sits at the core of our approach.

Private Real Estate Valuations Look Rich

One area of concern for us is private real estate, where we believe negative valuation adjustments have yet to occur. A “cap rate” is a measure of the rate of expected return on a real estate investment property based on the income the property is expected to generate, and these rates in aggregate serve as a benchmark for real estate valuations (lower looks more expensive). The cap rates reflected in private real estate markets are currently 1-2 percentage points lower than for public ones, so we have a hard time believing they are not heading higher (and so values for those funds, lower). If cap rates moved up closer to these levels, it could lead to double digit price declines (and that is not factoring in leverage).

Fortunately, we have selected partners with a similar investment mindset to us who are very aware of current market dynamics. We recently had a call with one of the Co-Lead Portfolio Managers on a real estate fund we have approved for PAF and he indicated they are being very cautious at the moment. They are not interested in deploying any capital given this backdrop and believe valuation adjustments are coming as well. The strategy did not draw any capital from investors in their queue in Q3 and does not expect to in Q4. They want to see valuations reflect this new environment before deploying the fund’s capital, which is music to our ears.

"As in public market investing, price discipline sits at the core of our approach."

Some Private Debt is Looking More Interesting

Another area where we have been treading carefully is private debt. Looking back a year ago, we interviewed some very good managers but we were having a tough time getting excited about unlevered yields of approximately 6-7%. At the time, products that were providing more attractive returns were utilizing leverage to get there (and so taking on more risk). We also struggled to identify managers that provided truly differentiated approaches. Many had strong relationships with private equity players but we felt that was a relatively common feature across the managers we interviewed. Flash forward to today and we are getting more interested. Yields have increased significantly, and we recently met with a company who is targeting an area of the market that private debt companies have not traditionally serviced.

What is the Right Allocation of Private Assets in a Portfolio?

This question is an important one, and the answer is, “it depends.” Given the liquidity constraints, investors must have a long investing time horizon and be able to cover interim cash needs through other, more liquid parts of their portfolio. For our institutional clients, we tend to see allocations of 5-20% of assets. For private clients who invest in private assets, the percentage can vary depending on individual time horizons and cash flows but is usually between 10-30%. Investors must be cautious with how much illiquidity they can afford in their portfolio because if (when?) private funds are revalued down, a rush to the exits by other investors may cause managers to close the redemption gates – leaving clients unable to adjust their asset mix during this period of repricing on the private portion of their portfolios. Over the long-term this is a natural part of investing in private assets but over the short-term it is a significant liquidity risk for investors.

"The cap rates reflected in private real estate markets are currently 1-2 percentage points lower than for public ones, so we have a hard time believing they are not heading higher (and so values for those funds, lower). If cap rates moved up closer to these levels, it could lead to double digit price declines (and that is not factoring in leverage)."

Watch the Exits

In times of crisis, investors looking to sell to cash or rebalance their portfolios are confronted with the liquidity constraints of private assets, which can either slow down the process or, in extraordinary times, be cut off entirely for extended periods. Investment managers have these restrictions in place to help them effectively manage the cash within the fund, and to do what they were hired to do at the outset – deploy that cash into assets that may not convert back to cash for some time. We witnessed such lockdowns back in the 2008-2009 Great Financial Crisis and in fact started seeing such headlines again in the back half of 2022, when two US real estate funds valued over US$85 billion restricted redemptions. Within Canada, several of the larger insurance companies also had to suspend contributions and redemptions from their private real estate funds during COVID and the Great Financial Crisis. For this reason, investors must be careful not to commit too much of their capital to these illiquid asset classes.


The constant reminder in our lobby of the sheep moving in the other direction is just as relevant when investors are heading for the exits as it is when they are rushing in. As contrarian investors, we feel our clients invested in PAF are perfectly positioned to take advantage of this uncertainty. While investing in private assets felt more comfortable a year ago, we are now entering an environment where better opportunities should be created. Markets will work their way through the coming period of disruption within private assets, but with it will come opportunity for those with the discipline and insight to capitalize on it.