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Another fund's assets frozen

GrowthWorks halts redemptions, wants regulator to OK changes

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Thousands of Manitoba labour-sponsored fund investors have had their assets frozen -- again.

The GrowthWorks Canadian Fund, the Vancouver-based fund that purchased the Ensis Growth Fund out of Winnipeg in 2008, suspended its redemptions before Christmas and hopes regulators will approve a plan in which investors can redeem their funds either semi-annually or annually up to some predetermined amount.

"We're not saying there will be no redemptions, we're saying we're going to need to manage the redemptions," said Tim Lee, chief investment officer for venture capital at GrowthWorks Capital Ltd. "There will be a cap (on redemptions)."

He said the markets for mergers and acquisitions and initial public offerings "ground to a halt" in the second half of 2011, which negatively affects the fund's ability to pay out redemptions.

"The reason why these global conditions affect us is the Canadian Fund owns shares in privately held companies and to convert the value of those funds to cash, you need either IPOs or M&A activity," he said.

Essentially, if the fund tried to meet all of the redemptions it expected would come due, most if not all of its cash and cash equivalents would be depleted and it would likely have to sell off many of its holdings at fire-sale prices.

If this sounds familiar, it should, but there are some important differences between the Canadian Fund and the infamous Crocus Investment Fund. In late 2004, the now-defunct fund, once the darling of Manitoba's venture-capital scene, halted sales and redemptions amid serious concerns about what turned out to be overly inflated values of the holdings in its portfolio. Crocus was eventually wound down amid a class-action lawsuit and a scathing report from the auditor general, but investors have only been compensated in dribs and drabs in the last couple of years. More than seven years after it hit the wall, it's still not a done deal as several million dollars are still tied up in Crocus investee companies.

Bob Bouchard, director of corporate finance for the Manitoba Securities Commission, said GrowthWorks has received an order from regulators allowing it to cease redemptions until the middle of April.

"They have to come back by then, either to get another order that might allow semi-annual redemptions, or some other redemption policy," he said.

Lee acknowledged the elephant in the room in Manitoba.

"The issue with the Canadian Fund is exit conditions, not with valuations (of companies in the portfolio). We have been communicating with a good number of advisers and shareholders and explaining the root cause of our current redemption restrictions and there is no shortage of appreciation for what the markets have done over the past 12 months. The volatility has reached new heights and there has been a trickle-down effect on IPO and M&A activity," he said.

One Winnipeg-based adviser, who asked that her name not be used, said she has had to tell a number of clients this week that even though they've held their Canadian Fund/Ensis shares for the minimum eight-year period, they can't redeem them for cash in their RRSPs.

"If the point is that people can't get their money out and this could drag on for years, then it's the same (as Crocus)," she said.

If regulators approve GrowthWorks' redemption plan, the adviser said she expects virtually every investor to tender their shares. They'll only receive a portion of what they're after because of the cap, she said.

Who is affected?

There are 10,000 client accounts in Manitoba that have GrowthWorks Canadian Fund units, the fund that merged with Ensis Growth Fund more than three years ago. The company estimates each account would have an average of about $10,000.

Other fund facts:

In 2011, the fund generated $44 million in exits from the companies in which it had investments.

GrowthWorks raised $17 million nationally last year, with less than $1 million coming from Manitoba.

The Canadian Fund has a net asset value of about $200 million, down from $350 million two years ago.

Republished from the Winnipeg Free Press print edition January 20, 2012 B4

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