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The Ontario government, led by Premier Doug Ford, is urging the province’s securities regulator to approve a new category of mutual funds designed for retail investors. These funds would enable investments in higher-risk private assets, including real estate, which are typically reserved for institutional investors and the affluent. However, advocates for investors caution that such funds may expose ordinary investors to significant risks and complex fee structures, potentially locking their money away for extended periods in illiquid projects.
Government’s Push for New Investment Class
Sources familiar with the discussions indicate that the Ford administration has pressed the Ontario Securities Commission (OSC) to expedite the introduction of these funds as a means to generate capital for major infrastructure initiatives. The OSC has been tasked to prepare a consultation paper with an unusually swift timeline, leading to concerns about the lack of comprehensive research and industry feedback in the proposal.
Scott Blodgett, a representative from Ontario’s Ministry of Finance, has clarified that while the government consults with the OSC regarding capital-formation strategies, it does not dictate the pace or nature of regulatory processes. “Decisions about long-term asset fund design, timing, and investor safeguards rest solely with the OSC,” he stated.
The Nature of Proposed Funds
Historically, mutual funds have invested primarily in public assets like stocks and bonds, providing a straightforward way for investors to gain exposure to diverse holdings. The new proposal aims to introduce funds that can invest in privately held assets such as apartment complexes, toll roads, and ports. Some of these funds may also engage in private lending, offering loans to companies with potentially higher returns.
The OSC’s latest framework would allow mutual fund companies to seek regulatory approval for these private asset funds on a bespoke basis, with individual managers presenting their own plans. Investor advocates, however, express concern over the illiquidity associated with such investments, noting that they often come with high fees and complex terms that may not be clearly communicated.
Kevin Burkett, a portfolio manager, emphasised the importance of liquidity, stating, “Even some of the most sophisticated investors commonly underestimate the importance of liquidity.”
Investor Advocacy and Regulatory Scrutiny
The Portfolio Management Association of Canada (PMAC), which represents fund managers overseeing $3.6 trillion in assets, has historically welcomed new investment products. Nonetheless, the prospect of retail investors accessing more opaque and complex funds has raised alarms. Victoria Paris, PMAC’s general counsel, articulated the tension between facilitating capital for infrastructure and ensuring that ordinary investors are not exposed to risks beyond their means.
Jean-Paul Bureaud, executive director of FAIR Canada, argued that there is little genuine demand for these new private asset mutual funds among retail investors. He pointed out that the high costs associated with such funds may deter most ordinary individuals from participating. “Most people don’t have enough money to invest in this,” he remarked.
The Road Ahead for Private Asset Funds
Despite the pushback, the OSC remains committed to rolling out this initiative, describing it as a forward-thinking approach that could benefit both retail investors and broader capital markets. The regulator’s consultation paper released in November 2024 highlights a vision for a structure that would facilitate investment in private assets while ensuring investor protections.
Currently, mutual funds are limited to investing no more than 10 per cent of their assets in illiquid investments. In contrast, private market funds are less restricted but often require higher minimum investments and are less transparent regarding their holdings and fee structures.
The OSC’s proposal would initially remove the 10 per cent cap for mutual funds on private assets and suggest that a cornerstone investor, such as a pension fund, hold a significant stake to provide stability. However, the plan has encountered resistance from mutual fund companies concerned about its complexity and potential regulatory burdens.
Why it Matters
The push to create a new class of mutual funds that target retail investors raises significant questions about the balance between facilitating investment opportunities and protecting ordinary investors from high-risk assets. As private markets continue to expand, ensuring there are robust safeguards and clear disclosures will be crucial in preventing potential pitfalls that could leave small investors vulnerable. The discourse surrounding these developments will shape the future of investment accessibility in Ontario, making it imperative to prioritise transparency and education in the evolving landscape.
