A flood of redemptions has forced a Toronto labour-sponsored fund to freeze almost $50-million, yet another nasty surprise for the troubled asset class.
Retrocom Growth Fund Inc. took the surprising step of suspending redemption payments on Dec. 23 after a stampede of large and small investors wishing to exit its real estate development fund. The freeze affects about 21,000 investors, including a handful of institutions that have each invested a minimum of $1-million.
The 10-year-old labour-sponsored fund (LSF) holds interests in bowling alleys, ice rinks, residential developments and the underperforming Retrocom Mid-Market Real Estate Investment Trust.
The fund will meet its obligations to investors by selling off assets to the highest bidder, spokesman Paul McKenna said. "The strategy going forward is to raise the cash through the disposition of properties. The board is meeting regularly to assess the situation, look at the properties, evaluate which ones to be disposed of, and in which order."
Mr. McKenna blamed the Ontario government's plan to unwind its tax credit benefiting LSFs for Retrocom's liquidity crunch. Ontario residents who invest $5,000 and have owned a fund for eight years receive a 30-per-cent combined provincial and federal tax credit.
But on Sept. 30 last year, the province said it would shrink its 15-per-cent credit over the next five years, and end it by 2011. The news affects more than 40 Ontario LSFs, which collectively have about $3-billion in assets under management.
"People are looking at it and saying 'I would rather redeem than wait to see what happens," Mr. McKenna said. "The outlook for raising capital in the labour-sponsored sector is not all that positive. The new cash flow into the fund is not going to be anything anybody will be happy with."
Several LSF funds contacted disagreed, reporting the future end of the Ontario credit has had little effect on business. For example, the $200-million VentureLink Group of Funds of Toronto reports a "very small redemption return rate" and "a positive reception" from financial advisers, managing partner John Varghese said.
Ontario's decision has meant "zero impact" on redemptions and fund flows at Vengrowth Capital Partners Inc., managing director David Ferguson said. The Toronto firm manages more than $1.1-billion in LSF funds.
"Size does matter in this sector, from the ability to consistently raise money, to get access to better-quality deal flow, to hiring the best investing talent," he said.
David Levi, president and chief executive officer of GrowthWorks Capital Ltd., the Vancouver-based manager of about $850-million in funds, described Retrocom as an LSF anomaly. The fund's real estate portfolio has limited upside, and its large institutional following lent itself to liquidity problems, he said.
"Their situation is quite different than everybody else," he said, predicting more consolidation. [Ontario's changes] have caused a lot of smaller funds to realize they are not growing fast enough, and they have got to start looking to be acquired."
Nevertheless, Retrocom's decision to end redemptions is another black eye for the sector. Returns in the tech-dominated asset class have been weak, and small investors are expected to lose millions because of the alleged mismanagement of Winnipeg's Crocus Investment Fund.
Thunder bay financial adviser Michael Morrow suggests avoiding the asset class. He fears Retrocom may be the first of many LSFs to face a cash crunch if and when investors choose to exit. "The real key issue is: For the people buying now, what is going to be left? Without the tax credits, the contributions are certainly going to be less."
The big chill
A flood of redemptions has forced Retrocom Growth, _a Toronto labour-sponsored fund, to freeze close to $50-million invested in real estate developments, more bad news for the troubled asset class. The LSF took the step of suspending redemption payments on Dec. 23 following a stampede of large and small investors wishing to exit the fund.
Average returns for LSIF
(as of Dec. 31, 2005)
Fund Sponsor: Retrocom Growth
Fund Type: Open-Ended
Inception Date: April,1995
Mgmt Expense Ratio (MER): 3.25%
Asset Class: Labour-Sponsored Venture Capital
Sponsors: International Brotherhood of Electrical Workers, Building and Construction Trades Department, Ontario Pipes Trades Council, Construction Counsel of Ontario
SOURCES: GLOBEINVESTOR.COM, RGFJJOBS.COM
© 2007 The Globe and Mail. All rights reserved.
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