Private Assets Sold to Retail: No Market Price, So Valuation Becomes Power
Public markets have four checks — disclosure, audits, analysts and the media — and private assets strip all of them away by design. No active trading means no market price, so valuation is done by the manager, and valuation directly determines how many units you get when you buy in and when you redeem.
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Winning a lawsuit depends on what you can prove, not what you know
Matthew Taylor is a litigator representing retail investors and pension funds. He says almost every successful negligence claim is preceded by a failure in the suitability analysis — KYC not done properly, KYP not understood. But failure does not equal a win: knowing something and being able to prove it in court are two different things. He lists several categories of especially damaging evidence: large numbers of clients holding identical portfolios in wildly different circumstances (one-on-one becomes one-on-many, and judges are visibly moved); off-channel communications; trades placed without confirmation; 80%–90% concentration in a single microcap; turnover done purely to generate commissions; and multi-account clients moved from commission accounts to AUM accounts — ‘double dipping’.
— Matthew TaylorA cliff in communication before and after signing is a signal
Taylor offers a very usable observation: accounts that go bad often had extremely dense communication during the courtship phase, then only one or two contacts a year after signing — the bare minimum. Another signal is that life changes are never revisited — retirement, a layoff, the death of the family breadwinner, a new child should all feed into the recommendation logic. He says this does not necessarily mean something has already gone wrong, but it is worth a second set of eyes. He also notes the trigger is often tax season: an accountant saying ‘this doesn't look right’ is frequently the first time an investor starts asking questions.
— Matthew TaylorRisk tolerance and risk capacity are two different things
Taylor thinks the thing advisors should discuss but do not discuss enough is risk capacity. His method is to talk through concrete scenarios: a client walks in saying they have high risk tolerance and want to take a swing, but when asked what happens if they lose their job, if the company goes bankrupt, what life looks like if this money is all gone, the person starts describing all kinds of bad outcomes and realises on their own that their tolerance is not that high. Ben Felix picks up the thread and walks through PWL's six-question risk capacity questionnaire: whether net worth is positive, whether there is liquidity covering three to six months of living expenses, whether employment or pension income is stable, whether more than 3% is withdrawn from investments each year, whether life and disability insurance are adequate, and whether more than 10% is expected to be drawn from the long-term portfolio (if so, the time horizon runs from under a year to over ten). Taylor says many clients simply do not know that tolerance and capacity are two concepts.
— Matthew TaylorSuitability is not the same as best interest
Taylor unpacks the difference: an ordinary negligence relationship only requires a duty of care, which in the investment context is suitability — a suitable recommendation based on the client's needs and the product recommended. A fiduciary or best-interest standard comes with something extra: conflicts of interest must be disclosed, informed consent is required where conflicts exist, and subsequent recommendations must be based on the client's best interest rather than the advisor's own. In theory, you can make a recommendation that is suitable for the client but brings you higher compensation or other benefits, and it does not necessarily have to be disclosed, because it is not inherently unsuitable. From the client's perspective his judgment is blunt: there is no downside, it only makes the burden of proof easier and provides a layer of protection; but it may come with a higher bar and higher minimum asset requirements, so it should not be the only deciding factor.
— Matthew TaylorThe two umbrella problems with private assets
Taylor reduces the problem private assets pose to retail investors to two interrelated umbrella issues: less information and less regulation, and both are by design. Public markets have a whole set of checks — periodic disclosure, periodic audits, equity analyst coverage, media relay — that compress information asymmetry to a considerable degree; private assets strip almost all of that away, with very limited legal reporting requirements and no comparable number of professionals digesting and disseminating information. His example: what is sold to you as a private asset is often not a stock but a business strategy — say, rolling up veterinary clinics. The investment thesis sounds easy to grasp, but lift the lid and it may be five to seven different entities each running its own piece and each taking its own fee. That feeling of ‘I can understand this’ is precisely the danger.
— Matthew TaylorNo market price, so valuation becomes power
In public markets the price is the traded price, and pricing information for large companies or active ETFs is solid. Private assets have no active market — not for commercial loan portfolios, not for veterinary clinic roll-ups — buyers are few, and transactions are negotiated one at a time with complex terms. So valuation can only be done by the manager itself or by a third party it hires, and valuation directly determines how many units investors get when they buy in and when they redeem. Taylor says that needing periodic valuations without periodic price information opens the door wide to mischief. He also flags the IRR problem: buy at 20, sell at 30, make 10 — that is a 50% return, anyone understands it; but private asset returns are a stream of cash flows, usually expressed as IRR, and ordinary investors instinctively compare it to a stock return rate as if they were the same kind of number, which is apples to oranges. IRR also has an anchoring effect — early returns can influence the number for years — and manager compensation is often tied to IRR as well.
