Frozen LSIF chills investors

You can excuse Manitoba investors if they’re having a bad case of déjà vu this RRSP season.

Thousands of them have recently had their investments in the Vancouver-based GrowthWorks Canadian Fund frozen as it attempts to avoid a crippling wave of redemptions.

GrowthWorks, which acquired ENSIS Growth Fund, the last remaining labour-sponsored fund in Manitoba, in 2008, has received permission from regulators to halt redemptions until mid-April while it waits for a ruling on a proposed “redemption management plan.”

Under the proposal, GrowthWorks would enable investors to redeem their funds during two annual windows, up to a pre-determined maximum.

The issues with the Canadian Fund have no impact on the operations of other GrowthWorks properties, including its Commercialization Fund.

Tim Lee, chief investment officer for venture capital at GrowthWorks Capital Ltd., says the fund’s cash crunch is a result of the markets for mergers and acquisitions and initial public offerings going south in the second half of 2011.

“The exit pace (of the Canadian Fund) had been clipping along at a good pace until the middle of last year. That really impeded our ability to generate cash-generating exits that we had planned,” he says.

“To ensure value is preserved for our shareholders, we opted to propose this plan that will allow the fund to manage its cash flows and give the portfolio time to realize on cash exits. We need regulators to provide their approval. Our hope is it comes very shortly.”

The company says 15 registered IPOs in the U.S. were withdrawn in August, 2011, the highest number in any month in the past decade.

The annual redemption value for the first year of redemptions under the plan has been set at $20 million, representing more than 20% of the fund’s mature Class A shares and more than 10% of its net asset value. According to the fund’s most recent figures, its NAV is approximately $200 million, down from about $350 million two years ago.

Sales have also been halted as both the management and the board focus on exiting companies in the portfolio and returning capital to shareholders, Lee says. The fund’s objective is to return to weekly unrestricted redemptions within two years.

Lee says the Canadian Fund has a decade-long track record of satisfying redemption obligations when they come due. Paying out all of the redemptions that were expected this year would not preserve capital needed for follow-on investments, he says.

The plan is designed as a temporary measure and will be scrapped if conditions improve, he says.

“While we’ve seen the exit window get highly compressed over the last six months, we know that markets (eventually) free up. We have every confidence that we’ll get back to our previous pace of exits, if not higher,” he says.

The Canadian Fund had been available to investors in Ontario, Saskatchewan and Manitoba, but it’s the latter province where the news is hitting particularly close to home.

Nearly seven-and-a-half years ago, the Crocus Investment Fund ceased trading amid allegations of overinflated valuations of the companies in its portfolio. Within months, it had been placed into receivership, been the subject of a scathing review by the auditor general and given a black eye to the entire venture capital sector.

Read: Manitoba regulator sets date for Crocus hearing

Liquidating the Crocus assets, which totalled more than $150 million when the trouble came to light in the fall of 2004, has been an exercise in extreme patience as money has been very slow to flow to investors. Nearly $55 million was distributed in the fall of 2009 and a further $9 million was paid out just this month. The fund still has about $7.3 million in short-term investments and bonds as well as debt and equity holdings with a carrying value of nearly $10 million in 10 Manitoba companies.

Financial advisors in Winnipeg who have been trying to put the Crocus fiasco behind them for years, have been forced by GrowthWorks’ actions to revisit the issue with their clients.

One advisor, who requested anonymity, says with the proposed cap on the Canadian Fund, investors could very well be forced to wait for several years before they could redeem their funds, above and beyond the eight-year minimum hold period.

“From a liquidity point of view, it’s looking pretty similar (to Crocus),” the advisor says.

In approving GrowthWorks’ request to stop redemptions until mid-April, the British Columbia Securities Commission says there are exceptions in which investors can be paid out—if they become disabled and permanently unfit for work or terminal ill; or they receive shares through a will.