Alternatives
Pure private equity, simplified
September 20, 2024
BMO Global Asset Management and The Carlyle Group Inc. have joined forces to simplify private equity investing for Canadian investors.
BMO GAM & Carlyle: Strength in partnership
What does it take to bring an established global private equity firm together with one of the most recognizable and respected names in Canadian finance?
In a word: opportunity. The opportunity to bring to market an innovative solution, to complement each other’s strengths, and ultimately, to democratize investors’ access to private equity.
For BMO Global Asset Management (GAM) and The Carlyle Group Inc. (being referred to together with its affiliates as “Carlyle”)—the partners behind the new BMO Carlyle Private Equity Strategies Fund—it’s a two-way relationship. Carlyle and its global investment solutions business, AlpInvest,1 have a proven track record in private equity (PE) (see chart “AlpInvest – Aggregate performance by strategy”). This includes global scale, dedicated programs for PE primary investments, secondary investments, and co-investments, and a robust portfolio management team. BMO GAM, on the other hand, brings its knowledge and experience in creating a fund specifically well-suited to the Canadian market, along with its national on-the-ground presence and its relationships with Canadian investors to guide them on their investment journey—from product education to portfolio positioning, client servicing and beyond.
BMO GAM’s Alternatives team looks to both the market and clients to define the alternatives strategies that Canadian investors need. When choosing to partner with a manager, we conduct rigorous due diligence to both define and select our ideal partner, and dive deep on four factors: People, Process, Philosophy, and Performance. In the case of the BMO Carlyle Private Equity Strategies Fund, investors get the benefit of Carlyle AlpInvest’s track record and performance, and Carlyle gets the benefits of our scale, reach, and relationships. The result is an institutional calibre strategy that simplifies investing in private equity.
Why private equity?
Private companies represent a significant portion of the investable landscape—in fact, in North America, there are over 20 times more middle market private companies than there are public companies of any size.2
Middle market companies drive the Canadian & U.S. economy
In Canada, large institutions like the “Maple Eight” pension plans allocate an average of roughly 17% of their portfolios to private equity. In contrast, Individual Canadian private wealth investors, allocate less than 3% to private equity.3
Maple Eight private market allocations
Current annual reports (2022/23)4
First and foremost, private equity’s role in portfolios is as a return-enhancer. Over the past decade, private equity has outperformed public markets, generating a compound annual growth rate that is approximately 6-12% higher than public market equivalents depending on the time frame (3-year, 5-year, or 10-year).5 Private equities can also offer less concentration risk than public equity markets, which have been historically top-heavy over the past year.6 Additionally, they provide a large and global opportunity set and the potential to offer complementary exposure to certain sectors and industries.
Carlyle: A global name with an enviable pedigree
In evaluating and ultimately selecting Carlyle to be our partner on this new fund, several characteristics and capabilities caught our attention. One is Carlyle’s AlpInvest business, which has demonstrated competence and experience across private equity strategies of primary investments, secondary investments, and co-investments. This is key for the creation of an evergreen solution like the BMO Carlyle Private Equity Strategies Fund, as it provides the best set of ingredients—portfolio holdings—to work from.
In the private equity world, primaries are necessary to feed secondaries and co-investments. If a firm doesn’t have robust programs across all three, they lack the tools necessary to achieve optimal portfolio composition and make relative value adjustments between them over time. Carlyle AlpInvest’s integrated approach, with all three strategies under one roof, is the best-case scenario in our view, and represents the ideal situation for the creation and management of an evergreen private equity strategy.
Carlyle’s scale and track record further underscore their suitability as a partner. Overall, they are a top five global private equity manager with US$426 billion in assets under management (AUM),7 and AlpInvest, their Global Investment Solutions business, includes 90 investment professionals, 450 institutional investors, 355 private equity manager relationships, and $77 billion in AUM.8 This scope and scale provides access to the types of deals that are the right fit for the BMO Carlyle Private Equity Strategies Fund.
Finally, and perhaps most impressively, AlpInvest has demonstrated long-term outperformance versus public market equivalents over the last 20 years.
