TORONTO, ONTARIO--(Marketwire - July 31, 2012) - As previously announced, on November 10, 2011, GrowthWorks Canadian Fund Ltd. ("Canadian Fund") obtained an initial regulatory order in connection with the Board of Directors' decision to close Class A share redemptions. On April 16, 2012, the initial order was extended to July 31, 2012. Canadian Fund announced today the granting of a further order (the "Order") that extends the effect of the initial order to November 30, 2012. Canadian Fund intends to apply for a further extension of the Order. While other retail venture capital funds have secured similar orders extending for two years and beyond, Canadian Fund's application is considered novel due to the terms of the redemption management plan adopted by the Board of Directors and based on Canadian Fund's capital structure, including the financing arrangements referred to below.
Why Canadian Fund Closed Redemptions
As a venture capital fund, Canadian Fund invests predominantly in private companies, the shares of which are not listed on a stock exchange or otherwise immediately saleable. Venture capital investments involve a longer time commitment than other types of equity investments, often taking three to eight years or longer to mature and present an opportunity for divestment (also referred to as "exits"). Venture capital funds like the Fund rely to a significant extent on favourable M&A and IPO market conditions for full value, cash generating exit opportunities. Increasingly volatile market conditions during the second half of 2011 impaired Canadian Fund's ability to complete planned divestments from its venture investment portfolio, tightening the fund's liquidity position.
In November 2011, the Board of Directors of Canadian Fund adopted a redemption management plan ("RMP") and closed Class A share redemptions in order to preserve cash needed to fund selected follow-on investments in Canadian Fund's portfolio companies and operating commitments. This decision was taken by the Board of Directors to allow more time to generate for shareholders what is believed to be significant upside potential in the portfolio. In connection with this decision, the Canadian Fund applied for regulatory relief, which resulted in the granting of the initial regulatory order referenced above. The Order does not represent regulatory approval of the RMP; rather it represents the regulatory order required to close Class A share redemptions. Canadian Fund intends to seek a further extension of the Order, along with conditions to the Order that would allow it to process redemptions on a semi-annual basis under the RMP, subject to Canadian Fund having sufficient cash resources to do so.
Despite the volatile market conditions, the Board of Directors and Manager of Canadian Fund remain confident in the potential of the fund's mature venture investment portfolio. The Board of Directors of Canadian Fund continues to review strategic options aimed at realizing on that potential value and providing liquidity for shareholders of Canadian Fund. These options are considered in light of a range of factors, including Canadian Fund's cash position, actual and projected levels of divestment activity, payment obligations under financing arrangements, the prospects for generating exit values in excess of carrying values and the prospects for Canadian Fund resuming weekly redemption processing.
Redemption Processing under the RMP
Under the RMP, subject to Canadian Fund having sufficient cash resources and the necessary regulatory order to do so, Canadian Fund would process redemptions of Class A shares semi-annually. Semi-annual redemptions would be processed based on redemption values determined by the Board of Directors after taking into consideration actual and projected divestment activity and Canadian Fund's follow-on investment needs, liabilities and operating commitments. Redemption values may be increased or decreased by the Board of Directors if divestment activity exceeds or falls short of projected levels. Redemption dates would also be determined by the Board of Directors. If redemption requests for a particular redemption date exceed the redemption value determined by the Board of Directors for that redemption date, the requests would be processed on a proportionate basis. When sufficient cash is generated from divestment activity and provided necessary regulatory orders are in place, Canadian Fund will issue a press release announcing the first redemption date and the process for submitting redemption requests under the RMP. There can be no assurance as to the levels or timing of Class A share redemptions processed under the RMP. As noted above, divestment activity is highly dependent on M&A and IPO market conditions. Volatile market conditions have dampened divestment activity over the past year or so, causing Canadian Fund's cash levels to fall short of previously anticipated levels.
