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By Keith Damsell
The Globe and Mail
Report on Business
Monday, November 28, 2005
ROI Management Ltd. hopes to inject some new life into the ailing labour-sponsored funds (LSF) sector.
Adrian Mastracci, investment counsel at Vancouver’s ‘fee-only’ KCM Wealth Management, says, "LSFs have been in demand from a lot of investors probably for the wrong reasons. If I strip away a lot of the tax stuff would I still buy this thing? The trouble is too many of them fail that first test for me.”
The three-year-old Toronto company's mezzanine financing strategy is trying to shake off the asset class's bad rap of weak returns and high risk.
"All of the criticism of the asset class is actually strengthening our story," said Fernando Cipriano, ROI's chief operating officer and co-founder. "You have had investors whose sole objective is to earn a tax credit, yet the underlying investments were taking big risks."
LSFs have had a tough time of late. A hefty weighting in science and tech startups have meant weak returns and the Ontario government has served notice it will kill its tax credit in 2011. Meanwhile in Winnipeg, the assets of the troubled Crocus Investment Fund are slated to be sold off to the higher bidder.
LSFs "have been in demand from a lot of investors probably for the wrong reasons," said Adrian Mastracci, a Vancouver financial adviser. "If I strip away a lot of the tax stuff would I still buy this thing? The trouble is too many of them fail that first test for me."
ROI argues its approach mitigates many of the risks associated with typical LSFs. First, it invests in mature businesses and uses debt rather than equity to provide greater liquidity. An ROI loan is similar in structure to a mortgage, said John Sterling, co-founder and chief executive officer.
"The real big advantage is there is downside protection. We are structuring our investments as loans. Loans come with security. If things happen to go badly, we have some recourse," he said.
Investments are made in well-established companies with existing bank relationships. To date, ROI has made a total of 12 investments in Ontario. The bulk of companies have a 20-year history with revenue of $10-million to $20-million.
The $69.2-million Return on Innovation Fund has returned about 1.24 per cent since its inception, an above-average gain for the tough asset class. Fund investors receive a hefty 30-per-cent tax break but must own the fund for eight years.
Early indications are the ROI strategy is working. The company has exited two investments with a handsome return. The board of directors is scheduled to soon debate the merits of a dividend for ROI's 13,000 unit holders, income distribution that's unheard of in the LSF sector. Assets under management are expected to surpass $100-million after next registered retirement savings plan season.
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