AlpInvest – Aggregate performance by strategy9
Net MOIC | Net IRR | MSCI World Benchmark PME10 | AlpInvest net IRR vs. MSCI World Benchmark PME | |
|---|---|---|---|---|
2010-202311 | ||||
Secondary investments | 1.5x | 16.6% | 10.9% | +5.8% |
Co-investments | 1.8x | 20.7% | 10.9% | +9.8% |
Primary investments | 1.8x | 16.7% | 10.9% | +5.8% |
Since inception12 | ||||
Secondary investments | 1.5x | 16.5% | 5.7% | +10.8% |
Co-investments | 1.8x | 15.4% | 5.7% | +9.7% |
Primary investments | 1.7x | 12.5% | 5.7% | +6.7% |
Investor-friendly access to pure private equity
What makes the BMO Carlyle Private Equity Strategies Fund stand out? At a high level, it offers evergreen access to fully-invested private equity through a respected and experienced manager with a proven track record.
Diving deeper reveals even more attractive features.
To start: diversification. The BMO Carlyle Private Equity Strategies Fund invests in a solution diversified across several axes, including vintage (the year in which capital was first committed to a project), manager, number of positions, geography, and type of private equity (funds and direct investments).
The Fund’s evergreen structure allows investors to be fully invested on any subscription. This avoids the issues faced by private wealth investors associated with closed-end funds—such as capital calls, the investment J-curve, and lockups of investor funds for 10-plus years—which make it challenging for investors to achieve their desired allocation to private markets. In contrast, the BMO Carlyle Private Equity Strategies Fund’s evergreen format grants investors the flexibility to buy when they want and benefit from certain liquidity features, with monthly subscriptions and redemptions,13 relatively low minimums compared to traditional private equity, and no capital calls providing full investment at any point.
In terms of exposure, the Fund focuses on secondaries and co-investments in global developed markets. More specifically, it notably targets what we believe to be the most attractive area of private equity: mid-market buyouts, which benefit from lower reliance on leverage, a robust exit environment not dependent on the initial public offering (IPO) market, and less competition due to smaller deal sizes.
BMO Carlyle Private Equity Strategies Fund: Target portfolio
Portfolio is focused on secondary and co-investments in developed markets.
Note: Portfolio targets are illustrative only. Actual portfolio composition may vary over time.
With a target return of 14-16%14, a competitive fee structure, and targeted registered plan eligibility, we believe the BMO Carlyle Private Equity Strategies Fund represents an attractive opportunity for investors to access pure private equity.
BMO Carlyle Private Equity Strategies Fund: Terms & structure15
Fund structure | Ontario Mutual Fund Trust2010-202316 |
Fund series | Series F – retail |
Minimum investment | Series F, A: $25,000 (initial) and $5,000 (subsequent) (denominated in the currency of the relevant series) |
Term | Evergreen structure (open-end) |
Currency | CAD fund; CAD and USD series available |
Subscriptions | Monthly subscriptions at NAV (with 8 business days’ notice) |
Redemptions | Monthly redemptions at NAV (with 14 business days’ notice) |
Early redemption fee | 2.0% discount to NAV within the first year following subscription |
Management fee | Series F, A: 1.40% (annually)18 |
Incentive fee | 10% above the net profits of the Master Fund, over any balances in the Loss Recovery Account (as defined in the offering documentation)19 |
Investor qualification | Canadian accredited investor; Registered plan eligibility expected, subject to the fund meeting certain conditions (RDSP, RRSP, RRIF, RESP, TFSA)20 |
Fund codes | Series F: BMA80503 (CAD), BMA80103 (USD) |
For more information
Contact the BMO GAM Alternatives Team or bmogamalts@bmo.com.
Insights
Sources
1Any reference herein to “AlpInvest” means “AlpInvest Partners B.V.” and any reference herein to “Carlyle AlpInvest” means “Carlyle acting together with its affiliate AlpInvest."
2National Center for The Middle Market Year-End 2022 Middle Market Indicator. Mid-market defined as companies with revenues $10million-$1billion.
