GrowthWorks unitholders wait for assets to thaw

Unitholders have okayed GrowthWorks Canadian Fund’s redemption management plan (RMP).

But the Vancouver-based fund is still waiting to see if regulators will follow suit.

The plan, which was first presented last fall after the fund suspended redemptions, was given the green light by 86% of the 1,384 unitholders who voted at its annual general meeting on June 28.

Read: Doors remain locked on venture fund

Despite the fact that only 2% of shareholders voted, Tim Lee, CFO of the embattled venture-capital fund, calls the vote a good outcome.

“If the turnout had been significantly higher because elements of the redemption management plan treated the shareholders adversely, we would have taken that into consideration,” he says.

A spokesperson for the B.C. Securities Commission says regulators are still evaluating the plan.

GrowthWorks froze its assets and suspended redemptions last fall because it said the market for mergers and acquisitions and initial public offerings had slowed in the second half of 2011.

That negatively impacted its ability to pay out redemptions, the fund said.

Read: Frozen LSIF chills investors

The RMP, if approved, would allow unitholders to redeem funds either annually or semi-annually up to some capped amount.

The freeze is in effect until July 31. It’s unclear what will happen if regulators don’t reach a decision by then.

Regardless, one Winnipeg-based advisor voiced concerns the fund’s been financially crippled by the millions in loans it’s taken out over the past two years.

The timing of a $20-million loan from Roseway Capital in May 2010, on which GrowthWorks is paying 33% interest, is particularly glaring, says the advisor.

“They took out their first loan in May 2010. So, they had no money and continued to allow mature investors to redeem. They borrowed money to fund redemptions,” he says. “Finally, the inevitable caught up to them and they had to free the fund.”

Lee says that’s not the case; the loan proceeds were earmarked for follow-on financings.

“March 2010 coincides with the most recent season of fundraising and redemptions. We didn’t require any funding to get past that season of redemptions,” he says.

However, the fund put out a May 23 release that indicates otherwise.

“On May 18, 2012, GrowthWorks WV Management Ltd., the manager of the Canadian Fund, on behalf of the Canadian Fund obtained a $4-million term loan provided by a third party lender in order to pay Canadian Fund operating expenses,” the company says.

Lee notes the 33% figure looks bad because the cost of capital on the Roseway loan is a “participation agreement” as opposed to a strict interest rate.

As such, Roseway will share in the profits from exiting companies in the Canadian Fund’s portfolio.

The advisor also criticizes a further $9.5 million borrowed from the Working Opportunities Fund, a sister fund to GrowthWorks.

“That reeks of conflict of interest. Was there no other third-party lender available? I have never ever seen this in my 25 years of being a financial advisor,” he says.

Due to market conditions, Lee says there wasn’t an abundance of lending options, adding the two funds have “completely separate” boards, independent review committees and decision making.

“Banks aren’t even lending to normal operating companies. We have approached banks and they do not have the capacity to lend to a venture capital portfolio,” he says.

The advisor also takes issue with management’s building up $3.5 million in fees during the freeze (fees have accrued but haven’t been paid out.)

“They were the management team that got us into this mess,” says the advisor. “They should be waiving fees.”

The faltering economy was the primary driver behind the fund’s decision to freeze redemptions, but Lee says the Canadian Fund was far from the only investment vehicle to feel the heat.

The former VenGrowth funds, which Covington acquired last year, have encountered similar challenges.

Read: VenGrowth’s abandoned merger leaves GrowthWorks hopeful

“There is an inherent connection between our exit markets, our ability to complete venture exits and our ability to meet our redemption obligations,” Lee says.

“The redemption freeze was tied to our performance on exits which were affected by macroeconomic factors.”

Despite the less-than-rosy situation, “The underlying portfolio is very strong,” says Lee. “There are 40 companies left in the portfolio.”

Management hasn’t been sitting still since the freeze was imposed. Lee says it’s completed a very small number of exits over the past eight months that have brought in the “single-digit millions” of dollars.

That’s why the management team wants the RMP approved “It would allow the fund to manage redemptions much more closely with exit activity,” Lee says. “We are quite confident in our ability to generate exits because our portfolio has strong companies that are well-positioned for mergers and acquisitions.”