Canada’s labour sponsored funds are delivering dismal performance to shareholders because the fund companies sponsoring them are pre-occupied with asset gathering, according to research by two industry experts.

“As a category, LSIFs have been very focused on raising capital, but have been unable to deliver good returns to shareholders,” says Julie Makepeace, Managing Director of IPM Funds.

The 14-year veteran of the LSIF industry says there are three reasons for the poor performance by the sector.

“First, because LSIFs are required by law to invest 70% of the capital they raise within 22 months, having too much money at the managers’ disposal means it’s very difficult to do justice to the thorough due diligence process required to make good venture capital investments. Second, once investments are made, the sheer volume of portfolio companies compromises the ability of large LSIFs to engage in the sort of hands-on, company-building added value that sets good venture capital investment management firms apart. Third, the continuous offering structure, and the pre-occupation with ‘critical mass’ that exists with many LSIFs — combined with a manager paid first approach — is significantly undermining long-term investment performance.”

“The average performance of labour-sponsored funds in Ontario has been negative across one, three, five and 10-year periods to December 31, 2003 at -5.22%, -12.93%, -3.08%, and -3.40%, respectively,” says Makepeace.

In comparison, she says the average 5-year return to June 2003 for early stage venture capital in the U.S. is 47.9%, and it’s 18.6% for balanced and 7.3% for later stage venture capital.

Makepeace says this difference isn’t because U.S. private companies are delivering better performance than their Canadian counterparts. “The difference is very poor performance from LSIF managers.

She notes that the weak performance has seen sales of Ontario LSIFs decline significantly over the past three years, from $649 million in 2001 to just $267 million in 2003.

John Willson, a Managing Director of IPM and a 25-year veteran of the mutual fund industry, says “fund size is definitely an issue. Based on our research of private venture capital pools, successful venture investment teams don’t try to manage much more than $100 to $150 million.”

Makepeace and Willson reached these conclusions based on research over the past year. They say they have used their research to develop a new approach to venture capital investing for retail investors embodied with the newly launched Terra Firma Funds.

According the pair, the new funds:

  • use a closed structure with a maturity date on the 8th anniversary, allowing portfolio performance to develop undiluted and peak at precisely the time investors are looking to redeem;
  • charge lower fees; and
  • take a “shareholders-paid-first” approach by eliminating the managers’ ability to receive performance bonuses until and unless shareholders have received 75% of those net realized gains by way of cash dividends.



Another difference between Terra Firma Funds and other LSIFs is that Terra Firma uses independent, venture capital investment management specialists: CastleHill Ventures and The Harbinger Ventures Group.