Labour-sponsored venture capital funds

[Shakespeare]

Conrad Black could learn a thing or two from Umlah

The best occurance would be, uh, an Umlah out.

[beaverlodge]

You could have figured it out from the name.

Crocus' only come up in the spring

[Norbert Schlenker]

Another complicated LSVCC story. Alleged hanky panky, self dealing, and general ass covering.

... a subsidiary of ROI agreed to buy Brooklin for $25.1-million, topping a rival $22.1-million bid. ROI directly invested $12.1-million, close to 25 per cent of its assets under administration at that time and contrary to the terms of the fund's prospectus that limit its exposure to 10 per cent of net assets, the lawsuit claims.

Gould alleges ROI and John Sterling, the company's co-founder and chief executive officer, bought Brooklin "for more than fair market value" in order to protect ROI's initial investment, to claim an additional $1.4-million in "improper" expenses, to protect the fund's investment profile and, finally, to secure the compensation of ROI's senior management. The take-home pay of Mr. Sterling and Fernando Cipriano, co-founder and chief operating officer, hinges on the fund's assets under administration. ...

[Bylo Selhi]

And now the coup de grace: Labour funds reel as Ont. axes tax credit

The Ontario government is axing its 15-per-cent tax credit for labour-sponsored funds, dealing a severe blow to the recovering sector...

"This is a wakeup call for funds with subpar performance," he said. "Financial advisers will be forced to look at the investment merits of the offering, not just the tax credit." [Doh! You mean they didn't do that before? ...bylo]

David Gamble, a spokesman for the Department of Finance, said the federal government is "monitoring developments" in Ontario but that no changes have been made at the federal level.

How soon will the other provinces, never mind the feds, follow suit?

[dakota]

And now the coup de grace: Labour funds reel as Ont. axes tax credit

The Ontario government is axing its 15-per-cent tax credit for labour-sponsored funds, dealing a severe blow to the recovering sector...

"This is a wakeup call for funds with subpar performance," he said. "Financial advisers will be forced to look at the investment merits of the offering, not just the tax credit." [Doh! You mean they didn't do that before? ...bylo]

David Gamble, a spokesman for the Department of Finance, said the federal government is "monitoring developments" in Ontario but that no changes have been made at the federal level.

How soon will the other provinces, never mind the feds, follow suit?

I'm beginning to like Ontario Liberals after all.

[Arby]

Hung out to dry

Thursday, September 01, 2005
Dale Jackson

TORONTO (GlobeinvestorGOLD) — The finance industry is raising a big stink over this week's Ontario government decision to cut the 15-per-cent tax credit on labour sponsored funds, saying it will hurt the venture capital market. For the retail investors trapped in these money-losing dogs of funds - well, you're on your own.

Financial advisers have been plowing unsuspecting investors into labour funds since they were introduced in 1991. It must have seemed like a good idea at the time. When they were first launched, investors received a tax rebate of up to 20 per cent from each of the two senior levels of government. A few years later, the rebate was reduced to 15 per cent from each level of government.

...The average management expense ratio (MER) on a labour sponsored fund is 4.6 per cent a year, compared with 2.6 per cent for the average Canadian equity fund.

... Most of those managers are also being paid handsomely to lose money. Over the past five years, the average labour-sponsored fund has lost more than 9 per cent each year. As a comparison, the BMO Nesbitt Burns Canadian Small Cap index has risen over 11 per cent annually during the same period of time. ...

[dakota]

TORONTO (GlobeinvestorGOLD) — The finance industry is raising a big stink over this week's Ontario government decision to cut the 15-per-cent tax credit on labour sponsored funds, saying it will hurt the venture capital market. For the retail investors trapped in these money-losing dogs of funds - well, you're on your own.

Sooo, the venture capital markets are going suffer eh? And what about that 5% that the managers are going to miss? They not going to suffer? Start looking for a real job fellas.

The retail investors were already trapped for the next eight years and pretty much on their own, nothing new there!

[Small Investor Activist]

" Forensic accountant Al Rosen, who worked on the Crocus file with the plaintiffs, said the alleged false statements in the prospectuses should have been prevented.