There can be no assurance that Canadian Fund will secure an extension of the Order or conditions to the Order needed to implement semi-annual redemption processing under the RMP or, if it does, that Canadian Fund will have sufficient available cash to process redemptions under the RMP. If Canadian Fund does not secure the regulatory order needed to implement semi-annual redemption processing, the Board of Directors will review alternative mechanisms for distributing available cash while Canadian Fund Class A share redemptions remain closed.
Duration of the RMP
The RMP was approved by shareholders at Canadian Fund's annual and special meeting held on June 28, 2012. The resolution approving the RMP provides for the implementation of semi-annual redemption processing for Canadian Fund's Class A shares until November 10, 2013 and authorizes the Board of Directors, without further approval by shareholders, to extend semi-annual redemption processing for a further 12 months thereafter to November 10, 2014. Any further extensions of the RMP would be subject to securing further shareholder approval and necessary regulatory orders.
Canadian Fund's ability to generate liquidity is entirely dependent on levels of divestment activity in the venture portfolio, activity that is highly sensitive to market conditions. The Board of Directors believes there is significant value potential in Canadian Fund's venture investment portfolio and to unlock that value Canadian Fund must maintain some degree of financial flexibility so that it may seek to optimize divestment timing. Financial flexibility also allows Canadian Fund to maintain the ability to make selected follow-on investments in its most promising portfolio companies and reduces the likelihood that Canadian Fund will have to sell promising assets at substantial discounts to current carrying values. To achieve greater financial flexibility during periods of declining capital raising and variable exit market conditions, Canadian Fund entered into financing arrangements aimed at supporting the fund's liquidity while divestments are pursued. A total of $33.5 million was advanced to Canadian Fund under the financing arrangements and approximately $38.7 million (including interest and participation amounts) is due to be paid on account of these financing arrangements by May 28, 2013. Details of the financing arrangements are set out in Canadian Fund's press releases of May 28, 2010 ("GrowthWorks Canadian Fund enters into a Participation Agreement with Roseway Capital") and May 23, 2012 ("GrowthWorks Canadian Fund Provides Update on Financing Arrangements"). Canadian Fund's payment obligations under these financing arrangements are secured by charges over Canadian Fund's portfolio assets and/or proceeds from the sale of those assets. If Canadian Fund were to default on its obligations under the financing arrangements, the security over Canadian Fund's assets may be enforced, which could result in forced divestments at values well below carrying values and a significant decline in Class A share values.
Canadian Fund continues to actively pursue divestments of portfolio assets which are determined to be in the best interests of Canadian Fund, as well make selected follow-on investments. There can be no assurance as to the timing or value of these divestments or as to Canadian Fund's ability to discharge its payment obligations under the financing arrangements described above.
Forward Looking Statements: This press release contains forward looking statements about future Canadian Fund Class A share redemptions, Canadian Fund's ability to make follow-on investments, to complete divestments from its venture investment portfolio and to make payments under financing arrangements. These statements are based on beliefs and assumptions of management of Canadian Fund at the time the statements are made, including beliefs and assumptions about Canadian Fund's ability to secure the regulatory order needed to process Class A share redemptions semi-annually as contemplated under the RMP, the Fund's ability to generate sufficient cash to satisfy its payment obligations under financing arrangements and to process redemptions under the RMP, future market conditions and future levels of divestment activity and Class A share redemption requests. These beliefs and assumptions are subject to known and unknown risks and uncertainties, including risks and uncertainties associated with seeking discretionary regulatory orders, volatility of market conditions and, in turn, the climate for divestment activity, performance of portfolio companies, valuations of portfolio companies, financing needs of portfolio companies and the availability of capital to satisfy such financing needs and other risks and uncertainties disclosed in Canadian Fund's most recently filed prospectus and other regulatory filings posted on SEDAR at www.sedar.com. These risks and uncertainties may cause actual results, events or developments to be materially different from those expressed or implied by such forward-looking statements. Unless required by law, neither Canadian Fund nor its manager assumes any obligation to update any forward-looking statements or to reflect the occurrence of unanticipated events, whether as a result of new information, future events or results or other factors.