Labour-sponsored venture capital funds

[brucecohen]

I guess so but I'm still not clear on how they've done so badly.

That's easy to explain:
1. The management fees are extraordinarily high.
2. Ontario's rent-a-union setup was really a welfare program for venture capital managers who a few years earlier in the '80s were cut off by pension funds and life insurers because they had over-promised and woefully under-delivered.

To be fair, LSIF managers were handicapped somewhat because they had to keep a constant 20% liquidity cushion. But I believe the investment restrictions on that money have been eased considerably in recent years. Also, factoring that in still doesn't account for the lousy performance.

[tvenner]

What about the Dynamic Venture Opp Fund, seems to be able to at least keep it's head above water over time? Top 10 holdings:
1. Kaboose Inc.
2. Saxon Financial Inc.
3. BCE Inc.
4. TeraGo Inc.
5. Pethealth Inc.
6. Toronto-Dominion Bank (The)
7. Bank of Nova Scotia (The)
8. IGM Financial Inc.
9. Bank of Montreal
10. Eatsleepmusic Corporation

[uhoh]

well geez, i wish we'd been *sold* that one instead!

[Bylo Selhi]

How can something that owns BCE, TD, BNS, IGM, BMO et al in its top-10 be considered a venture capital fund (labour-sponsored or otherwise)?

[AltaRed]

How can something that owns BCE, TD, BNS, IGM, BMO et al in its top-10 be considered a venture capital fund (labour-sponsored or otherwise)?

Beats me. One must always look under the hood on this stuff to know what is going on.

[DanH]

How can something that owns BCE, TD, BNS, IGM, BMO et al in its top-10 be considered a venture capital fund (labour-sponsored or otherwise)?

Probably because a certain amount of the fund needs to be in "liquid assets". With such high fees, many funds went the route of holding notes linked to stock baskets or indexes. Perhaps the biggest liquid stocks in Canada qualify too. What's more liquid than BCE and the big financial firms?

Ray Benzinger deserves some credit for turning around what used to be called Integrated Growth Fund (which Dynamic bought in 1996) which sported a ~14% MER because of its high costs and tiny asset base (caused in part by its poor performance). Benzinger eventually turfed everything but kept Nu-Gro, which was eventually acquired a few years ago at a decent (but not rich) price. You could do worse than buy Dynamic Venture Opportunities fund.

[brucecohen]

Ray Benzinger deserves some credit for turning around what used to be called Integrated Growth Fund (which Dynamic bought in 1996) which sported a ~14% MER because of its high costs and tiny asset base (caused in part by its poor performance). Benzinger eventually turfed everything but kept Nu-Gro, which was eventually acquired a few years ago at a decent (but not rich) price. You could do worse than buy Dynamic Venture Opportunities fund.

And Ray's success belies the claim by other LSIF managers that their high fees are justified by all the time and effort they have to put in. For Ray it's a part-time job -- almost a hobby. His real job -- CFO of Dundee Bancorp -- would more than enough for most people.

[Big Bob]

How can something that owns BCE, TD, BNS, IGM, BMO et al in its top-10 be considered a venture capital fund (labour-sponsored or otherwise)?

It may not be precisely the same situation here but I once asked how my LSIF could hold Cisco and the answer was that one of their investments was bought out by Cisco and instead of cash, shareholders received shares of CSCO.

Had I been thinking I would have followed up by asking why they would continue to hold CSCO when it did not match the objective of the LSIF.

[DanH]

Ray Benzinger deserves some credit for turning around what used to be called Integrated Growth Fund (which Dynamic bought in 1996) which sported a ~14% MER because of its high costs and tiny asset base (caused in part by its poor performance). Benzinger eventually turfed everything but kept Nu-Gro, which was eventually acquired a few years ago at a decent (but not rich) price. You could do worse than buy Dynamic Venture Opportunities fund.

And Ray's success belies the claim by other LSIF managers that their high fees are justified by all the time and effort they have to put in. For Ray it's a part-time job -- almost a hobby. His real job -- CFO of Dundee Bancorp -- would more than enough for most people.

You may know better on this one, Bruce, but I recall that a big part of Ray's job was to manage Dundee Bancorp's corporate investments in private businesses. And, IIRC, at one point that activity stopped and the company invested some capital into DVOF.

Still, it's a low cost operation at the margin because Dynamic's back office handles the admin, Ray talks to Goodman & Co. portfolio managers when dealing with public companies, and there are other aspects of the larger company that are leveraged for the benefit of the DVOF labour fund.

