A new closed-ended fund founded by several mutual fund industry veterans is seeking to go public — and its offering contains an unusual kicker for investors.
Investors who buy the Class A non-voting shares of Cymbria Corp. also get a chunk of the investment management company, EdgePoint Wealth Management Inc. of Toronto. Cymbria aims to achieve long-term capital appreciation by investing largely in global equities.
The share of the money manager held by Cymbria’s investors will depend on how much the fund raises. If Cymbria raises at least $100 million, its investors will end up with a 10% stake in EdgePoint. If the fund can find $750 million, its investors will have a 40% stake. That’s the maximum percentage that outside investors can own in EdgePoint.
Fledgling money manager EdgePoint was founded earlier this year by mutual fund industry veterans Robert Krembil, Tye Bousada, Patrick Farmer and Geoff McDonald.
All are former executives or managers with Trimark Financial Corp. and its successor firm Invesco Trimark Ltd. In 1981, Krembil was one of the founders of Trimark, a value-oriented manager that ultimately went public and was acquired by Amvescap LLC for $2.7 billion in 2000. It operated as AIM Funds Management Inc. until the recent name change.
EdgePoint’s four co-founders have considerable amounts of their own resources invested in Cymbria. They have agreed to acquire $22-million worth of Class J shares.
“EdgePoint believes that the wealth-management company has the potential to be a material contributor to the long-term value of [Cymbria],” Cymbria’s recently amended preliminary prospectus notes. “However, this investment will require only a minimal amount of capital in proportion to the size of the offering.”
Cymbria’s structure is potentially attractive because new investors are allowed to get in on the ground floor of the money manager alongside the management team. In a more conventional investment model, investors are offered a stake only in the funds that are sold by the manager.
Only later are they offered a stake in the fund manager — providing it decides to go public. For instance, it took Trimark more than a decade to go from a start-up mutual fund company to a publicly listed money-management firm.
There have been many studies over the years that have shown that investors are better off if they own a piece of the management company, as opposed to having a stake in one of the manager’s mutual funds. In the Cymbria offering, investors are getting shares in both.
Aside from getting a stake in the money manager, a three-year moratorium on management fees is another unusual wrinkle about Cymbria’s offering.
For the first three years, EdgePoint won’t charge Cymbria a fee for investing the proceeds of the offering. For Years 4 through 7, EdgePoint will charge a management fee of 0.75% of the net asset value of the Cymbria shares. In Year 8 and thereafter, the fee will be 1% of NAV.
For investment advisors selling Cymbria, however, a service or trailer fee will be paid all the way through. Advisors stand to collect a service fee of 1% a year. But the service fee won’t be paid after seven years.
Although the opportunity to get a chunk of the money manager may be attractive to some, clients should not lose sight of the investment focus of the company — global equities. Given the recent global stock market meltdown, some advisors believe that venturing outside of Canada isn’t a smart move — especially when exchange-rate risk is added to the mix. So far this year, all the major international markets are down by at least 20%, a performance shared by the S&P/TSX composite index.
Given that decline — and the ongoing uncertainty — now may not be the time to get back in. Then again, some investors — for example, Warren Buffett — have decided that now is the time to buy good-quality global firms. Buffett recently invested billions in each of Goldman Sachs Group Inc. and General Electric Co.
Cymbria’s approach to going public, and the structure it has adopted to provide investors with a stake in the money manager, is unique in Canada. Several other firms have sought to achieve similar outcomes using different strategies.
For instance, when Stone Investment Group Ltd. of Toronto was formed in 1994, founder Richard Stone created a limited partnership and invited in a group of limited partners to finance the operation. Stone raised $495,000 from 48 investors who were attracted to the offering because the general partner could flow through to them the losses on the money-management operation. In time, the limited partners became shareholders of the company.
@page_break@Winnipeg-based Value Partners Investments Inc. has taken a different tack: it invites financial advisors to become investors in the mutual fund management company. Those advisors make that investment via an offering memorandum, a document circulated to investors who meet the so-called “accredited investor” rules.
Greg Filmon, president of Value Partners, says the firm “has a private-equity offering to specific people whom we are inviting to be shareholders. It is not an open offering to anybody.”
The firm believes that a select group of what it calls “ethical and experienced advisors” make the best shareholders of a mutual fund company because they can provide the clearest recommendations on how to meet the needs of unitholders of the mutual funds managed by the fund manager.
A senior company officer’s discretionary family trust holds 50.4% of the company. No advisor holds more than 5% of the common equity of Value Partners. IE
Buying a fund — and the manager, too
Unusual offering from Cymbria Corp. gives investors the opportunity to get a slice of the investment manager
- By: Barry Critchley
- October 15, 2008 October 30, 2019
- 09:52