"This should have been caught by firstly the officers of the company, then secondly by the directors of the company, then thirdly by the auditors of the company, and fourthly by the Manitoba Securities Commission," Mr. Rosen said in an interview.

"They had four cracks at realizing the deficiencies and all four failed," he said. "

[dagan]

[Restored from backup 2006-07-18]

I'm not defending Crocus. I just don't like the soap box that Rosen sits on. He's a professional witness for the prosecution. He's paid to say the things that he says.

[Shakespeare]

Crocus croaks

[Bylo Selhi]

Labour-sponsored love lost

The days of reckoning could be coming for those of you invested in labour-sponsored investment funds (LSIFs). My advice is to run for the cash-me-out hills--now! ASAP! Dilly-dalliers who hang on may have to fight over the illiquid and possibly worthless asset scraps in their funds' portfolios...

It would also help to sell while funds are still flush. Many have 20% or more in cash and short-term securities, ready for your redemption call. (Attention, fee cheapskates: That makes a 6% MER more like 8% on the fund's actual investments. On the other hand, if a fund has less than 10% cash, I wouldn't even finish reading this article. I'd dial my adviser now.) Once that cash is used up to pay off early redeemers, the fund will likely have to sell its most liquid--i.e., best--public investments, then the private ones. This will lead to a "new," lower asset value. Redemptions will accelerate. Post-1997 investors who bail early will get the double whammy: They'll lose on the asset value and their tax credits. But if they hang on, only the fund holdings that suck will remain, and the fund will be marked down to market before you can blink.

[dakota]

The days of reckoning could be coming for those of you invested in labour-sponsored investment funds (LSIFs). My advice is to run for the cash-me-out hills--now! ASAP! Dilly-dalliers who hang on may have to fight over the illiquid and possibly worthless asset scraps in their funds' portfolios...

My thoughts exactly! I think this has just been a great tax rip off.
I'm glad that ON backed out of it!

[smelly]

Holy crap! WHO is Doug Steiner and how is it possible for one article to contain SO many inaccuracies?




1)The Ontario Government backed off on the cancellation of the tax credit. Now it’s supposed to start phase-out in 2008 and end completely in 2010. And if you believe that’s actually gonna happen, perhaps I can interest you in buying the Brooklyn Bridge.

2)VFs have to maintain 20% cash. Most are holding over 30%.

3)Like mutual funds, VFs can suspend redemptions.

4)Oil and gas Flow Through “thingamabobs”? They stunk as investments?

5)"Too few genuine opportunities"? Says who? Where’s the proof behind that statement?

6)If he’s going to talk about performance, at least have the decency to talk net, after tax performance. After that tax free 30% tax credit.

7)"LSIFs haven't helped the true, unfettered venture capital sector much either. Since 2001, my business has looked to invest in promising new technologies for financial markets. But we couldn't compete with the so-called pacing requirements for LSIFs." What?

eight)"many LSIFs are full of holdings in so-so, illiquid private companies," So-so? Says who?

9)"But all LSIF investors should think about bailing soon. First, there's probably no tax reason to hold on. Ontarians who invested before 1996 had to wait five years to redeem without penalty. The waiting period was then extended to eight years. Much of the money was invested between 1995 and 1998."
Can someone explain this one because I’m baffled.

10)"Attention, fee cheapskates: That makes a 6% MER more like 8% on the fund's actual investments." Another baffler.

11)"On the other hand, if a fund has less than 10% cash, I wouldn't even finish reading this article. I'd dial my adviser now." See #2, this can’t happen.

12)"The net asset value of the fund quoted in the newspaper? That's an estimate--and perhaps an optimistic one--based on the independent valuations that managers can get for private investments." Of course it’s an estimate but on what does he base the opinion that it’s optimistic rather than accurate or even overly conservative?

13) "The time for you to invest is, like, right now." WHAT?


Please tell me that none of you buy this drivel. It's a very poorly researched and poorly written article.

[brucecohen]

Smelly, Doug Steiner is a "real" venture capitalist who has invested his own money in creating and seeding small companies that later went public or were sold.

