TorQuest Partners Inc.

National Post, Private equity comes full circle

Public investors have chance to get aboard

Monday, February 12, 2007 - A cynic would say we are approaching the top of the market given that the average retail investor is being offered a chance to invest in funds that give them exposure to private equity -- a hot, albeit relatively new, sector seemingly interested in investing in any line of business.

And to show how things are cyclical in the private-equity world, a number of years back Harrowston Inc., a public company that made a series of private-equity investments, was sold off to TD Capital Partners, in part because management at Harrowston decided private equity wasn't suited to the world of public companies. A while later the son of Harrowston was born, this time in the form of Torquest Partners. That firm has raised two funds and garnered about $700-million of capital from institutional investors.

Fast-forward a few years and in the space of few weeks investors have been given two chances to get aboard. These chances -- which are being offered after US$400-billion was raised by private-equity funds in 2006, up more than fivefold over the past five years -- employ different structures.

First out of the gate was Diversified Private Equity Corp., which was formed to provide investors with a return linked to the performance of 20 of the largest publicly traded private-equity firms, 10 of which are based in North America, the rest in Europe. Plans call for the proceeds to be invested on an equal weighted basis in the 20 private-equity firms. The firms have an average market cap of about US$2.7-billion.

Onex Corp. is the sole Canadian-based firm included in the 20.

The fund, which will be listed on the TSX, will have a term of five years. Investors require a minimum outlay of $1,000 to get a stake.

The capital won't be invested directly in the 20 private-equity firms. Instead the issuer will enter into a forward agreement that will ensure that at the end of five years the investor will receive a tax-efficient return based on the performance of the private equity firms. Plans call for all the distributions to be reinvested and paid out at maturity.

And the return at the end of five years is deemed to be tax efficient because of the forward agreement. As a result, the income received by investors is treated as capital gain, not as regular income.

Toronto-based Kensington Capital Partners Limited was the second issuer to offer investors a chance. It has filed a preliminary prospectus for an initial public offering of units of Kensington Global Private Equity Fund. Kensington Investment Management will provide investment-advisory and portfolio-management services to the fund. Kensington has been around since 1996 and "has made commitments" of more than $230-million through its private-equity programs.

The issue requires a minimum investment of $25,000 -- 1,250 units at $20 per unit. But investors won't have to pay that amount in one shot. Instead, the issuer has brought back the concept of instalment receipts -- a method of paying for shares that has been out of favour for about a decade. Would-be investors are required to pay $10 on closing, another $5 by the end of the year and another $5 by March, 2009. (But the underwriters and/or the brokers who sell the fund get paid up front. Total fees are 5%.) Payments over time are akin to the situation in private-equity funds where funds are committed by the institutional investors and drawn down as requested by the general partner.

The fund will invest in either private-equity funds or funds of funds. While the fund has "global" in its name, plans call for only about 10% of the capital to be invested in markets outside of North America.

The Kensington fund will be decidedly different from Diversified Private Equity Corp.'s deal. For instance, the fund won't be listed on the TSX, valuation will occur only four times a year and redemption won't be allowed for the first five years of the fund's life. Fees and expenses are the other major difference: The management fee, set at 1% initially, will rise to 1.95% once all the funds have been committed. (On top of that, there is a 40-basis-point service fee paid to the brokers.) And after three years, the manager is entitled to receive a performance fee. In contrast, the MER of Diversified Private Equity will be 1.05%.

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