Kevin O'Leary is a rock star

You’ve got to hand it to Kevin O’Leary (“KO” to his friends), of Dragon’s Den fame. Decade of Daddy Fund ™ is launched! According to a press release dated June 27th, his O’Leary Global Equity Income Fund “has successfully completed its initial public offering of 3,335,000 units at a price of $12.00 per unit for aggregate gross proceeds of $40,020,000.” That’s alot of cake, indeed.

I know that we’ve come across as non-believers in this particular capital market strategy (see prior post “O’Leary ditches his “Get Paid While You Wait” investment cliché” June 1-08). But, like any market, there are plenty of views to go around: clearly, O’Leary was able to convince hundreds of brokers to steer their client assets his way. This might come as a surprise to some, given the fact that the prospectus disclosed absolutely no track record of prior investing performance, unlike what you might have seen with Eric Sprott, Ira Gluskin, the Bissetts, etc.

But, never underestimate the power of persuasion and media overexposure. KO is undeniably a “rock star”, to borrow a line from a downtown Toronto merchant banker of some renown.

From a fee standpoint, this offering won’t make anyone rich. With $40 million under management, O’Leary’s 1.5% management fee will generate just $600,000 to spread around his staff and the management team at Stanton Asset Management (whose historical line of business is running a hedge fund of funds). If KO keeps even just $200k for himself, there’s barely enough money around to hire two people to screen the thousands of global dividend stocks that the prospectus promised would be reviewed prior to investing. And then there are all of the private placement opportunities that were mooted: these guys won’t have time to sleep, what with the entire world to analyze and a skeleton staff to do all of the work.

Then there are the audit fees, public company costs, legals and so forth. I’ll bet that the first $1 million of profit each year will be used to just cover “the nut” of being public. With just $40 million of assets to cover those costs, retail investors might be surprised to learn that if KO returns 10% a year pre-tax on the $40 million ($4 million of dividends and gains), a full 25% of the notional gain might go to cover the overhead, another $600k will go to management fees (1.5% of the $40MM), and another $160k for “servicing costs”. A $4 million return will be reduced to $2.240 million, or a 5.6% annual return.

Sound sexy? 5.6% is in line with or below the current payout yield of BMO, CIBC, Duke Energy, MKS, Teranet, Torstar, Yellow Pages Income Fund, etc. You don’t need to hire a Dragon to get that type of net return.

The TSX was kind enough to get the units trading on Friday (OGE.UN:TSX), but despite the promise of “getting paid while you wait”, lead underwriter CIBC couldn’t keep the quote at the $12.00 offering price for more than a single day. Rather than get paid while they wait, O’Leary’s retail fans are already suffering paper losses. By the market’s close of business earlier today, folks were underwater at $11.80.

It is but 20 cents, of course, but retail investment advisors just hate it when structured products trade down out of the gate. Particularly when it coincides with the end of the month, because every investors’ monthly statement will arrive in a matter of days — showing that they’re already underwater on their Dragon Dollars.

Eventually, we will learn how much of the $40 million KO subscribed for himself (if any) to get the deal over the finish line. In the meantime, you’ve got to hand it to him. Raising a $40 million blind pool in the final minutes before a “bear market” is declared (the Dow Jones is down 19.9% from its high) is no small feat. Simon Cowell himself might applaud the success of his Canadian disciple.

As for applause from this corner, we’ll go one step further and put together our own shadow fund – free of charge – and see how it compares over time.

MRM
(disclosure – I own BMO and MKS)