It may not be precisely the same situation here but I once asked how my LSIF could hold Cisco and the answer was that one of their investments was bought out by Cisco and instead of cash, shareholders received shares of CSCO.

Had I been thinking I would have followed up by asking why they would continue to hold CSCO when it did not match the objective of the LSIF.

This is exactly the situation that revealed one of VenGrowth's weaknesses. As a major seller, often venture capitalists are required to hold onto the shares of the acquiring company for a specified period of time but venture capitalists have no business trying to manage a portfolio of publicly traded stocks because it's a very different focus and requires different skills.

[brucecohen]

You may know better on this one, Bruce, but I recall that a big part of Ray's job was to manage Dundee Bancorp's corporate investments in private businesses. And, IIRC, at one point that activity stopped and the company invested some capital into DVOF.

Ray was no doubt involved in Dundee's private business portfolio. I think all the big guys on that side were. Dundee is/was, after all, a merchant bank. But I'm not aware that it was a big part of his job.

I was there when they took over DVOF. AFAIK, they paid nothing for it. As you've pointed out, Integrated Growth was a disaster at that time and facing the real prospect of collapse. The story I got was that one of the directors asked Ned to attempt a rescue as a personal favor; Ned is extremely loyal to his longtime friends. Also, there was hope that it might generate pension business for Goodman & Co from the sponsoring union. The marketing department was strongly opposed to offering an LSIF, but had to go along. That said, only the most minimal effort was put into marketing until Ray began posting impressive returns.

While it's true that Ray benefits from synergy with other parts of Dundee Bancorp and Goodman & Co., synergies exist for all of Ontario's rent-a-union LSIF managers since they have other clients.

[Bylo Selhi]

This is exactly the situation that revealed one of VenGrowth's weaknesses. As a major seller, often venture capitalists are required to hold onto the shares of the acquiring company for a specified period of time

Fair enough. So what VC-financed companies did BCE, TD, BNS, IGM, and BMO acquire recently?

venture capitalists have no business trying to manage a portfolio of publicly traded stocks because it's a very different focus and requires different skills.

Fair enough. So why not replace half of their top-10 with a single, no-brainer holding of, say, XIU?

[DanH]

This is exactly the situation that revealed one of VenGrowth's weaknesses. As a major seller, often venture capitalists are required to hold onto the shares of the acquiring company for a specified period of time

Fair enough. So what VC-financed companies did BCE, TD, BNS, IGM, and BMO acquire recently?

venture capitalists have no business trying to manage a portfolio of publicly traded stocks because it's a very different focus and requires different skills.

Fair enough. So why not replace half of their top-10 with a single, no-brainer holding of, say, XIU?

In effect, many held something like XIU, but in linked note form (or something similar). As tax support was taken away, concessions were made in other areas - i.e. pacing requirements, publicly traded securities, etc. This explains, I suspect, why you're finding a certain amount of large cap Canada in DVOF.

[Shakespeare]

http://www.reportonbusiness.com/servlet ... iness/home

Most targets settle in Crocus suit

[A] settlement in principle will see audit firm PricewaterhouseCoopers LLP pay $6-million, the provincial government and the Manitoba Securities Commission pay $2.75-million, directors and officers of the fund contribute $3.15-million, and BMO Nesbitt Burns Inc. pay $100,000.

[Big Bob]

For anyone still following LSIFs I was interested to learn that the Canadian Medical Discoveries Fund has suspended redemptions (and subscriptions - you can make your own comments here). I managed to avoid this one but it makes me wonder if there is a point where one should take the 30% hit and get out while you still can.

From a tax perspective, if one was to sell out and lose the 30% (on the original purchase I might add, not the current value) in an RSP does this in some way off-set your over-all taxes or is it simply lost?

My apologies for the lame question but I am really not a tax guy.

[SoninlawofGus]

Wish I could. In our case, selling at a 45-60% loss in tax-sheltered accounts would net an overall loss after paying back the taxes.

For all us unlucky (and argubly not-too-smart) sods stuck holding these things for a few years to come, why doesn't Ontario start forgiving the tax hit? They are effectively admitting the program is a failure, CMDF noted that the loss of credits hurt their business, and now all holders are held "hostage" only because of that 8-year restriction.

For that matter, I wish the Government of Canada would review their policy and give the consumers a break on these things. Personally, I feel sucked by both the fund company and the federal and provincial governments. Granted, I didn't read the fine print back then -- but these things should never have been given special tax treatment. The fees alone are ridiculous, and the fund companies are guaranteed those fees for 8 long years.

[Big Bob]

I wouldn't be particularly worried if I held Dynamic Venture Opportunities, for example, and similarly, CI Funds has deep enough pockets if VentureLink is a concern but there are some other LSIFs I would be concerned about.

