In the shadow of the banks and pension plans that have given this country a reputation as a strong financial centre, the alternative-asset management business is still struggling to grow.
The financial upheaval around the globe is leaving smart Canadians who tried to build careers trading and running money in places like London and New York displaced and disheartened, and looking to come home to Canada to try to build a business. But for all this country’s reputation as a haven with strong finances, the refugees are finding this is a hard place to start a fund management business.
Hedge funds, private equity funds and venture capital funds all struggle with a tough environment for getting what they need to even begin to succeed. Somebody has to give them some money to manage, but the people who control most of the capital are wary.
That’s discouraging for entrepreneurs such as David Fry and Andrew Torres, the founders of Lawrence Park Capital Partners. Their firm is full of people who traded fixed-income securities for big banks and funds in New York and London.
They want to be in Toronto, because it’s home and because it’s a nice place to live, and are launching a fund that will try to capitalize on the difference in prices of bonds issued by the same company but trading on different markets and in different currencies. Despite their pedigree, they are finding it hard slogging raise money. If managers like them can’t find money, they won’t stay, and Canada will miss an opportunity to create a stronger, more diversified financial sector.
“We should have the ability to attract some of this talent to Canada, and keep some of this talent in Canada,” Mr. Fry says.
What the partners are finding is that “there are a couple of trillion dollars in Canada invested in mutual funds and pension funds, but very little capital available for startup asset managers.” The hurdle is most often “size and track record. And if you have neither, or one of, it's very difficult,” he says.
Size is important because the biggest pools of capital in Canada are pension funds that are so huge they have trouble committing money to small firms. A fund the size of the Canada Pension Plan Investment Board, at $152-billion, has trouble writing a cheque for a few million to a startup firm. Too many small investments is too much work for too little potential reward.
To put it in perspective, total venture capital fund raising in Canada in the first half of this year stood at $374-million. That’s just a tad more than the CPPIB, as part of a group of venture and private equity funds, put into one investment: a stake in the Internet communications company Skype in 2009.
Track record is key for risk managers, who don’t want to put money with an unproven fund. Similarly, big brokerage houses want to see a few numbers of good returns before selling new funds to clients.
There is some academic research that shows that investing in startup hedge fund managers can be a recipe for superior returns for at least the first couple of years of a fund’s life, but few people are willing to take the chance.
The hard part is finding a way to solve the problem that doesn’t force Canadians to invest in Canada for any reason but because they are seeking the best returns. The movement in Canada has been away from requirements to hold Canadian content, eliminating limits on foreign investments for everything from individual retirement accounts to the CPPIB.
Quebec is bucking that trend. There, pension funds including the Caisse de dépôt et placement du Québec have banded together to create a $175-million fund to seed new managers.
Mr. Fry is a fan, but there’s a reason public policy has been going the other direction. Pushing big money managers to invest in Canada for an industrial purpose is fraught with problems, mainly that it muddies their main mandate, to create returns for investors. Even so, governments, if they are serious about pushing for more financial jobs, should be taking another look at how to help.
In the meantime, fund managers who want to live here are going to have to raise money abroad.
One local startup manager, Ray Carroll at Breton Hill Capital, managed to convince the largest pension manager in the U.S. to commit $100-million (U.S.) to seed his hedge fund.
If Canadians won’t see the potential in this country’s emerging asset managers, maybe it will take investors abroad to show us what we are missing.
Editors note: A previous online and print version of this story referred to Lawrence Park Capital Management. The company's name is Lawrence Park Capital Partners.