LSIFs used to have to maintain a 20% cash cushion. If I recall correctly, that was eased a few years ago to allow some non-cash substitutes. But I don't remember the details and might be confusing a proposal with an actual change.

Managers of both LSIFs and regular VC funds have long complained about a shortage of strong opportunities in Canada. When I say managers, I mean the people actually running the money, not the marketing people.

Whether the tax credit should or should not be included in the performance consideration has been hashed out in this forum and WB many, many times. The bottom line is that, in exchange for very high fees, LSIF sponsors and their distribution networks have given investors access to govt money with little or no return on the investment side. In most cases, the tax credit has been the only return investors have received.

Steiner's point #7 is often made by true venture capitalists. In exchange for getting subsidized money, LSIF managers have to keep investing at a somewhat regulated pace. So they are more eager to do deals than regular VC managers who don't have access to the public trough. I remember a very irate phone call in the mid-90s from the head of Vancouver-based Ventures West -- one of Canada's premier venture capitalists -- who complained that BC's LSIF law was particularly unfair because it distorted the market by granting a tax credit and then restricted the field to just one LSIF sponsor.

Steiner's point #10 refers to the fact that unit holders pay full VC MER on the 20% of the portfolio that's simply kept in cash. I remember pointing out that, despite the vast size of its in-house "investment" team, Working Ventures was still paying high fees to a related party just to roll the T-bills in its cash cushion. (it just occurred to me that without these mandated cushion, LSIF investment returns would be even worse than they appear.)

Steiner's point #12 refers to a little recognized flaw in the whole LSIF structure. I wrote about it in the early or mid-90s but nobody paid attention except LSIF sponsors who barraged me with irate calls. There are no mandated standards for how LSIFs value their private holdings and thereby calculate their NAVs. It's all up to a committee of the fund's directors. The VC industry has conventions but funds are not required to follow them. Whether the valuations are conservative or optimistic depends, I guess, on the integrity of the fund and is known only when the holding is actually sold. I paid little attention to the Crocus disaster but recall that their portfolio was vastly overvalued. Maybe Dan H will correct me, but I suspect that many LSIF historical returns were inflated by their heavy exposure to the tech bubble and that this carnage is only now starting to show up in the 5-year numbers. I just checked Paltrak's annualized returns and indeed found a sharp plunge at the 5-year point. The MEDIAN 5-year return at Oct 31 was -12.3%. So, the investor who put money into the median fund 5 years ago is still well under water even with the tax credit -- unless that tax credit was successfully invested elsewhere. But I'm off on a tangent. The bottom line is that LSIF valuations have to be taken with a heap and a leap of faith.

All that said, I too was puzzled by a number of Steiner's other comments.

[Bylo Selhi]

I too was puzzled by a number of Steiner's other comments.

Could you elaborate please. (Or did the creation of the detailed rebuttal wear you out? )

[brucecohen]

Could you elaborate

1. As Smelly pointed out, Ontario’s phase-out is years away. (I wonder how a Stephen Harper govt would view the federal LSIF credit given their stand against corporate handouts in the last campaign)

2. Steiner’s numbers on the mandatory cash cushion were wrong and I found his related statements puzzling

3. Smelly was correct in noting that an LSIF can suspend redemptions if required, though that of course would kill it going forward

4. I question whether all LSIF investors should bail now. The DSC plus tax credit repayment would take quite a chunk out of the proceeds.

5. Steiner suggested that this is the time to invest, but did not say in what. As I’ve noted in this thread and others, the LSIF program has structural flaws. (FWIW, I hold one LSIF – Vengrowth II – bought outside my RRSP in 2001 but wouldn’t put in any more money.)

[DanH]

Could you elaborate

1. As Smelly pointed out, Ontario’s phase-out is years away. (I wonder how a Stephen Harper govt would view the federal LSIF credit given their stand against corporate handouts in the last campaign)

This is a fair point since Ontario went from "it's gone really soon" to "it stays as is for 3-4 years but then it's gone completely in 5-6 years". They've flip flopped and now the finance minister who made that decision is gone.

The industry will lobby, hard, to get this reversed.

4. I question whether all LSIF investors should bail now. The DSC plus tax credit repayment would take quite a chunk out of the proceeds.