It may be an example of the tax tail wagging the investment dog but just the same, I can remember a time when the original Vengrowth was one of my better performers. Oh, for the days of irrational exuberance!

I wish some sort of break would happen but I'm not going to bet on it.

[Shakespeare]

I wish the Government of Canada would review their policy and give the consumers a break on these things

Our friend Merle Hazard again?

[SoninlawofGus]

Instead of H-E-D-G-E, he could call it L-S-I-F, but the song wouldn't sell well because fund-holders could not afford to buy it.

[Big Bob]

I suppose, then, the answer is to circle the clawback-free date in your datebook and hope that there are no CMDF-type surprises in store. Just as well that we were limited to $5000 per year.

It's just that when I see something like that I think that a 45-60% loss beats a 100% loss.

[SoninlawofGus]

Does anyone own the Talvest Axis fund, now owned by BEST? Sometime over the past month, it dropped over 30% in value (and is now worth a little over $1600, with 3.5 years to go!). Between the BEST and Axis Web sites, I've learned nothing -- which is to be expected.

[SoninlawofGus]

So, the Vengrowth I and II funds have frozen redemptions, promising an "annual distribution."

Sadly, we own this one. It's bad enough that it's mythically valued around 50% of what we paid for it, but now we can't even redeem the stupid thing at any price. Rather, we're left twitching in the wind with nothing but the faint hope of crumbs in August of every year. And, to add salt to the wounds, Vengrowth keeps collecting their 2% MER!

Perhaps someone can enlighten me: Does this announement mean that we cannot ever sell this fund? Does this mean we just have to wait for Vengrowth to give us whatever they're going to give us every August?

[randomwalker]

"...Perhaps someone can enlighten me: Does this announement mean that we cannot ever sell this fund? Does this mean we just have to wait for Vengrowth to give us whatever they're going to give us every August?

The answers to your questions are yes and yes. Buried on page 34 under "Share Capital Of The Fund" in the fund's prospectus is a "gate provision" allowing the fund manager to suspend redemptions or close the gate to allow for an orderly liquidation/ winding down of the fund. The problem of course is that labour sponsored funds are often involved in small illiquid often private companies that are not as easily valued as publicly traded ones and for which there may be no buyer or at least not at the price the fund wants to sell at.


http://www.vengrowth.com/pressDetails_id=779.html

"...Under the new distribution policy, the Board of each Fund will make a determination of the surplus cash available to be distributed to shareholders at the completion of each fiscal year, starting August 31, 2009...In light of economic and stock market turmoil, the Funds find themselves with what they believe to be portfolios of high quality private companies, but without an environment conducive to exit events to generate cash to fund redemptions..."


http://www.sedar.com/GetFile.do?lang=EN ... OSPECT.pdf

"The Fund is entitled to suspend the right of holders of Class A Shares to redeem Class A Shares and/or delay the date for
payment of the Redemption Amount in respect to any redeemed Class A Share for the whole or any part of any period during
which the consent of the Ontario Securities Commission has been obtained."


http://www.sedar.com/GetFile.do?lang=EN ... th-Dec.pdf

In the Matter of the Process for Exemptive Relief Applications in Multiple Jurisdictions and In the Matter of VenGrowth II Capital Management Inc.
(the Fund Manager)

[kcowan]

Perhaps someone can enlighten me: Does this announement mean that we cannot ever sell this fund? Does this mean we just have to wait for Vengrowth to give us whatever they're going to give us every August?

I think this might be their way of ensuring that you get something out of your investment rather than almost nothing. With illiquid assets, the price of an urgent disposition is often much less than book value. They are probably doing you a favour.

[SoninlawofGus]

Thanks randomwalker and kcowan.

I just wish they would more accurately value these things (or that the OSC or somebody would force them to do so). It does little good to show a valuation in my discount brokerage account that is essentially meaningless. Practically speaking, these funds today have a value of $0 -- and I don't believe the number they're showing me has any meaning. It cannot be sold, so it has no value. The same would be true of any frozen asset.

[DavidR]

I was going over my list of LSIF funds on the weekend and found that 2 of the 3 that I purchased in February 2001 aren't accepting redemptions any more. (Medical Discoveries and Vengrowth II). Covington II however can be sold.

To avoid clawbacks of course you normally have to hold them 8 years from the date of purchase. But did you know there is a special rule that allows you to get out 30 days earlier (for units purchased in the month of February) without clawback of tax credits? It's true, although Covington still wants their DSC unless I wait until March. But I'm getting out now while the getting is good.