Episode 148 - Preserving Wealth Post-Exit: Using Institutional Models for Global Diversification

Hello and welcome to views from the market, mid-market private equity and M&A in Canada. My name is Mario Negro, and I'm a partner in the private equity and M&A group at Stike Mailer. For today's podcast, I'd like to welcome our special guests, Vanessa Houie and Andrew Sarna. Both are at Fourth Lane Partners, Vanessa is a senior client advisor, and Andrew is a portfolio manager. Vanessa, Andrew, thank you for joining us and welcome. Thank you so much for having us, Mario. Vanessa, Andrew, we always start the podcast by asking our guests to tell us a little bit about themselves, and then in your case, a little bit about Fourth Lane and what Fourth Lane is and the work that you do. So I'll start with Vanessa if I could. Sure, absolutely. So Mario, I often describe myself as a recovering lawyer. I actually started my career in M&A at a Bay Street law firm and then found my way to Fourth Lane to pursue what I often refer to as my own entrepreneurial journey. Actually both Andrew and I had the opportunity to start at Fourth Lane when Fourth Lane was just an idea, and this was back in 2018. So we were both employee one and two. I don't know who goes first, but yeah. So I've spent the last seven years taking my law and actually business background and helping Fourth Lane start, and we've grown amazingly over the last couple years. But my current focus at Fourth Lane is working with our clients, which we can get more into, as well as prospective clients that are interested in learning a different approach to wealth management. And thanks for having us, Mario. I'm Andrew. As portfolio manager, I have Fourth Lane partners. I spend a lot of my time working with, trying to work with individuals and families, building out institutional quality, diversified portfolios to steward family wealth for decades. So we look at anything from public equities to private equity to infrastructure. And I really spent the past seven years building out the platform, and two years ago I actually moved down to the Cayman Islands to open up the Cayman office for Fourth Lane partners. And now we manage capital down here for families who have moved down to the Cayman Islands, as well. You're in a separate podcast. I'd love to talk about moving to the Cayman Islands, and we'll have to leave that one for another time. 100%. So just tell us a little bit more about Fourth Lane itself. And I know you both play key roles in terms of Fourth Lane and the real core of what Fourth Lane does. And as you focus on the clients, practice a little bit about that, and then talk a little bit about the portfolio itself and how you build out the investment strategy. So. Sure. So I would say my very short one-line answer to what is Fourth Lane would be, we are an independent wealth and asset management firm focused on serving high-net-worth individuals, family offices, and foundations across Canada, and as Andrew mentioned, in Cayman and other offshore jurisdictions. But I think the real answer requires just me to bring up two stories, what I kind of call our origin story. So back in 2017, the group of us came together because we really observed a gap in the Canadian wealth management landscape. And the gap that I would explain is, on one hand, Canada is actually very well known for our pension plans. Ontario teachers, CPIP, they're often seen as kind of the pioneers in developing the endowment pension style approach that a lot of other countries look to Canada as a role model for. And then on the other end of the spectrum, when we looked at what options were traditionally available to high-net-worth individuals and families in Canada, we observed that a lot of the market share is still occupied by the Canadian banks. So really, Fourth Lane's origin story starts with wanting to close that gap and almost challenge what has traditionally been available to high-net-worth individuals in Canada. The second part of that story is actually who makes up the Fourth Lane team. So I would say almost all of our founding partners have had their own either liquidity events or just grown and accumulated their own personal wealth in the financial industry. And then when they looked around and saw where they would want their wealth to be managed, they honestly couldn't find something that satisfied them. So the origin of Fourth Lane was actually a place for our founding partners to manage their own wealth in the way that they knew having worked in the institutional world for their careers. They knew institutions were investing this way, so they wanted to create a place that could offer that sophisticated risk management aware type of investing that really uses broad global diversification to achieve that. And then from a portfolio management perspective, you think our average client comes from one of the Canadian banks. The Canadian banks obviously dominate the wealth space in Canada. And again, our DNA coming from the Canadian pension plans is to look across the investment universe and the use of alternatives and really just expand our aperture of what sort of things we can invest in. So a client will come to us with a 60/40 portfolio of stocks and equities from a bank. And then, depending on the client's objectives, we may build a more optimally diversified portfolio with better downside protection, or maybe the client wants more growth and maybe that expression is through things like private equity. But our independence and our institutional backgrounds allow us to have the experience of operating some of these asset classes. So if a client comes to us and wants private equity, we're able to execute on a mandate like that for them. Our institutional backgrounds and experience covering a variety of asset classes, including alternatives, gives us the tools and experience to implement mandates such as private equity if a client wanted to come to us looking for a growth year long-term investment compared to what they may