Before diving into a discussion of the prolonged labour needed to give birth to the latest U.S. income trust, B&G Foods Holding, let's take a moment to review the growing pains of the Canadian trust industry.
It's easy to forget, when the sector's now worth $90-billion, but the concept of a business trust was greeted with near-universal skepticism when mattress maker SCI Income Fund was created in 1997. The pioneering initial public offering from the company raised just $76.5-million.
In another landmark development, Superior Plus started out as a propane play, then successfully diversified into chemicals on its way to becoming a $2.5-billion trust. And mighty Yellow Pages Group, now commanding a market capitalization of $4.5-billion, was built through a series of unit sales over the past two years.
So what to make of B&G Foods? On first glance, the taco-and-salsa maker's debut seems to be missing some spice. RBC Dominion Securities led what's only the second such offering in the U.S. market, and raised $261-million (U.S.) against a preliminary target of up to $560-million.
Falling short of that initial goal, after a seven-month IPO process, could be seen as a setback in a sector that's previously seen several companies pull offerings, while more than a dozen deals, worth billions, are lined up, ready to go.
Dig deeper and recall the Canadian experience, and it becomes clear that the critical element of the B&G Foods IPO was that it did get done. And $261-million buys a whole lot of tacos.
RBC can now go to other American clients and demonstrate the merits of what it calls an enhanced income security. It joins a club of dealers with just one other member, CIBC World Markets, which led a $275-million offering for catering company Volume Services America in December, 2003.
With its units now trading, B&G Foods can keep selling salsa and build a track record for handing out the cash it generates. You have to believe the company's major shareholder, private equity firm Bruckmann Rosser & Sherrill, will cash in more of its holdings by selling additional units. Over time, the public float will grow, and with it, an investor following.
The trust structure was always going to be a more difficult sell in the American market, as income-hungry investors find more on the menu than they do in Canada, with offerings that include high-yield bonds. But the success of the B&G Foods offering shows this sector does have potential in the United States. Two successful IPOs show deals can get done. Remember, a major component of the Canadian capital market sprang from far humbler origins.
It's all about income
To understand the fertile ground that has given rise to Canadian trusts, look at the long-term trends in domestic mutual funds.
At the end of 2000, when total mutual fund assets were in the $400-billion range, Canadian bond and income funds held 6.5 per cent of industry assets. Dividend and income funds accounted for another 4.5 per cent of assets.
Both types of funds have been steadily scooping up money for the past three years.
So why are trusts so popular in Canada? In part because they offered just what domestic fund managers needed at a time when demand for income products more than doubled in 36 months.
Going international in Yorkville
Part of the attraction of Toronto's Yorkville neighbourhood is it doesn't feel like Toronto. High-end boutiques and swish restaurants abound. Squint, and you're in Milan or New York. The international flavour doesn't stop there. Money manager Diversified Global Asset Management (DGAM) was set up on the second floor of a Yorkville complex in August, offering institutional clients a fund-of-hedge-funds approach to alternative assets. Out of the gate, founders George Main and Neil Selfe, formerly a senior investment banker at RBC Dominion, have garnered more than $600-million in assets.
Most clients are based in Europe and the United States, and foreign firms account for the bulk of the 37 hedge funds that are investing DGAM's money.
Domestic talent is needed to work with clients and external money managers. This week, DGAM welcomed Warren Wright as a managing director, charged with selecting outside hedge funds and keeping an eye on how portfolios are put together. DGAM is backing 24 distinct strategies, including cutting-edge hedge fund approaches such as catastrophe bonds and credit arbitrage.
Mr. Wright was most recently running the hedge fund portfolio at Toronto-based Northwater Capital Management, which runs the largest independent fund-of-hedge- funds in the country. Mr. Main was previously the chief investment officer at Northwater.
© 2007 The Globe and Mail. All rights reserved.
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