It’s no secret that foreign private alternative funds have their sights set on Canada. According to a recent study, asset fund managers from the U.S. and Europe are increasing efforts to penetrate the Canadian market, with 65% identifying Canada as a target market for raising capital. It stands to reason why. Canadian investing clients can be considered among the most sophisticated and wealthiest investors in the world. Many are actively seeking to increase allocations to alternative assets, such as private equity real estate.

For their part, private U.S. firms certainly have an appeal. They comprise an estimated US$13.1 trillion and benefit from their size, maturity, and name recognition. However, as more foreign firms enter Canada it is important to consider what they can and cannot offer Canadian investors. Here, we discuss some of the key differences between domestic and foreign alternatives from a Canadian point of view.

Cost efficiency: taxes and other costs

Mature foreign firms have access to the world’s largest pools of capital and the growth prospects that come with them. Unfortunately, Canadian investors will not necessarily benefit from this growth to the same degree as investors in their home countries. For example, American investments can be subject to U.S. withholding taxes — up to 30% — on dividends and other forms of income. Additionally, Canadians investing abroad may also pay a premium for currency hedging and FOREX fees. Investing domestically provides advisors with a more cost-effective avenue to diversify their clients’ portfolios.

Foreign exchange risk

When Canadians invest abroad, they accept a layer of risk that is unrelated to the performance of the underlying asset. Fluctuating foreign exchange rates can cause the relative value of investments to shift unpredictably. Retired clients relying on regular cash flows must be comfortable with the possibility of less-than-predictable payouts. In extreme cases, otherwise profitable investments might generate losses depending on the relative weakness of Canada’s dollar. Some foreign private funds hedge to the Canadian dollar to mitigate foreign exchange risk, but they cannot eliminate it. Domestic investments in Canadian dollars can help create a more predictable investment experience for Canadian advisors and their clients.

Access to local expertise and insights

To make the best possible recommendations to their clients, advisors must actively seek out market trends and emerging investment opportunities. As subject matter experts in their respective sectors, private firms can be an excellent source of these much-needed insights. For uniquely positioned alternatives such as private Canadian real estate, however, where advisors look may be just as important as what they learn. Firms active in the markets they invest in typically offer more valuable insights than companies investing from afar. Working with a responsive local company also offers peace of mind when it comes to making transactions and monitoring performance.

Domestic opportunities drive Canada’s home-country advantage

Like domestic alternatives, well-managed foreign funds have the potential to offer stability in many economic environments — even during significant volatility. That said, few countries can match Canada’s historically stable growth, particularly in the realm of real estate. Among G7 countries, the Canadian economy is expected to experience one of the strongest rates of growth in 2024. Likewise, the long-term resilience of Canadian real estate is supported by surging population growth and a protracted shortfall of housing.

When considering private alternatives, it remains important to weigh every opportunity, foreign or domestic, based on your Canadian client’s needs. A candid conversation can help determine if they are comfortable with the risks of investing abroad. They may also want to know more about the stability and tax efficiency of private Canadian investments. With access to investment opportunities like Canadian real estate, lower costs, and local insights, Canadian private alternatives certainly have much to offer.