Crocus problems called

(July 14, 2005) While there have been dire predictions of more labour-sponsored investment funds (LSIFs) breaking down in the wake of Crocus, experts in the private equity industry say it appears to be an exceptional case.

“While it is a labour-sponsored fund, I think it really is just an isolated incident of corporate governance breakdown. It could happen in any industry,” says David Ferguson, managing general partner, Vengrowth Private Equity Partners. “I don’t think its any reflection on the underlying asset class or any other fund.”

Ferguson admits that there are valid criticisms about the performance of some LSIFs, but he says the problems with Crocus started at the outset, with a complete lack of private equity investment experience on the board, and no governance policies, procedures or oversight in place.

The Auditor General of Manitoba issued a report after investigating the fund and made a series of recommendations regarding internal controls that simply did not exist.

“The rest of the industry looked at this and for the most it was just basic, basic stuff,” says Ferguson.

But what made Crocus unique in the LSIF category before governance broke down was its investment mandate, which served what the company called “multiple bottom lines,” meaning investments were not only supposed to generate a decent return, but also had to serve a social purpose.

“Crocus was interesting because they had a real social objective, which you don’t find with Ontario-based labour sponsored funds,” says Ferguson.

“When we make an investment, there’s really one objective: will this investment have a strong prospect of producing a superior rate of return for our shareholders,” he says. “All the other stuff that happens, like research and development spending, exports, employment, are just natural bi-products of investment. You don’t go into an investment saying ‘I want to increase employment’.”

He says several of Crocus’s investments are clearly aimed at social development, unconstrained by sound investment policy. The fund appeared to be closely linked to what many see as the role of government and in fact there were members of the provincial legislature sitting on the Crocus board.

“Crocus was absolutely unique,” he says. “You’ll never find another labour-sponsored fund talking about serving multiple bottom lines and you won’t find government officials sitting on the board of directors.”

Ferguson says advisor reaction to Crocus has demonstrated an understanding that the problems were exclusive to that fund. Of the approximately 8,000 advisors selling Vengrowth products, he says he has only received two calls expressing concern.

“Without a question it was unfortunate and it will cause people to wonder about the whole labour-sponsored fund program,” he says. “We really do believe it’s an isolated incident.”

It is still not entirely clear what will become of the companies that Crocus had funded. Ferguson says the portfolio may be taken over by new management or the investments may be sold off individually to new stakeholders, assuming the meet their investment criteria.

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“We’ll take a look at some of the investments,” he says. “From what we hear there are some good investments in the portfolio.”

Those that were strictly social investments could well find themselves high and dry when their existing capital is eventually spent.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(07/14/05)

Steven Lamb