Warning for Canadian hedge fund managers

At last month’s CVCA annual meeting in Halifax, there were but twelve different “Limited Partners” represented (27 people registered for the conference from those 12 different entities). I’m referring to the pension funds, life insurance companies and Fund of Funds that dedicate money to general partners such as Wellington Financial.

The turnout seemed light to me, given that 450 people attended the conference representing most of the venture, PE and debt funds in Canada; KKR’s Henry Kravis was even speaking. There was lobster. A dingy casino. What’s it take to get an LP to show up?

While the LPs might not enjoy being button-holed at each coffee break by fund managers that are currently in the market, the CVCA’s conference agenda was highly relevant to them. What better way to due diligence a potential GP than to see them in action on a panel. Or, better yet, hear what other have to say about them in the corridors.

A recent post from All About Alpha tells a bit of the story regarding LPs and local hedge fund managers, but the message should worry the Canadian venture capital and private equity industry as a whole. Here’s an excerpt:

“The inaugural Canadian “HFM Live” event organized by HFM Week magazine was held in the Great White North Thursday and Friday. One by one, Canadian mega-investors stood up today to tell the audience about how they would love to invest more in Canada – but that the managers simply weren’t big enough. The result: few if any Canadian hedge funds in their multi-billion dollar portfolios.

For their part, Canadian hedge fund managers stood up one by one to say that they had filled the home-country gap by raising money off-shore – where they were apparently better appreciated.

While sessions ranged from due diligence to the quintessentially Canadian topic of principal-protected notes (PPNs), the question permeating each discussion was obvious: how do Canadian hedge funds compete in a global investment marketplace?

The Day 1 navel-gazing produced a consensus that the global hedge fund industry knows no borders. Yet at the same time few of the international participants had been to Canada before and few were aware that Toronto – Canada’s financial capital – was only 15 minutes further from New York than was New York’s favorite neighbor, Boston.

It turns out that major hedge fund investors are actually getting their Canadian (read: resources & financial services) exposure from US managers who are active in Canadian names. In addition, Toronto is not generally part of the whistle-stop tours regularly conducted by European and Asian investors as they trek through North America.”

And don’t think this is just a hedge fund trend. At least one Canadian public service pension fund has hired a U.S.-based Fund of Fund firm to pick Canadian venture fund managers. On the one hand, the pension fund gets a wealth of performance data to use to adjudicate the success of their GPs. On the other hand, they are trusting a California-based group to pick Canadian-based venture capitalits they’ve never done business with before. All from a foreign country.

That’s not to say that Canadian Fund of Fund teams will actually cross the street to meet with a local fund manager, ’cause some won’t. Even if that GP is managing funds for them. But if Canadian LPs don’t have time for our local conference, and are engaging foreigners to pick local stocks and GPs, that’s a trend I’m concerned about.

And so should the rest of our industry.

MRM