The last gasp for GrowthWorks fund?

GrowthWorks Canadian Fund is also considering a pair of other possibilities to get out of its predicament: finding a more conventional lender that would pay off Roseway, or merging with another fund.

“We concluded what the process needed was the discipline of the CCAA [Companies’ Creditors Arrangement Act],” says Ian Ross, the fund’s chairman and interim CEO. “[Roseway] agreed with us [and] agreed to support our application to do the filing.”

The GrowthWorks fund has been in financial distress since the end of 2011, when it froze redemptions amid a cash crunch caused by falling markets for initial public offerings and mergers and acquisitions. But the Roseway money has been the millstone around the fund’s neck.

In return for advancing the fund $20 million in May 2010, Roseway was to receive guaranteed payments of $5.7 million on the three subsequent anniversary dates of the deal and then be repaid the balance of the original amount. Roseway also would get to participate in the fund’s upside.

The fund made two of the guaranteed payments but was unable to make the third.

“We tried to negotiate a settlement with them,” Ross says. “The only source of revenue for the fund is to sell assets, which are minimal investments in early-stage companies. The hope was to get an agreement to pay [Roseway] if we had some cash. But we needed to retain sufficient working capital to continue to operate the fund and meet its expenses. The payments to Roseway would be lumpy. It was a good deal for [Roseway].”

GrowthWorks Canadian Fund has about 25 companies in its portfolio, about 20 of which are “fairly” active, Ross says. The fund’s current net asset value (NAV) is about $84 million. In 2000-01, the fund’s NAV was about $1 billion.

The Roseway financing “raised a few eyebrows,” says Dan Hallett, vice president and principal with Oakville, Ont.-based HighView Financial Group, because even the minimum amount payable would have been “very costly financing.” The annual interest rate is 33%. “It was clear back then,” Hallett adds, “that liquidity was a problem.”

Unitholders have been waiting to hear something positive about redemptions since the units were frozen. Although unitholders still may get some return, they should neither hold their breath nor plan any extravagant purchases.

“If the fund pays up that full amount Roseway says it’s owed,” Hallett says, “there will be assets left, but it will be a devastating loss [for investors].”

Technically, the fund is in redemption mode, Ross says, but the board has to be satisfied that any money paid out would meet the solvency test of the Canadian Business Corporations Act. “We are not in a position,” he says, “to do any redemptions until we resolve our issues with Roseway and look at our ability to do redemptions, based on our liquidity.”

The ultimate goal is to wind down the fund over a reasonable period of time, Ross notes, rather than having a “forced fire sale.” Says Ross: “We feel there is value there, and we want to try to recover it as best we can.”

The fund has also announced the termination of its management agreement with GWWV and the removal of former president and CEO David Levi and two other executives.

Not having to pay Levi annual fees of 5%-6% could help “stem the bleeding,” Hallett says: “Clearly, the fund has not been successful and perhaps the board felt it had no other choice.”

Neither GWWV nor its parent company, Matrix Asset Management Inc., were happy about the termination of the management contract or the removal of Levi and the other executives. Says a joint release from the companies: “Matrix and GWWV strongly disagree with Canadian Fund’s position. The termination of the management agreement would have a material adverse effect on Matrix’s operating revenues and results of operations.”

Disputes between GrowthWorks Canadian Fund and GWWV are supposed to be referred to binding arbitration, but the CCAA order may have scuttled that.

© 2013 Investment Executive. All rights reserved.