So here's a story about a Canadian asset manager and I don't know what to do with it so I'm pretty much just going to tell you the story, and at the end there'll be a quiz, and the choices on the quiz will be like:
- Is there something a little weird about this company? or
- Is this just, like, how things are done in Canada? or
I don't know the answer but maybe you do? Mostly I just love the story so you ought to hear it and then you can decide.
The company is called One Financial Corp. and it markets mutual funds in the "All-Weather Profit Family." These are advertised as "Canada's first and only family of long/short mutual funds and wrap portfolios," designed to "bring benefits of hedge funds to the masses" by being long-short and trading derivatives and stuff.1
One thing to know about One Financial is that it fired 70% of its workforce over the weekend and Jeffrey O'Brien, the CEO and founder, "said he was threatened" by some of them. Also he's looking to hire some salespeople who don't suck like the old ones did.2 Also there's some debate as to whether those fired people were fired (a) last Friday or (b) on Monday when they showed up and the doors were locked.3
All bad signs! But that's not the story, that's just like some stuff that happened. The amazing story is that, in parallel with firing all its staff, this company is doing an IP'O, which is like an IPO only the P' stands for "private" rather than "public," because this is an initial private offering, and it is a pile of amazing. To me. Maybe not to you? Maybe you see this sort of stuff all the time?
Here are some things I enjoyed about One Financial's initial private offering:
1. It is an offering of common shares (at $20 per share) and senior notes. The senior notes accrue 11% interest, payable at maturity. Maturity is 2.5 years but can be extended to 3.5 years at One Financial's option. The total offering size is $9.6mm ($6.4mm shares / $3.2mm notes), and the price would seem to represent a market cap of $50mm-ish though that's not clear from the offering memo.4
2. Because it is a private offering and won't be listed, shareholders won't be able to get liquidity by selling shares on the market. But that's okay because here is a truly innovative liquidity mechanism:
ONE Financial intends to provide liquidity for holders of Shares via a share repurchase plan (the “Share Repurchase Plan”), whereby ONE Financial intends to repurchase Shares at a premium that grows at the rate of 50% of the Share Issue Price per annum for each year or part thereof that has passed since the Closing Date. It is ONE Financial’s current intention to repurchase at least a portion of the Shares distributed hereunder on or before Maturity. While it is ONE Financial's objective to execute repurchases under the Share Repurchase Plan in respect of all Shares, there are no guarantees or assurances that such plan will be successfully executed, and investors may not be provided liquidity for any of their Shares via repurchases by ONE Financial. ONE Financial is not under any obligation to execute the Share Repurchase Plan in respect of any Shares and may decide to repurchase or not repurchase any Share at its option at any time in its sole and absolute discretion.
The liquidity mechanism, to be clear, is "maybe we'll buy back your shares at a huge premium, and maybe we won't." Sole and absolute discretion. The summary page of the offering memo says "$20 per Common Share - Growth up to 50% Per Annum." But there's a footnote. Also later there's a table of prices that you might get paid:
3. How do you know the shares are worth $20? Well, because they might buy back the shares at $40 or whatever, first of all, but also because you can value the company based on a multiple to assets under management. The summary page of the offering memo notes a "Potential value per Common Share approx. $100 to $267 at $1 billion AUM, based on industry comparables," and page 7 has a table of comps (with AUMs of $5.7 to $123 billion) that trade at 6-10% of AUM. Also, says the offering memo, "the valuation of ONE Financial would be approximately between 2.4x and 6.4x that of a traditional mutual fund company, or 24% to 64% of AUM." So you're getting a great deal, at $1 billion AUM.
One nit-picky question you might ask there is: does One Financial have $1 billion of AUM? Amazingly the offering memo does not say what One Financial's AUM is. It does say this:
ONE Financial is currently taking steps to diversify its distribution capability in an effort to raise large amounts of assets into its AWP Family, and as a complement to its wholesaling efforts. ... Given such diversified efforts, along with ONE Financial’s new sales and marketing platform which is four times the size of when it raised assets in its previous product lines, it has the following targets for assets under management (“AUM”) in the AWP Family: $250 million by the end of the first year following the Closing Date, $525 million by the end of year 2, $825 million by the end of year 3, $1.15 billion by the end of year 4, and $1.5 billion by the end of year 5.
