Starlight Capital brings Institutional Private Assets to Canadian Accredited Investors

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Starlight Capital CEO and CIO Dennis Mitchell highlights how advisors can build institutional-style portfolios with alternatives and private assets: real estate, infrastructure, and private equity

OVER THE PAST four decades, investors have enjoyed strong returns from traditional assets. Investors owning a conventional 60/40 portfolio of stocks and bonds benefited from this allocation – until 2022. The world has changed as inflation and borrowing costs have risen while global growth has slowed. Accredited investors must rethink their asset allocation to include more alternatives to build an institutional-style portfolio. “As Canadian pension plans look beyond traditional investments and increasingly turn toward alternatives, it’s clear that these investments offer unique benefits that would also benefit accredited investors,” Starlight Capital CEO and CIO Dennis Mitchell says. “While most accredited investors are aware of alternatives, many are unaware that private investments, historically and primarily designed for institutional investors, are now accessible to them.”

Starlight Capital is an independent Canadian asset management firm with over $1 billion in assets under management. We manage global and North American diversified private and public equity investments across traditional and alternative asset classes, including real estate, infrastructure, and private equity. Our goal is to deliver superior risk-adjusted total returns to investors through a disciplined investment approach: focused business investing. Starlight Capital is a wholly owned subsidiary of Starlight Investments. Starlight Investments is a leading global real estate investment and asset management firm with over 360 employees and $25B in AUM. It is a privately held owner, developer, and asset manager of over 77,000 multiresidential suites and over eight million square feet of commercial property space. Learn more at www.starlightcapital.com and connect with us on LinkedIn at https://www.linkedin.com/company/ starlightcapital/

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Historically, 15%+ of VC and buyout funds lose money, while less than 1% of secondary strategies lose money

“The largest pension plans in Canada have ~40% of their assets in alternatives like real estate, infrastructure and private equity”

Dennis Mitchell, Starlight Capital CEO and CIO

During a recent interview with Wealth Professional, Mitchell moves quickly from topic to topic – from discussing solar energy in Germany to an auto plant in Alabama to accredited investors he recently met in Winnipeg – rarely pausing while firing off a steady stream of statistics. Along with decades of experience in the markets and an impressive track record of returns, Mitchell is a person who clearly does his homework and likes to be well-prepared. His commitment to delivering institutional-quality investments to advisor clients was apparent from the very beginning. When he joined Starlight Capital as CEO and CIO in 2018, the firm spent two years conducting extensive research and due diligence before finally launching their first private investment solutions in 2020. “We used those two years to speak with advisors, to find out what they and their clients needed,” he explains. “This consultative approach has led to Starlight Capital’s current $1.1 billion assets under management, allocated across real estate, infrastructure, and diversified equities.” Starlight Capital’s experience in global markets and extensive network of relationships have equipped them to source and analyze global private investments. However, the firm’s commitment to its investment philosophy of Focused Business Investing is best exemplified through its rigorous due diligence process, enabling the team to limit their private partners and focus on the best opportunities. An impressive External Investment Committee ensures these opportunities are also vetted by independent investment and compliance professionals. While Starlight’s portfolio encompasses a sophisticated range of holdings, from data centers and toll roads to single-family homes, Mitchell argues that these are opportunities to which accredited investors can gain exposure, just as large investors like pension funds have.

Mitchell recently brought this message to approximately 200 high net worth (HNW) investors during his visit to Winnipeg. They have significant capital, Mitchell says, but due to a number of concerns regarding complexity and liquidity, they remain cautious about private investments. “Accredited investors have a lot of catching up to do. Institutions like insurance companies, pension plans, endowments, and foundations have long been invested in private alternative assets. The largest pension plans in Canada

have approximately 40 percent of their assets in alternatives like real estate, infrastructure, and private equity.” While Mitchell believes this is a missed opportunity for accredited investors, he understands their concerns. Liquidity is the biggest worry because many wealthier investors are also older, and already thinking about transferring their wealth to the next generation. Mitchell told the investors in Winnipeg that Starlight Capital’s Private Pools are allocated 80 percent into private assets and 20 percent into listed securities. “That 20 percent provides liquidity, whereas the 80 percent in private investments provides the returns and diversification,” he says. “Our infrastructure pool has now grown to approximately $130 million of assets, meaning there is approximately $26 million of capital in very liquid securities to absorb redemptions.” Along with questions about liquidity, accredited investors also expressed concern regarding the transparency of private investments, which don’t attract coverage from analysts and don’t have their share price reported by exchanges every second of the trading day. “I would argue that the transparency of private assets is very, very similar to public assets,” Mitchell says. “They trade less frequently and don’t have analysts providing opinions, but a firm like Starlight Capital is uniquely positioned to bridge that gap and perform the diligence and analysis accredited investors require, while also providing the liquidity they need.”