Agreed. Plus, when performance perks up - not necessarily in general but on an individual fund basis - that may help keep funds more liquid.

5. Steiner suggested that this is the time to invest, but did not say in what. As I’ve noted in this thread and others, the LSIF program has structural flaws. (FWIW, I hold one LSIF – Vengrowth II – bought outside my RRSP in 2001 but wouldn’t put in any more money.)

Here's what he wrote...

The bright side of all this? I'd bet that the real venture funds that are left will make a pile as the LSIF venture capitalists head for the hills. The time for you to invest is, like, right now.

He's saying, I think, that it's a good time to invest in non-LSIF venture capital pools since the LSIFs will be dumping their investments to traditional venture pools as investors head for the exits. At least that's his take on it as a venture capitalist.

[smelly]

4. I question whether all LSIF investors should bail now. The DSC plus tax credit repayment would take quite a chunk out of the proceeds.

There are thousands of people who don't even sell when they can. Ask the LSIF companies. One once gave us a list of our clients who could sell without clawback. Since we research this and recomend redemption whenever we meet with clients, these people were "customers" not clients that haven't been in to see us in many years so there isn't much we could do or felt motivated to do beyond sending letters (which we did).

[smelly]

Smelly, Doug Steiner is a "real" venture capitalist who has invested his own money in creating and seeding small companies that later went public or were sold.

What happened to disclosing an author's credentials underneath the article so we know who he is and what his biases are? In this case I think Dougie's sittin' on a big crate of sour grapes

[smelly]

This is a fair point since Ontario went from "it's gone really soon" to "it stays as is for 3-4 years but then it's gone completely in 5-6 years". They've flip flopped and now the finance minister who made that decision is gone.

The industry will lobby, hard, to get this reversed.

According to the LSIF guys we met with last week (disclosure, they bought me and a couple of dozen other advisors lunch), they actually met with Daulton and Greg over the weekend after the announcement. Greg had no clue of the what an LSIF was or about any of the benefits. Daulton being from Ottawa where they know a bit about High Tech and the importance of venture capital (and his brother being an MP fom Ottawa and another brother involved in Ottawa city council) made it an easy sell. Post-poning was Daulton's way of helping Greg save face. But it's dead.

[Norbert Schlenker]

Judge dismisses Crocus investors' legal team

Plus ...

Retrocom Growth Funds Inc., a troubled labour-sponsored fund that has halted redemptions, has been hit with a $2-million lawsuit from an institutional investor.

The legal action, filed by the Sheet Metal Workers Local 30 Pension Trust Fund, is more bad news for the Toronto-based fund. In December, a flood of redemptions forced the $50-million fund to freeze its assets. Then, earlier this month, it warned its estimated 21,000 investors that its shares are expected to plunge.

"It has come to the attention of the fund that a significant reduction to its net asset value will be required as a result of the annual independent valuation of the fund's investments," Retrocom said in a Jan. 19 statement. In addition, the labour-sponsored fund (LSF) delayed until Feb. 28 the release of its audited financial statements for the year ended Aug. 31, 2005.

Retrocom sued by union pension fund

[patriot1]

Why would a non-taxable entity such as a pension fund invest in an LSF anyway? What's the whole story?

[brucecohen]

Why would a non-taxable entity such as a pension fund invest in an LSF anyway? What's the whole story?

AFAIK, Retrocom is the only LSIF with meaningful union investment. The fund is sponsored by one or more building trades unions and part of its mandate is to invest in construction projects. It was set up at a time when Ontario's construction industry was dead. The sponsoring unions kicked in real money -- not the nominal $1 -- in order to help it kick-start building projects.

[smelly]

Who can tell the class how/when you generate a capital gain or loss on the redemption of a LSIF? This is a trick question.

[brucecohen]

Who can tell the class how/when you generate a capital gain or loss on the redemption of a LSIF? This is a trick question.

If you sell at a loss, the capital loss for tax purposes is reduced by the amount of tax credits you received. I don't know any trick concerning triggering a capital gain.....mentioning capital gain and LSIF in the same sentence seems to be an oxymoron.