Labour fund revolutionary beats a tactical retreat

“It’s definitely a superior model and I think we’ve really shaken up the labour fund industry and drawn people’s attention to it,” she says. “This model is better for the shareholders. These products need to have a maturity date that is coincident with when the shareholders would be logically looking to redeem at the end of their term.

“If they do mature at that point, then the venture capital managers can be moving the portfolio to peak performance at that point, so you’re not constantly diluting the returns with the inflows of capital. It’s the only model used in the private equity funds, because those are discerning investors who wouldn’t tolerate it.”

So if the product itself was superior, what went wrong?

“We should have mounted a bigger, more aggressive marketing campaign and we were a little bit late,” Makepeace admits. “We launched the funds in the middle of January and it’s very difficult for the financial advisor to entertain a new labour sponsored fund in the middle of January — their RSP season is in full swing by then. We needed to be out there talking to them in September and October.”

Makepeace says it is difficult to attract enough capital in a single season to fully fund the management company, but hopes to re-launch the funds this fall for the 2004-2005 RRSP season.

But Hallett says launching the very same funds a year later doesn’t sound like it has a high probability of success, given the apparent narrow interest the first time around. “Then there’s the Ontario moratorium on new LSIFs. I suppose the only way around the moratorium is if Terra Firma returns unitholders’ money but doesn’t actually fold the funds — hence allowing them to ‘re-market’ them next year.”

Investors who received the LSIF tax credit in the spring will see this amount deducted from their redemption as a withholding tax, as there is no provision in the relevant tax acts to allow for a transfer to another firm. Makepeace points out that this “nets out” in the end, but investors may still fell burned.

“The shareholders don’t lose anything, but they don’t benefit from that tax credit,” She says. “It’s unfortunate that we have not been able to raise the capital in the management company to finance the ongoing operation of the Terra Firma funds, because I really believe they are a superior product.”

“Investor confidence won’t be shaken as a result of Terra Firma’s proposed liquidation but I hope it makes investors and advisors think twice about new LSIFs,” says Hallett. “It doesn’t mean you avoid them altogether, but you’ve got to have more than a good story. Advisors have to look further down the road to the fund’s ability to raise a sufficient amount of money.”

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