That’s a lot of people coming to a country that doesn’t have enough residential real estate, whether it's single-family homes, multi-family, or student housing. There's just not enough. This shortage of homes has a number of causes, but a significant driver is the fact that Canadians tend to cluster in just a few cities. And the two most popular cities – Toronto and Vancouver – are hemmed in by natural barriers such as mountains, the sea, a lake, and protected green space. Another factor driving Canadian housing prices upward is the lack of labour mobility compared with the US. “Sixty years ago, Americans made cars in Michigan and people migrated there for the well-paying union jobs. Today, they’re making cars in Alabama, Mississippi, and Arkansas, and that’s where people are migrating to. In Canada 60 years ago, the auto industry was in southwest Ontario, and that’s where it still is today.” Mitchell says Starlight Capital has a diversified portfolio of real estate that targets the different trends and opportunities in the US and Canada. “The Canadian REIT market is anticipated to generate 3 percent earnings growth this year, whereas the US REIT market is forecast to generate 8 percent earnings growth. But if you look at valuations, Canadian REITs are trading at a 23 percent discount to net asset value, while US REITs are trading at a 7.5 percent discount. So investors can choose either higher growth and a lower discount or a higher discount, but lower growth.” Asked about a specific real estate play he likes, Mitchell names Unison, which enables institutions to take equity investments in single-family homes. Unison, he says, delivered a 53 percent return for Starlight Capital in 2021 and is poised to continue delivering very strong returns.

Starlight Capital casts a wide net when it comes to infrastructure. Along with toll roads, railways, and utilities, Mitchell says the firm is particularly focused on the infrastructure required to support the accelerating demand for data. Mitchell notes that 90 percent of the data that exists in the world today was created in the last two years. Streaming, social media, AI, e-commerce, big data, and analytics are all

History is clearly important to Mitchell. He frequently weaves long-term trends into his analysis of today’s markets. It’s important on a personal level as well. When Mitchell founded Starlight Capital back in 2018, he did so with a large cohort of former colleagues from Sentry Investments, including Graeme Llewellyn, the former COO of Sentry Investments, who is Starlight Capital’s CFO and COO. Starlight Capital is bridging the gap between accredited investors and institutional private assets, and helping advisors build more institutional-style portfolios for their clients. Starlight Capital continues to provide institutional alternative investments and private assets to their advisor clients, in real estate, infrastructure and private equity. For more information on Starlight Capital, visit www.starlightcapital.com and follow https://www.linkedin.com/company/starlightcapital/

Leading the way in the private assets revolution

Conclusion

Published 15 May 2023

“The rate of growth for primary private equity in the last 15 to 20 years is 5x while the secondary market is growing at 12x”

Dennis Mitchell, Starlight Capital CEO and CIO

Unison targets the owner-occupied real estate market in the US. That’s a $39 trillion market

Unlocking private assets for accredited investors

Starlight Capital Real Estate Investment Solutions

Mitchell says Starlight Capital’s own real estate portfolio is currently 100 percent invested in North America, though the firm’s mandate is global. “It’s not the geography that matters, it’s really the sector that matters: industrial real estate, residential real estate, datacentres and cell towers. Today, the portfolio is north of 50 percent industrial and residential because those two sectors have the best fundamentals.” Mitchell points to some powerful demographic tailwinds behind residential real estate, especially in Canada, where the government is planning to increase immigration to about 500,000 people per year.

drivers of data creation and demand. Starlight Capital sees opportunities in the data centers required to process and store all of this data, as well as the broadband and cellular networks required to carry it around the world. Private equity is Starlight Capital’s newest investment solution. Launched last fall, Starlight Capital’s private equity pool has entered a market rattled by a number of headwinds including volatile valuations and a slowdown in fundraising. Despite this, Mitchell believes accredited investors will leap at the chance to gain access to private assets managed by Blackstone Inc., Harbourvest Partners, Morgan Stanley, and Whitehorse Liquidity Partners. Mitchell is particularly bullish on the opportunities in the private equity secondary market. He cites data showing that over $1.5 trillion of capital has been earmarked for the primary private equity market, and only about $132 billion for the secondary private equity market. However, he adds, the rate of growth for primary private equity in the last 15 to 20 years is 5x while the secondary market is growing at 12x. “You're going to see that rate of growth in the secondary market for quite some time,” Mitchell says. “We like the secondary market because by all metrics that we consider important – duration, volatility, yield, transparency, liquidity – it is superior to the primary market. “Historically, 15 percent or more of venture capital and buyout funds lose money, whereas less than one percent of secondary private equity strategies lose money. All of our private equity investments are in the secondaries market, and we are already receiving material cash distributions.”

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