offer at the banks. And when I think about what we're able to look at versus the banks, some of our competitors, we get more mass market, large mega funds where we're able to be a little bit more nimble, maybe look at lower middle market, or look at other different geographies, other parts of the capital stack, secondaries as well, to implement and execute on where we think the opportunities are within private equity. You touched on a point that we're seeing more and more, which is kind of retail investors interested in private equity. Obviously, in the world that I live in, seeing more individuals wanting to invest in private equity directly, assume your clients are saying that to you too, it sounds like you're getting that desire to kind of enter that asset class and find different ways of engaging in that asset class. Can I ask you, for a client who wants to invest in private equity, how do you get them there? What do you focus on with a client who wants to do more private equity investments? So historically, we've had a commingled vehicle that would allow us to, that we would group client assets to access through funds. The challenge in the space is really, I think a lot of people underestimate how difficult private markets are. We work with a lot of family offices as well, and something when a direct deal comes across my desk, something I always say is, why am I so lucky to see this opportunity? Because a lot of the time, if it's coming across a family office's desk or a firm like ours who isn't spending 100% of their time focused on that pocket of the market, it's because it's been passed over by somebody. So I think it's very important in private markets, especially to have a steward with experience who can shepherd you through private markets, because again, what a lot of people sometimes fail to realize is that once you make that allocation, you're stuck with it for 10 years. You need to ensure you are partnering with experienced individuals to make sure that a 10-year decision is going to be one you're happy to be stuck with. If I can ask you, I know you're obviously on the front lines working often, and this is where we see in our marketplace, both managers come to the forefront, exits in sales of business, and I'm always amazed when I talk to owner-operators in the middle of a sale, and they don't really do a lot of planning, and they don't, how do you engage with them? Because often they don't really want to talk about the stuff where they assume that their bank account is good enough for the limited amount. I'm just curious how you engage with owner-operators, particularly in order to make them understand the value proposition, given the fact that I find that our marketplace, it's very hard to actually get owner-operators to focus on this part of managing this, their success story, managing their life savings. So I think one way we often engage with owner-operators before a liquidity event is actually through helping almost co-create that liquidity event, and when I say that, I'm not saying that we're going out and shopping their deal for them, but actually a lot of our team has backgrounds in investment banking and corporate finance, so actually our CEO, Robbie Pride, he came over to Fourth Lane last year after having run TD's Global Investment Banking Group. Our founder, Ken, has built his career in investment banking, so often we find that entrepreneurs who are thinking about liquidity in the next year or so, they really just are looking for an independent sounding board that can help them truly often come in and whiteboard on the options available to them, how they should be thinking about an exit, what they want to consider before they do exit. So we'll often be that independent guide as a family works through their upcoming liquidity. The second thing that is, I think, something that we really take pride on is it's honestly the ecosystem that we've built at Fourth Lane amongst our clients who might be entrepreneurs in a similar industry that a prospective client is looking to sell in, or just through our network of global managers that we're investing in, often we will be able to find an expert in the industry that a prospective client is focused on and be able to connect them. I like to call it, or I like to position Fourth Lane or call Fourth Lane's position the advisor on the family's side of the table because of our independence. I don't want to ask you to give away the secret sauce, but I mean, when you look at your investment strategy, what's the differentiator for Fourth Lane when you look at your strategies, your approach to investing, what would be the kind of key elements of what makes Fourth Lane unique in terms of how they focus on their investment strategy? Yeah, when I think about what is our secret sauce, it really comes down to or begins with our experience, and that experience allows us to build some portfolios that better protect the downside for families. So the adoption of some alternatives like hedge funds and some defensive credit strategies allow us to earn a real return, but also protect the downside. It's an alternative to equities, and I think equities are a little challenged right now. You look at the Canadian economy, we've had anemic real GDP growth, trade war causing exports to fall two months in a row of negative job growth. It doesn't make me too excited about investing in the Canadian stock market. But given our breadth of knowledge, we're able to adopt some strategies where we can protect capital, generate a stable eight to 10% a year, but during periods like April of this year, Liberation Day when the market fell through the bottom, and I know various different people who open their brokerage account to see it down millions of dollars, which is not a good feeling. Where we tend to work with families is one of the things we love to say is they spent their lives working to get rich, you don't want to get rich twice. So we build these portfolios that allow them to sleep at night, so you never run