- Why has Advantage suspended redemptions of the Advantage Structured Funds?
- Why is Advantage entitled to suspend redemptions?
- When can investors expect Advantage to reinitiate redemptions?
- What has Advantage done in response to these challenging markets and its need to suspend redemptions?
- How will Advantage process redemptions when they are reinitiated?
Why has Advantage suspended redemptions of the Advantage Structured Funds?
Advantage has suspended redemptions of the Advantage Structured Fund as it does not currently have the capital on hand to redeem investors’ shares in the fund. This includes redemptions previously made upon death. Under the Small Business Venture Capital Act, in exchange for investors in Advantage receiving a 30% refundable tax credit on their investment, Advantage was required to invest 80% of the funds it received from investors into eligible small businesses in British Columbia. Advantage invested those funds into a number of emerging BC technology, life sciences and cleantech companies and currently has ten core holdings in its portfolio. Of those core holdings, two are public on the TSX and eight are private. The adverse financial markets for emerging companies worldwide have made it challenging for Advantage to sell its public holdings and private companies at reasonable valuations. However, the Advantage portfolio companies have generally performed very well – making strong progress on their strategic business objectives and raising the funds necessary to continue their growth. Advantage management now spends the majority of its time working with its portfolio companies to help them achieve liquidity events. As significant shareholders of Advantage themselves, Advantage management is committed to achieving these liquidity events and reinstating redemptions as soon as possible.
Why is Advantage entitled to suspend redemptions?
Advantage is legally entitled to suspend redemptions as its Articles of Incorporation provide that it is entitled to suspend redemptions and as its ability to suspend redemptions was clearly set out in the Prospectus through which it sold its shares to its investors. The specific wording in the Prospectus is as follows:
As set out in our Articles, we will not complete a Redemption Request if:
(a) we are not in compliance with the minimum investment requirements under the SBVCA or the redemption would cause us not to be in compliance with the minimum investment requirements under the SBVCA by reducing our available funds to an amount that is less than the aggregate amount of all future investments we are required to make in order to remain in compliance with such investment requirements;
(b) we have a working capital deficiency or the redemption would cause us to have a working capital deficiency;
(c) we are insolvent or the redemption would cause us to be insolvent;
(d) the redemption would cause us to be in default of our financial obligations under a bona fide arm's length loan agreement;
(e) the redemption is otherwise prohibited under applicable law; or
(f) our Board of Directors determines, in its sole discretion, that the redemption should not proceed.
On May 3, 2010, Advantage announced that it was temporarily suspending redemptions as it did not have sufficient funds available under the Small Business Venture Capital Act to allow it to meet its redemption obligations.
When can investors expect Advantage to reinitiate redemptions?
There is no certainty as to when Advantage will be able to reinitiate redemptions. As set out above, Advantage’s ability to reinitiate redemptions is dependent upon when it will be able to sell its public holdings and private companies at reasonable valuations. Advantage’s ability to sell its public holdings at realistic valuations is impacted by the performance of the public companies in its portfolio and in the performance of the emerging company public markets themselves. Advantage’s ability to sell its private companies is dependent upon the private company being able to attract a strategic acquirer or being able to access the public markets through an initial public offering. While Advantage management is doing everything it can to drive its portfolio companies to liquidity events at realistic valuations, there is no certainty as to when that can be achieved.
What has Advantage done in response to these challenging markets and its need to suspend redemptions?
In addition to its efforts to achieve liquidity in its portfolio companies, Advantage has taken a number of steps to reduce its costs so as to maximize the amount of money available to its investors when redemptions are reinitiated. In early 2011 Advantage closed its funds to further fundraising thereby eliminating all marketing and selling costs and its fund manager, Lions Capital, voluntarily reduced its management fee from 2.75% to 1.25% on shares eligible for redemption and waived its performance fees until redemptions are reinitiated. At year end 2011, Lions Capital further voluntarily agreed to terminate its management agreement with Advantage which eliminated management fees altogether and transferred management of the fund to Advantage management. Advantage concurrently reduced its partners from five to three (which will be further reduced to two at the end of 2012) and reduced its support and accounting staff from six to three. The remaining fund managers have voluntarily taken a material reduction in their salaries and Advantage has moved to smaller offices in North Vancouver, which has reduced its office overheads substantially. By taking these steps, together with terminating trailer fees on matured shares, Advantage has been able to reduce its administrative costs by more than $1 million per annum.
How will Advantage process redemptions when they are reinitiated?
Upon Advantage achieving sufficient liquidity in its portfolio companies, it will notify its shareholders that redemptions have been reinitiated. Advantage will then process redemptions requests in the chronological order that the shares became redeemable under the Small Business Venture Capital Act.