Friday, May 28, 2010

The Inevitable Return of Labour Sponsored Funds

For several months now there have been rumours that the Ontario government is preparing to reintroduce the kind of investment tax credits that formed the backbone of Labour Sponsored Funds (or "LSIFs"). Whether this is an active policy initiative or wishful thinking, it's an inevitability.

What's driving this evolution? On the one hand, the retail sector is crying (and really, it's SO unattractive when they do this)for investment product to sell to their customers. Thanks to IAF Funding and the new OETF matching funding for start-ups, Ontario has amassed a solid portfolio of Series A ready companies with no real money available to fund them. And, of course, sitting to the east of us all is Quebec and its growing start-up community, taunting us with the sheer velocity of activity driven by similar incentives.

To appeal to a retail community, new LSIFs will have to look meaningfully different than their forebears. Certainly, they likely would need to have much lower management fees, and investment rules that allowed managers to take a balanced risk to investment. (Under old rules, funds had to be deployed the year they were raised to meet tax creidt eligibility requirements. In an up market, there was nothing headier than being a lawyer for a high tech start-up in November, when LSIFs would seek out companies into which they could dump funds before the year closed out). And, of course, there needs to be greater accountability for funds to their retail investors.

There's an opportunity to create a new, evolved retail product that will plug the gaps in our current investment ecosystem - will it emerge?

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