The Ontario Securities Commission (OSC) has released an interesting discussion paper with respect to a potential new type of public investment fund that could hold long-term assets. In Consultation Paper 81-737 Opportunity to Improve Retail Investor Access to Long-Term Assets through Investment Fund Product Structures, the OSC sets out a framework proposal relating to investment funds (to be known as Ontario Long-Term Funds (OLTFs)) that would allow investments in long-term illiquid assets. In addition to potentially providing benefits to investors such as increased diversification, these structures could lead to more investment in capital-intensive assets such as infrastructure and natural resource projects.
For the purposes of the framework, long-term assets would be considered “illiquid assets” under National Instrument 81-102 Investment Funds (NI 81-102), which may be difficult to value, can not be disposed of readily, and generally have longer investment time horizons. Examples provided include venture capital, private equity, private debt, mortgages, and real estate.
As these investment funds would be publicly offered reporting issuers in Ontario, the funds would be required to have a registered investment fund manager and a registered portfolio manager, and the funds would be required to calculate a net asset value (NAV). Depending on the redemption terms of the funds, these could either be a mutual fund or a non-redeemable investment fund. The funds could also be either fixed-term or evergreen funds if liquidity risks are effectively managed. It is proposed that many of the requirements in NI 81-102 would not be applicable to OLTFs, such as the illiquid asset restriction. Instead, OLTFs would be required to hold a minimum and maximum percentage of long-term assets to ensure sufficient liquidity to meet redemption requests.
OLTFs would be required to invest through the securities of underlying collective investment vehicles (CIVs). Each CIV would be required to have a “cornerstone investor,” such as a pension fund or other institutional investor that qualifies as a “permitted client”. Ownership by OLTFs in a CIV would be limited to 10% of a CIV’s equity, and a cornerstone investor would be required to hold at least 10% of the CIV’s equity. It will be interesting to follow comments on this aspect of the proposal, as the consultation paper notes that the right to exit investments in CIVs by cornerstone investors should be proportional to the exit rights of the OLTF, meaning that some redemption rights might be more constrained under this framework.
The funds would still need to address issues such as liquidity, volatility, concentration, duration, and informational asymmetries through the potential means addressed in the consultation paper. The OSC is seeking comments on these attributes. For example, the OSC indicates that redemption restrictions should be allowed, to the extent the OLTF needs them to manage liquidity and reporting needs. The initial view is that redemptions should be no more frequent than monthly and no less frequently than annually, with NAV calculations being aligned with the timing of redemptions. Several potential redemption restrictions are noted as being permissible under the framework, such as discounts to NAV, advance notices, caps as a percentage of NAV, and a requirement to wind up an OLTF if annual redemption requests exceed the cap for two consecutive years. Alternative redemption restrictions are suggested for fixed-term OLTFs. The funds would be subject to a requirement to obtain an independent valuation at least annually.
Despite the fact that assets of the funds could be held outside Ontario, the funds themselves would only be available to Ontario investors, and as such, they would not have any securities listed and traded on a marketplace in Canada. The initial proposal considers the securities of the funds would be made available through investment dealers, portfolio managers, and mutual fund dealers that distribute alternative mutual funds (for OLTFs that would qualify as a mutual fund under securities legislation).
To help manage some of the atypical risks these funds present, initially OSC staff think that OLTF requirements would include:
- A corporate structure with an independent board of directors;
- The IFM disclosing how they manage the portfolio in the best interests of the fund and its security holders; and
- The IFM disclosing its assessment of whether the assets in the fund are fairly valued for purposes of the NAV calculation.
The next phase of the consultation is expected to include a publication for comment that would implement the framework, if supported by stakeholders. Several specific questions are posed, which range from broad questions on the benefits to retail investors from increased access to long-term assets, to the proposed CIV requirement, to questions about valuation and liquidity. Comments will be accepted on the consultation until February 7, 2025. As this would be an entirely new framework for public funds in Ontario, interested parties should strongly consider providing their views on the consultation.
October 31, 2024