— Matthew TaylorClients think they can redeem any time, but they cannot
Private funds can almost always gate or lock up, yet clients often assume they will get their money in a day or two like a mutual fund. Taylor says this is the issue advisors must put first: a client may suddenly need to fix a roof or buy a car, assume they can take the money out, and find they cannot. He recommends building an emergency plan into the financial plan in advance, assuming the private asset cash flow simply is not available — because gating is in the news everywhere now, he gets more calls about it than he can count, and it will be a persistent feature for the foreseeable future. He also offers an analogy: walk into a Ferrari dealership and the salesperson will find a way to sell you a Ferrari, even if what you actually need is a Dodge minivan.
— Matthew TaylorInstitutions do not sue, retail investors do
Taylor uses incentive structure to explain why litigation over private assets will increase: institutional investors historically did not sue, because they need long-term relationships with fund managers and may want to work in the industry again, and in the US they are often forced into arbitration. Retail investors have none of those concerns — they do not care about a relationship with the fund manager, and in Canada mandatory arbitration and class action waiver clauses are harder to enforce. All the incentives point the same way: more litigation, and more of it in Canadian courts. He cites the paper by Ludovic and William Magnuson: asset classes once open only to accredited investors are now sold to the public without the protections that traditionally accompany public offerings, creating a significant regulatory gap — misleading performance metrics, manipulable valuations, opaque fees, limited liquidity, exemptions from fiduciary duty — all of which become litigation risk once ordinary investors enter.
— Matthew TaylorIn their own words · checked verbatim
There's what people know, and there's what people can prove. And very seldom do those two things perfectly overlap.
Matthew Taylor1:00
If you move away from a he said, she said to a he said, she said, she said, he said, they said, you're in a much better position.
Matthew Taylor2:04
Legal claims are not like wine. They don't get bare with age. They're like milk. They have a pretty set period of time in which they have value.
Matthew Taylor12:20
Theoretically, you can make suitable recommendations that result in higher compensation to you, or there might be some other benefit flowing to you. And you don't necessarily have to disclose that either.
Matthew Taylor24:45
And when we're talking about a fiduciary standard, an interest in a lawsuit is an asset. It's something that has potential value. It's something that can be sold.
Matthew Taylor41:16
It turned out that there weren't any trees in the forest.
Matthew Taylor43:16
But people feel like they can understand it and that can actually be a fairly dangerous thing, I think.
Matthew Taylor47:22
the mandate of a regulator is not necessarily to return your funds. Their mandate is to police the market, levy out fines, or reduce people's ability to participate in the market.
Matthew Taylor1:07:33
Figures
| Number of questions in the PWL risk capacity questionnaire | 6 | 14:21 |
| Annual withdrawal rate threshold in the risk capacity questionnaire | 3% | 14:21 |
| Long-term portfolio withdrawal rate threshold in the risk capacity questionnaire | 10% | 14:21 |
| Concentration range called out | 80%–90% | 2:04 |
| Sino Forest peak market cap | about $6 billion | 43:16 |
| ETF fee example | 0.6% of assets | 47:22 |
| Stock return example | buy at $20, sell at $30, a 50% return | 49:33 |
| Episode Harold Geller appeared on | Episode 236 | 1:16:00 |
Glossary
- risk capacity
- How much loss a person can objectively withstand, which is a different thing from their subjective willingness to take risk.
- IRR
- An annualised rate of return calculated from a stream of cash flows, not the same kind of number as a stock return.
- gating
- A fund restricting or suspending investor redemptions under specified conditions, a common term in private funds.
- exempt market
- The Canadian channel that allows securities to be sold to accredited investors without a prospectus.
- inoculation
- Presenting a false claim to a client in weakened form first and then having the advisor rebut it, to build resistance to misinformation.
How to listen
For high-net-worth individuals, family offices and wealth management practitioners, especially those considering or already allocated to private assets who need to judge whether their advisor is on their side.
1:01:08–1:09:37 on Finfluencer jurisdiction and recourse, which is fairly far from investment decisions.