New breed of

(January 15, 2004) A Toronto-based firm is shaking up the labour-sponsored investment fund (LSIF) industry, today introducing three closed-end labour funds that promise lower management fees.

The three Terra Firma funds from IPM Capital, available in Ontario, are the brainchild of two industry veterans: Julie Makepeace, a founding executive of Canada’s first labour fund Working Ventures, and John Willson, former chief financial officer at YMG Capital.

Makepeace says that although venture capital has been a lucrative asset class for institutional investors, retail investors have largely missed out on the performance because of the open-ended structure of most labour-sponsored funds. “We’ve addressed those shortcomings and believe we offer something of tremendous value for retail investors at a very promising time in the economic cycle,” Makepeace said in a news release.

The company says that because the funds are closed after the initial capital is raised, shareholders will benefit from the full return potential of venture capital investing rather than see their returns diluted, as is the case with the continuous offering structure used by most Canadian labour funds.

“Shareholders will also receive realized gains through cash dividends paid during the eight-year holding period,” IPM Capital says, as well as qualifying for a tax credit on the first $5,000 invested.

IPM Capital claims the management expense ratio on its three funds will be around 4%, compared to between 6% and 11% for other labour funds. As well, no performance bonuses will be paid to fund managers until shareholders have received 75% of gains by way of cash dividends, a change IPM Capital says is in “sharp contrast” to existing labour funds.

“The fee structure is innovative — and lower — than the prevailing structure,” comments independent fund industry analyst Dan Hallett. “And the closed nature is a positive if they raise a sufficient amount of money.”

The closed concept isn’t totally new, Hallett adds, since others have closed pools and launched subsequent pools. “However, charging lower fees on cash, and levying performance fees only after shareholders receive their cash share of realized gains is innovative and shareholder friendly.”

Hallett says he doesn’t specifically recommend new labour funds, due in part to fund-raising uncertainty, but he says the developments presented in this new offering are “significant.”

Author and fund industry commentator Steven Kelman predicts that Terra Firma could get the lion’s share of Ontario’s labour fund market this year.

The Terra Firma Income Fund, Terra Firma Equity Fund and Terra Firma Emerging Companies Fund will be open to investors up to March 1. The funds all mature on March 1, 2012.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com