GrowthWorks defends management fees on flailing fund

After being frozen out for 13 months, shareholders of GrowthWorks Canadian Fund might finally get some money back.

The Vancouver-based labour-sponsored fund, fresh off having its redemption management plan kyboshed by regulators on November 29, is now open for redemption requests.

Under the rejected plan put forward in November 2011, the fund would have enabled investors to redeem their shares twice a year up to an annual total of $20 million.

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In his decision, Peter Brady, director of corporate finance at the British Columbia Securities Commission, considered whether approving the redemption management plan “would not be prejudicial to the public interest.”

He wrote, “I have not come to that conclusion and, accordingly, I deny the requested relief.”

David Levi, president of GrowthWorks, says the fund’s current strategy is to provide at least one month’s notice to shareholders when capital is available for redemptions. The process will be done on a pro-rata basis.

“The redemptions will be voluntary. It won’t be forcing people to redeem if they have to pay a tax penalty [for having held the units for less than the mandatory eight-year period],” he says.

Under the Canadian Business Corporations Act, a company can’t pay out dividends or redemptions if it doesn’t have sufficient cash on hand to remain solvent, Levi adds.

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Thousands of shareholders wanting their money back isn’t the only demand on GrowthWorks’ capital. The fund also has $11.7 million to pay by December 20 to the Working Opportunities Fund, which is also managed by GrowthWorks Capital, and $27.2 million to Roseway Capital L.P., a venture capital investment fund, by May 28.

But GrowthWorks says there can be “no assurance” when it will have enough cash to process redemptions.

Its debt obligations to Working Opportunities and Roseway appear to have precedence over shareholders as the fund says those payments are secured by charges over the fund’s portfolio and proceeds from the sale of its investee companies.

“If Canadian Fund were to default on its obligations under the financing arrangements, the security over Canadian Fund’s assets may be enforced, which could result in forced divestments at values well below carrying values and a significant decline in Class A share values,” the fund says.

According to its financial statements for the year ended August 31, 2012, cash reserves are at $160,000, down from $1.87 million a year earlier.

The share price has been in steady decline for more than five years. At the beginning of 2007 it was north of $10. As of this week, it sat at $5.62, down about 15% in 2012.

Shareholders can download the redemption request form from the fund’s website.

Some investors have criticized GrowthWorks for not waiving its management fees while the fund was in trouble. Levi defends the move, saying the company needs to pay its employees and has to work extra hard during difficult times.

“We have certainly worked hard to earn our fees. The fund needs a manager, that’s very clear. It can’t be left unmanaged,” he says. And, “We have essentially worked without pay for almost a year in terms of our supporting the fund.”

That being said, Levi says he expects the $2.5 million the manager didn’t collect over the past 12 months to be repaid eventually.

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“We realize the fund has a short-term liquidity issue. The manager is doing everything it can to provide liquidity for shareholders and help it meet all of its obligations,” he says.

The fund was also criticized for borrowing $4 million in May to pay management fees. Levi says most of that capital was put towards a follow-on investment for one of its companies.

The fund has nearly 50 companies in its portfolio, with investments ranging from $200,000 to more than $20 million.

One Winnipeg-based advisor, who asked that his name not be used, says he is telling his clients to write off their investment in the GrowthWorks Canadian fund.

“Don’t expect to see a penny out of this thing,” he says.

The advisor lays the blame squarely at the feet of Levi and his management team, in particular for the borrowing of millions of dollars to pay management fees.

“The peripheral countries in Europe taught us one thing – if you borrow more and more to support a lifestyle that you can’t sustain, it eventually comes home to roost,” he says.

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Until the middle of 2011, GrowthWorks was realizing up to $50 million annually from selling positions in its investee companies. But then the bottom fell out of the IPO and M&A markets and the cash stopped coming in. Only recently has the tide started to turn. Levi says the fund has realized up to $4 million on a number of small sales in the last few months of 2012.