Lee-Chin’s second coming

AIC’s fortunes eventually foundered on the shoals of disappointing performance – assets under management (AUM) fell to $3.8 billion from a peak of about $15 billion in 2002 – before the firm was sold to Toronto-based Manulife Financial Corp. three years ago. However, Lee-Chin’s personal portfolio has been bolstered in recent years by his holdings in private companies – and it is this kind of diversification that he wants to add to the toolkits of ordinary investors.

“I’m nervous and excited,” says Lee-Chin of his new venture. “There is a systemic dysfunctionality in the way portfolios are constructed for the retail client due to lack of access to private equity, and I see an opportunity to change it.” In essence, he says he wants to “democratize what has previously been the purview of wealthy investors and institutions like pension funds.”

Expected to be available on Oct. 1, the new Portland fund lineup will include three private equity funds and three traditional mutual funds. The mutual funds, including two equity funds and one income fund, will seek to own concentrated portfolios of superior businesses for the long term, similar to the strategy employed at AIC. Minimum investment for the mutual funds will be $250.

On the private-equity side, instead of focusing on publicly traded securities, the new Portland funds will take stakes in private businesses spanning the spectrum of industries, including oil and gas, telecommunications, real estate, power plants, shipping ports and airports. With private companies, valuations are not subject to the same volatile swings as those for companies whose shares are traded in public markets. The private-equity funds will be sold by offering memorandum rather than prospectus, narrowing the target audience to accredited investors. Minimum investment for those funds will be $10,000.

Lee-Chin says wealth is created most efficiently by private businesses, when the owner is “chief bottle washer and has skin in the game.” Private firms often are managed by strong, visionary leaders who have primary control over the firm’s direction and strategy, he says. As private companies are not priced every day in the stock market and management decisions aren’t inhibited by stock analysts’ reactions to quarterly results, business owners are able to focus on long-term strategies.

When there is a team of people running a business, decisions require more compromises, Lee-Chin says, referring to the hired management teams and boards of directors who set the course for many large public companies. These people usually are compensated whether they make good business decisions or not, he says.

However, the fact there is no daily public market for the shares of private businesses means that the assets in the private-equity funds are not liquid. Value of the holdings in the Portland funds will be realized ultimately through a liquidity event, Lee-Chin says, such as the sale of the company, a refinancing through debt or equity, or a public listing.

To match the illiquidity of the assets, the private-equity funds will be structured in such a way that investors’ capital will be committed to the funds for several years before the funds are wound up. Investors may then cash out in stages, he says, as investments are “harvested.” Says Lee-Chin: “As fund managers, if we invest in a private business, we will need to know the exit before we go in – and the time frame.”

Because of these liquidity issues, Lee-Chin says investors are best served by holding a mix of private equity and liquid vehicles, such as mutual funds, in their portfolios, which is why Portland will offer both products: “It makes sense to build portfolios that are more like pension funds, with a mix of public and private holdings.”

The launch of Lee-Chin’s new venture may mark another turning point in the dramatic career of the self-made billionaire. After his beginnings as a mutual fund salesman at Toronto-based Regal Capital Planners Ltd. and Winnipeg-based Investors Group Inc., Lee-Chin recognized the profit opportunities in owning and managing the products he was selling, so he bought AIC in 1987 as the vehicle to launch a family of funds and receive lucrative management fees on the assets.

At the time, AIC was a fledgling money-management firm with less than $1 million in AUM. Using Warren Buffett’s long-term “buy and hold” philosophy and concentrating heavily in wealth-management and financial services companies, AIC then rode a wave of strong performance for more than a decade as assets flowed into the funds. By 2002, AUM had surged to $15.4 billion and Lee-Chin had amassed a personal fortune estimated at more than $2 billion.

Subsequently, performance began to lag as the market turned its favour to resources stocks and income trusts, securities that were absent from AIC portfolios because they didn’t meet Lee-Chin’s investment criteria. Lee-Chin held fast to his investment strategy as AUM flowed out the door, but, in 2009, when AIC’s AUM had fallen by 75% to $3.8 billion, he finally sold AIC’s retail fund business to Manulife in return for an undisclosed amount of Manulife stock. (Manulife’s stock price has subsequently slipped to about $11 a share from around $22.)

After the sale of AIC, Lee-Chin and his team at Portland continued to subadvise on a handful of former AIC funds under their new banners at Manulife, but that contract recently ended.

Some financial services industry-watchers say Lee-Chin faces an uphill battle on a number of fronts. First, he must overcome the damage inflicted by several years of lacklustre performance by the AIC funds and win back the loyalty of dissatisfied financial advisors and clients who redeemed funds.

Second, industry dynamics have changed, with investors increasingly risk-averse and conservative in their approach – particularly baby boomers approaching retirement. With markets volatile and investors fearful, wealth-management companies are fighting harder for sales.

“The AIC funds suffered a long streak of redemptions coinciding with poor performance,” says Rudy Luukko, investment funds and personal finance editor with Morningstar Canada in Toronto. “But Michael Lee-Chin is an energetic and dynamic personality with a passion for the investment business, and he wants to get back into it. As a businessman, he’s had success with his private ventures. And, to a greater degree, he will be operating as a buyer of businesses when dealing in the private-equity market.”

Lee-Chin says the advantages of private equity became “crystal clear” to him during the financial crisis of 2008. Although his publicly traded holdings were hurt by the market meltdown, he continued to do well on his private-equity projects. The National Commercial Bank Jamaica Ltd., in which he took a 75% position in 2002, has seen its after-tax earnings rise from $5 million a year to $150 million in 2011. The bank is now ranked first in the Caribbean, Central and South America, he says, and 14th in the world, in terms of return on capital. Lee-Chin has also done well with a minority interest in Columbus International Inc., a leading provider of cable and broadband services in Latin America and the Caribbean that he bought in 2006.

“Private equity may lean more into Michael Lee-Chin’s strengths than anything else he’s ever done at the retail level,” says Dan Hallett, vice president and director of asset management at HighView Financial Group in Oakville, Ont.

As for today’s more fearful and conservative investor, Lee-Chin believes there is a lot of frustration and fatigue associated with exposure to public markets, and that advisors and their clients will be receptive to the benefits of private equity. When introduced into the mix, he says, private equity will lessen volatility; the new Portland products will help advisors differentiate themselves and give them something new and useful for their clients in a tough market.

“I have a cause, a righteous premise, along with experience and expertise,” Lee-Chin says. “[I’m] 61 years old, and I’m not interested in doing anything that is not incremental to the investment landscape. I want to live a life of passion, and to do something I believe in. Otherwise, life is boring and unfulfilling.”

© 2012 Investment Executive. All rights reserved.