Leo de Bever knows what it feels like to get burned.
About 20 years ago, he put some of his own money into a real estate company, with the cash going toward a property deal in Texas. The investment went sour, and an angry Mr. de Bever approached the firm’s founder.
“I told him, ‘Look – you sold it, you fix it,’” recalled Mr. de Bever, now the head of Alberta Investment Management Corp. “And he did.”
The firm was First Leaside Wealth Management Inc. of Uxbridge, Ont. The founder’s name was David Phillips. And two decades later, Mr. de Bever’s association with them has once again landed him in an unhappy situation.
First Leaside filed for bankruptcy protection last month, putting in limbo the money of some 1,200 investors. Most were wealthy Ontario residents attracted by the promise of good returns from private investments in property. Some, no doubt, were drawn in by advertising that highlighted the company’s connection to Mr. de Bever, a First Leaside director who has become one of Canada’s most influential investors as the man in charge of AIMCo’s $70-billion in assets.
He has said almost nothing about the case – until now.
In an interview, Mr. de Bever said that Mr. Phillips engendered his trust, and that of a lot of other people, because of a long track record of working to ensure that even troubled real estate investments, such as the one in Texas in the mid-1990s, eventually turned around.
These individuals were also attracted to Mr. Phillips’ stated philosophy of creating a firm that performed to higher standards in the rough-and-tumble world of real estate limited partnerships.
As Mr. Phillips wrote in the Financial Post in 1992: “For a variety of complex tax and personal liability reasons, the limited partnership is a superior way for individuals to invest in real estate. It allows them to participate as a group in opportunities that would otherwise be outside their reach.”
The limited partnerships would use investors’ funds to buy properties such as apartment buildings or retirement homes that needed to be fixed up. The investors would get a tax deduction and, once the properties were refurbished, stood to gain a steady stream of rental income, along with the potential for a capital gain when the properties were sold.
But these types of investments weren’t always so simple, Mr. Phillips wrote in his Post article. “The details of how they work are often distorted by their creators (the syndicator, promoter or general partner), much to the detriment of the investor.” He outlined conflicts of interest and said that “only when advisers, accountants, lawyers and brokers are made more accountable for statements made in formal documents will investors stop losing hundreds of millions of dollars each year in limited partnerships.”
These ideas appealed to Mr. de Bever, who says he didn’t know Mr. Phillips before making his first investment in First Leaside. So he agreed to help the firm as an adviser and became a director.
Last fall, the board asked Mr. Phillips to step down as chief executive officer, amid investigations by regulators and findings of incomplete financial records. The lack of up-to-date numbers, coupled with First Leaside’s byzantine structure, has made it a challenge for regulators and directors to understand exactly what has happened.
And Mr. de Bever, who chaired the independent committee of directors that decided the firm should file for bankruptcy protection, is now in the hot seat, with some investors alleging that they were lured to the firm because of his affiliation with it.
“I didn’t have objections to being identified as a long-term limited partner, but that’s different than having people make decisions based on my association. These are accredited investors.”
Mr. Phillips would not comment for this story. His lawyer said: “He has been working co-operatively with the independent committee with the object of maximizing the return for investors through the restructuring process.”
Mr. de Bever has his own views on what went wrong. First Leaside tried to grow too fast, he said. And it was doing so at a time when the market for some of its real estate investments – which include apartments, retirement residences, commercial rental properties and land in Ontario, British Columbia and Texas – was softening.
“Over the last few years, management tried to execute business plans before raising all of the required capital,” Mr. de Bever said.
The company is now locked into a court process that will determine how to distribute its assets.
“We looked at the alternatives and we felt that CCAA [the Companies' Creditors Arrangement Act]was the best way to maximize the value of existing investments,” he said.
Some of the firm’s limited partnerships – namely, those that invested in Texas – are staying outside of the court proceedings for now, in the hopes that they will still produce good cash flow. Some properties might be sold.
As for his day job, Mr. de Bever said AIMCo’s board is not concerned about the situation. “They feel it’s a personal matter and does not reflect my role at AIMCo,” he said.
But that doesn’t mean he’ll escape without some harm to his pocketbook: He still has some of his own money tied up in investments with First Leaside.