The CEO of the Canada’s largest stock exchange group is urging the Carney government to allow retail investors to buy stakes in a new $25-billion sovereign wealth fund through publicly traded units such as exchange traded funds (ETFs).

“Our team has reached out to (the Department of) Finance on this,” said John McKenzie, chief executive of TMX Group Ltd. , which owns the Toronto Stock Exchange.

“Our recommendation was you do that in the form of a closed-end fund, or an ETF, (and) that you could put a piece of it on the marketplace. ”

Prime Minister Mark Carney announced plans for a sovereign wealth fund , which would back priority national projects in the areas of energy, critical minerals, agriculture, and infrastructure, on April 27, and said all Canadians would be given an opportunity to participate through a retail investment product.

The next day, in an economic update, the government said the retail component of the Canada Strong Fund — while still open to consultation on specific design — would be broadly accessible to Canadians, easy to purchase, hold and transact and provide returns based on the fund’s success, while initial invested capital would be protected.

McKenzie said the government’s wording sounded more like a bond than an ETF, but that the government has indicated it is open to input.

“They’re in listening phase,” he said. “I think they brought this out as a concept without having it completely baked as to what they want to do, so they’re open to ideas.”

While a structure that involves a public exchange stands to benefit TMX Group, McKenzie said a fund that owns a number of assets such as the proposed Canada Strong Fund could easily incorporate a retail component by listing it on an exchange, whether that’s an ETF or simply units.

What’s more, he said, that structure would offer key selling points to retail investors such as transparency and disclosure requirements and, unlike a bond, it would trade easily on a public marketplace.

“If it’s a public market product, we’re going to insist on disclosure around it, like we would on any other fund,” he said.

“You need to have be able to value the things in it and that’s why I like an exchange-traded product, not just because we’re in exchange, (but) because it forces transparency, disclosure and liquidity in the way a private product wouldn’t.”

This is particularly important because the sovereign wealth fund is being designed to operate like a large pension fund, which typically doesn’t have to contemplate the needs of retail investors, he said.

“My worry in these models is that performance of the fund is not transparent,” he said. “We don’t have the visibility into the assets that are in it in terms of how they’re performing, what are the returns?”

Ari Pandes, a professor of Finance at the University of Calgary’s Haskayne School of Business, said a closed-end fund as suggested McKenzie is compatible with a sovereign wealth fund. By raising a fixed pool of capital upfront and listing on exchange, investors would be able buy and sell freely without forcing the fund to liquidate underlying assets, which are expected to include long-duration, illiquid investments such as infrastructure, natural resources.

However, there are drawbacks.

“The problem with closed-end funds is that they almost always trade at a discount to their net asset value — often 10 to 20 per cent in normal markets, sometimes wider under stress,” Pandes said.

If, for example, Canadians were to buy in at $10, the market price might still settle around $8.50 even if the underlying assets are worth $10, he said.

“For a fund being sold partly on the idea of broad public participation, that could be both a reputational and a political problem.”

Carney has said the Canada Strong Fund will expand beyond priority infrastructure and energy projects identified by the federal government’s Major Projects Office, and McKenzie said his team is pushing Ottawa to include growth companies.

Canada has long struggled to get sufficient capital into companies that need the funds to build scale, with many turning instead to the United States, McKenzie said, adding that a particularly discouraging part of his meetings with private companies in the “go-public pipeline” is encountering Canadian founders running companies in Silicon Valley.

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“That means that the IP is there, the talent went there, the taxes went there, but they’re still Canadians,” he said.

“The problem to solve is getting capital into growth companies … so they can grow in Canada, as opposed to just get bought out and go to the U.S., or go straight to the U.S. and start there.”

• Email: bshecter@postmedia.com