Moratorium will help labour fund sector, say experts

(May 19, 2004) The Ontario budget tabled yesterday demonstrated the ministry of finance’s understanding of the serious issues facing labour sponsored investment funds (LSIFs), according to the head of that sector’s industry association.

“I think it’s part of the maturity of the industry,” says Dale Patterson, executive director of the Association of Labour Sponsored Investment Funds. “It shows a further understanding that the ministry has of critical mass and what it takes to have a strong, vibrant venture capital industry.”

The budget included a moratorium on the creation of new LSIFs, pointing to the low inflows of cash at several of the new offerings this past tax-season. If a LSIF does not receive significant amounts of investment capital, they struggle to find investment opportunities, stifling their long-term viability.

“If no new LSIFs are allowed in Ontario, it will be a good move overall — but bad for firms that like launching new products every single year,” says industry analyst Dan Hallett, president of Dan Hallett & Associates. “Some of the LSIF mandates that exist don’t make a whole lot of sense to me so I’m happy to see some of them merged into the history books.”

Patterson agrees there have been too many new offerings in the past few years, with the increased competition making it difficult for any given fund to raise enough money to be considered a success. But he says the total amount of money taken in by these numerous offerings shows a strong interest on the part of the investing public.

“If you assume that the product is sold on the basis that people wanted to invest in labour sponsored funds, then one could argue that the money that went into these new products could have gone into other products that would have met critical mass,” he said.

The budget also proposed to ease restriction on LSIF mergers and takeovers. Patterson says it is too early to tell whether this will lead to larger funds taking over the smaller funds, or whether a consolidator will emerge among the small funds, merging them into a viable entity.

“The budget paper was bang on in stating that too many funds have an insufficient asset base,” said Hallett. “These funds are not doing their shareholders any favours. So, legislation to facilitate more mergers of LSIFs will be an opportunity for small LSIFs — and affected shareholders — to be saved from the prohibitive costs that accompany tiny asset bases.”

The provincial government also announced it would conduct a review of the entire LSIF program during the moratorium. Patterson’s association has been in discussions with the government “for months” and he is confident the review will help the industry.

“What they’re looking at is issues around the labour sponsored fund program and how you make a good thing better,” he said. “They understand the role we play on the public policy front and the role we play in job creation and economic development. It’s something we really do welcome.”

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