into this scenario where you're opening up your investment, or you open up your investment statement and it's down millions of dollars. So actually that is another way that we start engaging with owner operators before their liquidity event is actually by, we're not trying to scare anyone, but we're trying to help people understand that if you're investing your exit proceeds, so you've spent 30 years of your life building a entertainment lighting business and you sell it, if you're just investing it in a portfolio that's largely stocks and maybe some bonds, there have been periods in the last five years like March 2020 when the whole world went into COVID lockdowns where your life earnings, what you've worked so hard to build could be down 30% just because markets are down. And same with Andrew saying in April, we're lucky that markets rebounded quite quickly after liberation day, but if history was to tell us anything, that doesn't always happen. So I really try to educate entrepreneurs that just investing in stocks and bonds and not finding what we kind of call uncorrelated return streams can really make you vulnerable to market volatility, and that means losing millions of dollars of your hard-earned post-exit proceeds. Vanessa, I know there is a lock going on in your space in terms of happenings, and we always ask our guests a little bit about the trends that they're seeing. I call it the crystal ball question, and I want to ask that to you. Is there trends in your noticing from a kind of wealth management perspective or from your client's perspective or trends we should be watching out for that you're seeing coming when it comes to the work that you do? From an investment lens, I think one trend or one thing I'm watching really carefully is really the direction of U.S. equity markets. Over the past decade, U.S. markets has been the trade. Going into the year was all about U.S. exceptionalism, but there are so many tail risks in this world that it makes me nervous, and then you look at, from a valuation perspective, any time that valuations have been as stretched as they are today, returns have disappointed in the low single digits to negative over the next 10 years. I know we've all been conditioned that markets only go up and subbibe the dip, but if history is any guide, things will eventually reverse, and the market is not going to snap back that one time. The one big thing we're going out and having a lot of conversations with our clients about is diversification and having multiple different return drivers, not only relying on your equity portfolio to drive returns, but having other investments that aren't going to be tied to big tech that are going to drive your portfolio and preserve wealth for the long run. I would add to that observation about families really seeking diversification. We've, in the last year, had a lot of real estate families, so families that have built their wealth in real estate who have said, "We've spent the last 20, 30 years investing in real estate," and given the challenges that we've observed in the Canadian market in real estate, we're actually looking for where else we can invest. The good thing about the way that foreclames invest in alternatives outside of private equity, so alternatives such as hedge funds, we can actually provide uncorrelated returns in a way that's still liquid, so often these strategies are a year lockup and a quarterly liquidity after, so it's a really good compliment to families that are looking for diversification into alternatives, but are also looking for a bit of liquidity diversification too. Another group of prospective clients that I've been speaking to a lot in 2025 are actually families that have spent the last few years very happily invested in bonds, so they might have sold the business, not really had the time or motivation to figure out where to invest that $100 million that they've sold their business for, and they put it in bonds. So the last couple of years, bonds have actually been an okay place to be when they're yielding 5%, but now when you have bonds yielding maybe two and a half and that's fully taxable income, people are looking for better alternatives, and so that's been a big conversation starter for me. And then the other conversation is that I'm having our families thinking of leaving Canada, so obviously based in Cayman, getting a lot of questions about what it's like living in the Cayman Islands. For now, and what I've observed over the past couple of years, it's a lot of families who like to talk about it, but it's ultimately a very big decision, and there's only a select few who actually do leave. One last trend, and I know I already said last trend before, but another area we're spending a lot of time and where our clients have benefited is going into the year, we invested a lot of our, or we had a significant exposure to gold. It's hard to believe, but gold's up 45% this year, which is sort of unbelievable, and I think that really ties into some of our concerns around the sustainability of government deficits and what is going to happen to fiat currencies. So fourth thing, we're actually spending a lot of time looking at the real asset space, not only around precious metals, but other commodities. After a decade of underinvestment in the space, there are some mega themes that we believe are going to drive demand for some of these commodities. They are like green energy, the AI boom and reshoring of supply chains. And we think within that, there are some real opportunities to generate attractive returns. Investing in companies that attractive valuations that will provide upside and good diversification to things like equities and bonds as well. Vanessa and Jordan, really appreciate you both joining us and telling us a little bit about yourselves, a little bit about the fourth late story, and it's particularly interesting to see the kind of evolution of the firm and your focus. So thank you so much for joining us as guests today. Thanks for having us.