And in the seventh month, unit holders in the GrowthWorks Canadian Fund waited. And waited. And waited some more.
Unable to finalize a plan for the Vancouver-based fund, which stopped payments to investors last fall amid a cash crunch, regulators have extended the freeze until July 31, 2012.
GrowthWorks needed more time to examine its redemption management plan (RMP), says Bob Bouchard, director of corporate finance at the Manitoba Securities Commission. The plan would have enabled investors to redeem their funds during two annual windows only, up to a pre-determined maximum.
“The timeline was too tight. It couldn’t comply with its prospectus because of its liquidity issues. It’s going to take a bit more time to come up with a final solution,” he says.
GrowthWorks first proposed its RMP after it froze investor assets last October. It said evaporating merger-and-acquisition and IPO markets in the U.S. forced its hand.
Why the freeze? If the fund processed all expected redemptions, it would have run out of money and would have had to sell many of its holdings at fire-sale prices.
The longer the Canadian Fund’s assets are frozen, the more comparisons will be drawn between it and Crocus Investment Fund. (The one-time darling of the Manitoba venture-capital scene ceased trading in 2004, amid serious concerns about the valuations in its portfolio. It subsequently went bankrupt became the subject of a scathing report from the provincial auditor-general, and was the target of a $200-million class action lawsuit.)
Tim Lee, chief investment officer for venture capital at GrowthWorks, says he doesn’t see the extension as a setback: it shows the regulators are doing due diligence.
“If they thought we were working contrary to our shareholders’ interests, we would have heard from them quite quickly that we should cease and desist,” he says.
The Canadian Fund, which includes unit holders across Saskatchewan, Manitoba and Ontario, has a net asset value of about $200 million, down from about $350 million two years prior, though most of that decline was due to capital that was returned to shareholders via redemptions. Last year, it raised $17 million nationally.
Its MER has nearly doubled from 6% in 2008 to about 12% today. The net asset value sits at $5.75 per share—down from $9.50 when the Canadian Fund merged with Winnipeg-based ENSIS Growth Fund in 2007.
Much of the drop in net asset value can be blamed on dwindling dollars in the venture-capital space, similar to what other funds have been experiencing, such as the former VenGrowth funds acquired by Covington last year.
Lee says the MER spiked because it’s costing GrowthWorks more to borrow money. A $20-million loan from Roseway Capital in May 2010, on which GrowthWorks is paying more than 30%, is particularly glaring. Lee says the cost of capital on the loan is a participation agreement, as opposed to a strict interest rate.
“Roseway earns its return through a percentage participation in the value of certain venture holdings once those holdings are exited. If the cost of financing ends up higher than 30%, then the underlying assets would have exited at increased values and the fund would have generated significant cash proceeds from those exits. That cash could be used to fund redemptions,” he says.
Dan Hallett, director of asset management at HighView Financial Group, an Oakville, Ont.-based investment counseling firm, says the MER and other financial data indicate GrowthWorks’ poor liquidity.
“Whenever you enter an agreement where you’re giving away some of your exit proceeds, you have to know it’s an indication it wasn’t the first choice. It’s an expensive way to get liquidity when you’re not attracting money into the funds,” he says. “It becomes a bit of a cycle when the [15% LSIF] tax-credit support is withdrawn in the largest labour fund market [Ontario]; that curtails purchases of the funds.”
Investors shouldn’t read too much into the extension given by regulators, he says. It’s just a matter of time until the final obituary on the LSIF industry is written, says Hallett.