So, see, $1 billion should be no problem. Remember it just fired most of its sales staff. (But: looking for producers!) Also, from that FP article: "O’Brien, who said that assets under administration (which includes some real estate assets) are now about $35-million ..." Anyway here is a helpful table of valuations that, again, is actually in the OM:
4. You might say, "how odd not to mention the current AUM, shouldn't that be in the financial statements?" Hahaha maybe? Actually the offering memo for accredited investors doesn't include financial statements. The OM for non-Ontario non-accredited investors does,5 including September 2012 audited financials, and including projected financials for 2014-2018 with high, medium, and low scenarios of $2.5 billion, $1.5 billion, and $500mm of AUM in five years, respectively. The latest unaudited historical financials, as of December 31, 2012, show a net worth of negative ($1.8mm) and a quarterly net loss of ($711,970) on $261,664 of revenue. No mention of AUM.
5. Perhaps worth noting that the first risk factor is "No underwriter or agent has been involved in the preparation of this Offering or performed any review or independent due diligence of the contents of this document."
6. Though, for not underwriting the deal, sales agents are doing pretty well: commissions include a 10% placement commission (8% in cash and 2% in shares), an additional 2% (in shares) Chairman's Council Bonus for agents who place more than $1mm of securities, plus a 4% Referral Dealer Fee (2% cash / 2% shares) in connection with sales that come in through referrals. So up to 16% total placement fees.6
7. So how's it going? Here is the press release announcing the offering, which was scheduled to close on or about April 29, 2013. Here is the press release announcing the extension of the offering to May 31 and it is among the great press releases of our time:
ONE Financial Corporation ("ONE Financial") announced today that it is extending the offering period for its initial private offering, in response to significant demand from Canadian investors and their financial advisors. According to ONE Financial's CEO Jeffrey O'Brien, demand for the offering - which provides high income and growth potential for accredited and other eligible investors - has been strong.
"We are pleased with the response to our initial offering, which reflects investors' current appetite for balancing attractive fixed income, with strong growth potential." commented O'Brien
The offering which was launched in the second week of April, was originally scheduled to close on April 30. However overwhelming requests from financial advisors to provide more time for their clients to participate prompted ONE Financial to extend the offering to May 31, 2013.
We extended the offering due to overwhelming demand is a new one to me,7 and I used to be a capital markets banker. But not in Canada? Anyway now it's June 6, maybe the offering closed and they were too busy firing their staff to put out a press release?
So: One Financial! Pretty much my new favorite company. Thoughts?
One Financial cuts more than 70% of Canadian work force [FP]
Initial Private Offering [One Financial]
Offering Memorandum (Non-Ontario) - ONE Financial Corporation Initial Offering [One Financial]
Offering Memorandum (Accredited Investors) [One Financial]
ONE Financial Corporation responds to strong demand for its initial offering [CNW]
1.The prospectus for these funds is basically normal-looking and audited by PwC. These funds are only a few months old and there doesn't seem to be any performance data for them, and their NAVs are all basically unch'd since inception.
There's some price data available on past products (closed-end structured notes that are no longer offered), though it's not immediately apparent how those translate into performance. The structured notes include the delightfully named "CASH+ Breakfast Notes," which, like, cash and breakfast? Sign me up!
2.From the FP: "He said that the bulk of the firm's sales and marketing department plus other support staff were let go. ... And as part of the plan, O'Brien said the firm is looking for sales people 'who will produce.'"
3.FP again: "'Why would all the staff turn up for work Monday morning if we had been told that the office was shut,' said one [employee], noting that tensions were so high that the police were called."
4."Immediately following final closing of the Maximum Offering, up to a maximum of 2,588,800 Common Shares, and 1,000 Founders Class Shares, of ONE Financial will be issued and outstanding on a fully diluted basis." Founders Class shares seem to be like Common Shares, except that they "retain the entire voting rights of ONE Financial." The Founding Shareholder (O'Brien) will own 2.4mm of the 2.6mm Common Shares.
5.This is a private offering it is available only in Canada and only to eligible investors. (Here is a law firm memo about those rules.) "Eligible investors" is defined on a province-by-province basis but in B.C., Nova Scotia, New Brunswick and Newfoundland, it means "all investors." In Ontario it means something close to the U.S. "accredited investor" status. Elsewhere it means you have to purchase through an investment advisor, or earn at least $75,000 a year, basically.
6.That's from page 19 of the non-Ontario OM, which also calculates even higher numbers assuming that the commissions paid in shares are repurchased at a premium. Also there's a further 2% fee to the placement agents if the company decides to extend the notes from 2.5 to 3.5 years, presumably to console them for customer complaints at that point.
7.I mean, "we closed the offering early due to overwhelming demand," and "we extended the offering due to weak demand": those are things I've heard. Never the combination though.