3Bain & Company, Global Private Equity Report 2023
4Annual reports. Where not explicitly cited in annual reports, private credit allocation is approximated by “Level 3” credit assets divided by gross plan investments.
5Historical performance on Private Equity from PitchBook’s North America PitchBook Benchmarks Q2 2023 report. Public comparables sourced from Preqin’s Private Capital Quarterly Index. All data as of June 30, 2023. Benchmark: MSCI World Index.
6Felix Salmon, “The stock market’s concentration, in one chart,” Axios, June 27, 2024.
7Forbes; by AUM including Global Credit business segment, as of December 1, 2023.
8Annual Report, AUM as of December 31, 2023.
9Net IRR: Calculated based on gross IRR net of management fees and carried interest charged by the GP. Net Multiple on Invested Capital (MOIC): the ratio of Total Value less carried interest accrued and paid to Capital Called and is based upon carrying values including carrying values of outstanding escrows and earnouts and realized values inclusive of the receipt of any items that offset fund management fees divided by total capital invested, including deducting carried interest (accrued and paid), fund level expenses and fees incurred. Performance as of June 30, 2023. Past performance is not indicative of future results or a guarantee of future returns. Return metrics are subject to change as a fund or investment portfolio matures. AlpInvest began making primary investments and co-investments in 2000 and began making secondary investments in 2002. AlpInvest performance information for periods before 2012 is based solely on the investments selected by AlpInvest and made on behalf of AlpInvest’s previous owners, which comprised over 97% of all capital committed by AlpInvest across all investments since inception through December 31, 2011. AlpInvest’s secondary investments and co-investments strategies each are segmented into sequential investment programs (each, a “Program” – e.g., Secondaries Program II or Co-Investment Program IV). A Program is comprised of all the investments made by an anchor mandate(s) (i.e., generally the largest account(s) within a Program) during its commitment period and includes (beginning in 2012) the other client accounts committing to such investments.
11Includes investment with a vintage year of 2010 and after.
12Includes investment with a 2000 vintage year or later.
13See “Summary of Principal Terms” – “Redemptions” and “Redemption Limitation at the Master Fund” of the OM, “Investment Risks” – “Limited Liquidity on Redemptions” and “Redemption Notes” of the OM and “General Tax Risks” of the OM. Redemptions are subject to restrictions defined in the OM. The Master Fund (as defined below) may, but is not required to, limit aggregate redemptions on any dealing day so that the aggregate redemption price payable with respect to a one-month period is no more than 1.667% of the aggregate net asset value or outstanding shares of the Master Fund as at the relevant redemption date. Notwithstanding the foregoing, redemptions will be capped at 20% of the average number of shares of the Master Fund in issue per annum, calculated by reference to the average number of shares of the Master Fund in issue over the 12-month period ending on the relevant redemption date and the aggregate number of shares of the Mater Fund redeemed during that period. Redemption payment will, subject to certain conditions, generally be made within 45 business days after the relevant valuation date.
14For information purposes only, based on past performance observations. There is no assurance that assets will perform as described.
15See offering memorandum dated June 2024 of the BMO Carlyle Private Equity Strategies Fund (the “OM”) for full disclosure of all terms and conditions.
16Ontario Mutual Fund Trust status is conditional on meeting certain investor thresholds.
13See “Summary of Principal Terms” – “Redemptions” and “Redemption Limitation at the Master Fund” of the OM, “Investment Risks” – “Limited Liquidity on Redemptions” and “Redemption Notes” of the OM and “General Tax Risks” of the OM. Redemptions are subject to restrictions defined in the OM. The Master Fund (as defined below) may, but is not required to, limit aggregate redemptions on any dealing day so that the aggregate redemption price payable with respect to a one-month period is no more than 1.667% of the aggregate net asset value or outstanding shares of the Master Fund as at the relevant redemption date. Notwithstanding the foregoing, redemptions will be capped at 20% of the average number of shares of the Master Fund in issue per annum, calculated by reference to the average number of shares of the Master Fund in issue over the 12-month period ending on the relevant redemption date and the aggregate number of shares of the Mater Fund redeemed during that period. Redemption payment will, subject to certain conditions, generally be made within 45 business days after the relevant valuation date.
