The sale of Kevin O'Leary's fund company to Brett Wilson's Canoe Financial is being billed as a "dragon deal" because the two men were once colourful characters on Dragons' Den. A better description might be "last, best hope."
O'Leary Funds caught fire after launching in 2008, raising roughly $1-billion in assets under management in only two years. Pounding his chest, Mr. O'Leary then suggested the company's assets would hit $5-billion within three years and even dangled the idea of going public.
The fund company Canoe is buying is a fraction of that size. Mr. Wilson's firm is acquiring $800-million in assets under management (AUM) – one-third less than the $1.2-billion O'Leary Funds managed at the end of 2011, even though the S&P/TSX composite index has climbed 15 per cent since. (Assets under management grow when the market rises, or when new money is invested.)
Throughout O'Leary Funds' short history, some funds have stood out for solid returns – notably the Canadian Bond Yield portfolio, which won a Lipper award last year. But a number have struggled with poor performance. Despite promising investors reliable returns, the company occasionally had to hand capital back to investors to make up for shortfalls in their distribution income.
The spotty history doesn't bother Canoe all that much. "He got hit with some big redemptions," Mr. Wilson said of Mr. O'Leary, but Canoe also had growing pains. "One can point out that Kevin overpromised and underdelivered," but fomer Canoe senior portfolio manager Bob Haber did the same, so he was replaced by Rob Taylor, whom Canoe hired from BMO Asset Management in 2013, he said. "Everyone has their moments."
Rather than look at past results, Mr. Wilson said he is focused on something else. "The question is how well can we convince the unitholders of O'Leary funds to convert to Canoe funds." The deal was largely struck to bulk up because scale matters when managing money, but even though the acquisition is expected to boost Canoe's AUM to "almost $4-billion," there is no guarantee that all investors will transfer their savings to the new portfolio managers.
Once the new assets are acquired, few of the 19 existing O'Leary funds will remain in their current form. Most will be merged into existing Canoe funds, while others will have their investment strategies amended.
Since setting up the fund company, Mr. O'Leary has merely been a marketer of the funds and generated some investment ideas, while Stanton Asset Management has served as the portfolio manager. As it stands, Stanton will only subadvise on one fund after the merger – although Mr. Wilson said there is a chance that the company, which is based in Montreal, ends up doing more. "I still need more people," he said.
After some tough years for performance and asset outflows, O'Leary Funds started turning things around in 2014, posting record fund sales and earning the Lipper award. However, it is difficult to judge what these mean for the bottom line. The sales figure reported wasn't a "net" one, and that means existing investors could still be taking their money elsewhere.
It is also tough to get an accurate picture of fund performance because of survivorship bias. Most of O'Leary Funds' poor-performing portfolios – such as the former Global Equity Yield Fund and the Yield Advantaged Convertible Debentures Fund – were merged with other portfolios, so the weaker returns are no longer reported.
Financial terms of the sale to Canoe were not disclosed – but Mr. Wilson said the final price is still in flux, suggesting that it will depend on how many O'Leary investors ultimately migrate to Canoe, a common feature in asset-management deals.
Once combined, Mr. O'Leary will become vice-chairman of Canoe but won't be doing any money management. "Kevin is not actively involved with investing these assets going forward," Mr. Wilson said.