Rethinking Asset Allocation in the Exempt Market

Diversification has long been a pillar of sound investing. As private investments become more accessible to individual Canadians through the exempt market, it’s just as important to think about how private capital is allocated—both across your entire portfolio and within the exempt market itself.

Recently, regulators have introduced measures to help protect investors from becoming too concentrated in certain sectors or specific issuers within the private market. These changes aim to reduce risk and ensure private investments remain part of a balanced, thoughtful approach—not a one-sided bet.

Understanding these constraints—and how they connect to your broader asset allocation—is key to making informed, confident decisions.

What Is Asset Allocation?

Asset allocation is the process of dividing your investments among different asset classes—such as cash, public and private equities, fixed income, and real estate —with the goal of balancing risk and reward based on your financial goals, time horizon, and risk tolerance.

Traditionally, portfolios have focused on public market assets (stocks and bonds), but in recent years, private investments have become a more common part of the conversation. These include opportunities in:

• Private real estate

• Infrastructure and energy

• Private equity or debt

• Mortgage investment corporations (MICs), and

• Specialized funds and emerging industries

The exempt market allows access to these types of opportunities—but with less liquidity, longer time horizons, and greater complexity than traditional investments.

Why Allocation Matters More in the Exempt Market

Because exempt market investments are often illiquid and sector-specific, over-allocating to a single issuer or industry can create unintended exposure. For example:

• Investing heavily in private real estate across multiple issuers may appear diversified but could be overly concentrated in a single sector.

• Reinvesting redemptions into similar products without reviewing your portfolio holistically could increase risk unintentionally through increased exposure.

• Relying on yield or return projections alone, without balancing time horizons or liquidity needs, can lead to mismatches between financial goals and actual outcomes.

That’s why asset allocation within the exempt market needs to be done with the same care and intention as public market investing—if not more.

A Focus on Investor Protection

To help safeguard retail investors, Canadian regulators—including provincial securities commissions—have introduced measures aimed at managing concentration risk in the exempt market.

Here are some of the key areas of focus:

Concentration Limits by Issuer

To help protect investors from taking on too much risk in a single investment, Canadian securities regulators have implemented concentration limits within the exempt market—especially for individuals who do not meet accredited investor criteria.

These limits are designed to ensure that retail investors do not allocate a disproportionate amount of their investable capital into one issuer or product. Instead, they encourage spreading investments across different opportunities, reducing the potential impact if one investment underperforms or encounters delays.

The amount you can invest may also vary depending on your financial situation, your experience with private investments, and whether you're working with a registered Dealing Representative. When an advisor determines that an investment is suitable based on a thorough understanding of your financial goals and risk tolerance, higher limits may apply.

Ultimately, these rules are in place to help investors participate in the exempt market in a responsible, diversified way—ensuring private investments remain a thoughtful complement to a broader portfolio, rather than becoming overly concentrated or risky.

Monitoring for Sector Exposure

Firms are increasingly expected to monitor clients’ exposure across similar asset types, even when investments are held with multiple issuers. For example, too much exposure to real estate-based offerings—even across different regions—may be flagged as sector over-concentration.

This isn’t about discouraging private investment—it’s about encouraging smarter, more diversified participation.

Suitability assessments now go beyond risk tolerance and investment goals to include an analysis of how each investment fits into the overall portfolio. This includes consideration of:

• Liquidity needs

• Time horizon

• Income vs. growth objectives

• Proportion of private vs. public assets

These layered assessments are meant to ensure that private capital exposure remains appropriate, responsible, and well-aligned with long-term planning.

What Investors Should Be Asking Themselves

When it comes to asset allocation—especially in the private space—it’s important to move beyond surface-level decisions and ask deeper, internal questions:

• Am I too heavily invested in one industry or asset type?

• Have I considered how long each investment will be tied up—and whether that matches my cash flow needs?

• Is my portfolio resilient across different market conditions, or am I betting too much on one outcome?

• Do I understand how each private investment complements the public side of my portfolio?

• Have I reviewed my allocation recently, especially after a redemption or major life change?

These questions don’t require a background in finance—just a willingness to stay curious and intentional.

A Balanced Portfolio Isn’t Just a Pie Chart

It’s easy to view asset allocation as something that gets done once and then forgotten. But as markets evolve and personal goals shift, so should your allocation strategy. This is especially true in the exempt market, where new offerings and structural complexity require an added layer of diligence.

Working with a financial professional who understands private capital—alongside public markets—can help ensure your investment strategy is truly diversified and risk-managed.

Conclusion: Thoughtful Allocation Builds Long-Term Confidence

Private investments offer valuable opportunities for diversification, growth, and income—but only when they’re part of a well-balanced plan. Recent regulatory measures are designed to support investor protection, but the most powerful tool is still personal awareness.

Understanding where your capital is going, how it's spread across sectors and issuers, and whether it reflects your true financial objectives can make a significant difference in long-term outcomes.

If you’re considering investing in the exempt market—or wondering whether your current allocation still makes sense—a conversation with a registered Dealing Representative can help clarify your options and ensure you're making decisions with your full portfolio in mind.

Disclaimer:

This article is for informational purposes only and does not constitute investment advice. Exempt market investments are subject to regulatory restrictions, including concentration limits and eligibility criteria. These investments carry risk, may be illiquid, and are not guaranteed or insured. Please consult with a registered Dealing Representative to determine whether an exempt market investment is suitable for your financial circumstances and objectives.