18In each case management fees are calculated and accrued monthly net of any Luxembourg withholding or other taxes and paid quarterly in arrears based on the relevant rate set out in the Master Fund Prospectus for the given class of Master Fund shares multiplied by the share of the Master Fund’s NAV attributable to such class of Master Fund shares as of the end of the relevant month.
19See “Terms and Conditions of the Fund” – “Fees” of the OM for a complete description of how the incentive fee is calculated.
Disclaimers
For Advisors and Institutional Client Use Only
“BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.
BMO Global Asset Management (BMO GAM) is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. Certain of the products and services offered under the brand name, BMO Global Asset Management, are designed specifically for various categories of investors in Canada and may not be available to all investors. Products and services are only offered to investors in Canada in accordance with applicable laws and regulatory requirements.
The information contained herein: (1) is confidential and proprietary; (2) may not be reproduced or distributed without the prior written consent of BMO GAM; and (3) has been obtained from third party sources believed to be reliable but which have not been independently verified. BMO GAM and its affiliates do not accept any responsibility for any loss or damage that results from the use of this information. This article has been prepared solely for information purposes by BMO GAM.
The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results.
Certain statements included in this material constitute forward-looking statements, including, but not limited to, those identified by the expressions “expect”, “intend”, “will” and similar expressions. The forward-looking statements are not historical facts but reflect BMO GAM’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. Although BMO GAM believes that the assumptions inherent in the forward-looking statements are reasonable, forward-looking statements are not guarantees of future performance and, accordingly, readers are cautioned not to place undue reliance on such statements due to the inherent uncertainty therein. BMO GAM undertakes no obligation to update publicly or otherwise revise any forward-looking statement or information whether as a result of new information, future events or other such factors which affect this information, except as required by law.
This article is provided to you on the understanding that you will understand and accept its inherent limitations, you will not rely on it in making or recommending any investment decision with respect to any securities that may be issued. An investment in the BMO Carlyle Private Equity Strategies Fund, a trust established under the laws of the Province of Ontario (the “Fund”) described hereby is speculative. A subscription for units of the Fund should be considered only by persons financially able to maintain their investment and who can bear the risk of loss associated with an investment in the Fund. Prospective investors should consult with their own independent professional legal, tax, investment and financial advisors before purchasing units of the Fund in order to determine the appropriateness of this investment in relation to their financial and investment objectives and in relation to the tax consequences of any such investment. Prospective investors should consider the risks described in the confidential offering memorandum (OM) of the Fund before purchasing units of the Fund. Any or all of these risks, or other as yet unidentified risks, may have a material adverse effect on the Fund’s business and/or the return to investors. See “Investment Objective, Investment Strategy and Certain Risks” in the OM of the Fund. In addition to the risks described in the OM of the Fund, the Fund will bear certain risks associated with investment into strategies run by Carlyle AlpInvest (meaning the Carlyle Group Inc., together with its affiliates, also referred to as the “Carlyle Group” or “Carlyle” in this presentation), i.e., the strategies explored by Carlyle AlpInvest through Carlyle AlpInvest Private Markets Sub-Fund –I, a sub-fund of Carlyle AlpInvest Private Markets SICAV –UCI Part II, multi-compartment investment company with variable capital (société d’investissement à capital variable) established as a public limited liability company (société anonyme) in accordance with the law of 10 August 1915 on commercial companies and registered under Part II of the Luxembourg Law of 17 December 2010 relating to undertakings for collective investment (the “Master Fund”, the alternative investment fund manager of the Master Fund being AlpInvest Partners B.V., or “AlpInvest”) in proportion to the amount of the Fund’s investment in the Master Fund. Prospective investors in the Fund should therefore carefully consider the risks described under “Certain Risk Factors and Potential Conflicts of Interest” in the prospectus of the Master Fund. Units of the Fund can only be offered to Canadian accredited investors.