National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions – relief granted from the investment fund conflict of interest investment restrictions in securities legislation to permit pooled funds to invest in underlying pooled funds, subject to conditions.
Applicable Legislative Provisions
Securities Act (Ontario), R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(4), 113.
September 16, 2016
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS
IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
ENTRUST FOCUS PARTNERS LP
IN THE MATTER OF
ENTRUST 49 FOCUS FUND
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of the Fund for a decision under the securities legislation of the Jurisdiction (the “Legislation”) exempting the Filer and the Fund from the following provisions in connection with its investments in Underlying Entities and Stand-Alone Vehicles (each as defined below):
(a) the restriction contained in paragraph 111(2)(b) of the Legislation which prohibits an investment fund from knowingly making an investment in a person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial security holder; and
(b) the restriction contained in paragraph 111(2)(4) of the Legislation which prohibits an investment fund from knowingly holding an investment described in paragraph (a) above;
(such provisions herein called the “Substantial Security Holder Rules” and the requested relief, the “Substantial Security Holder Relief”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
a. the Ontario Securities Commission is the principal regulator for this application, and
b. the Filer has provided notice that section 4.7 of Multilateral Instrument 11-102 – Passport System (MI 11-102) is intended to be relied upon in each of the provinces of Canada, except Manitoba and Prince Edward Island (together with the Jurisdiction, the “Jurisdictions”).
Terms defined in National Instrument 14-101 – Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined herein.
This decision is based on the following facts represented by the Filer.
1. The Filer is a limited partnership established in Delaware, United States and registered with the U.S. Securities and Exchange Commission as an investment advisor. The Filer’s principal office is located in New York, United States.
2. The Filer is registered in the categories of investment fund manager and portfolio manager in Ontario, and in the category of investment fund manager in Quebec.
3. The Filer is not a reporting issuer in any Jurisdiction and is not in default of securities legislation in any Jurisdiction.
4. The Filer acts as the portfolio manager and investment fund manager of the Fund.
5. The Filer is a commonly owned and controlled affiliate of EnTrust Partners LLC, EnTrust Capital Management LP and EnTrust Partners Offshore LP (the “EnTrust Affiliated Managers”), all of whom are registered with the U.S. Securities Exchange Commission (SEC) as investment advisers.
6. The Fund is established as an open-ended investment fund under the laws of the Province of Ontario pursuant to a trust agreement dated July 16, 2014, as amended and restated on April 20, 2015 between the Filer and Computershare Company of Canada as the trustee (the “Trust Agreement”).
7. Securities of the Fund are offered for sale on a continuous basis to qualified investors in all provinces and territories of Canada other than Newfoundland and Labrador pursuant to exemptions from the prospectus requirements under National Instrument 45-106 – Prospectus and Registration Exemptions.
8. Units of the Fund are only distributed in Canada pursuant to exemptions from the prospectus requirement in accordance with NI 45-106.
9. The Fund is not a reporting issuer in any Jurisdiction and is not in default of securities legislation in any Jurisdiction.
10. The Filer is a “fund of funds” manager, more specifically a manager of hedge funds and the Fund is a fund of hedge funds. The Fund’s investment objective is to achieve long-term capital growth through investment in a diversified portfolio of private investment entities managed by independent managers selected by the Filer (each, an “Underlying Entity”).
11. The Filer engages in an extensive due diligence process when selecting an Underlying Entity for the Fund, which includes but is not limited to: (a) a scoring process based on the Filer’s proprietary due diligence procedures; (b) a review of critical documents of the manager of the prospective Underlying Entity; and (c) a background check on, and an on-site visit with, the manager and key back office personnel of the prospective Underlying Entity.
12. The Fund imposes an initial lock-up period of twelve (12) months from the date of an investor’s subscription (the “Initial Lock-Up Period”). With the expiry of the Initial Lock-Up Period, the Fund’s securities are redeemable upon a ninety (90) days’ prior written notice to the Filer. Accordingly, on the expiry of the Initial Lock-Up Period for the Fund’s first subscriber (January 1, 2016), the Fund may be considered to be a “mutual fund in Ontario” as of such date.
13. The Underlying Entities are managed by third party managers and advisers independent of, and selected by, the Filer. Investment in the Underlying Entities is offered on a private placement basis.
14. The Underlying Entities are almost always private investment entities such that access to the investment management of the Underlying Entities is not generally available to the public at large.
15. Securities of the Underlying Entities are typically redeemable at various intervals. As the Fund has a long-term investment horizon, the Fund is able to manage its own liquidity requirements taking into consideration the frequency at which the securities of the Underlying Entities may be redeemed.
16. The Filer believes that investing in the Underlying Entities offers benefits not available through a direct investment in the securities of issuers held by the Underlying Entities. Such benefits include diversification by both investment style and range of investments. In addition, in certain situations, the Filer may only be able to gain access to certain investee companies through an investment in an Underlying Entity.
17. Investing in the Underlying Entities will allow the Fund to achieve its investment objectives in a cost efficient manner and will not be detrimental to the interests of other security holders of the Underlying Entities.
18. In some situations, the Filer and one or more EnTrust Affiliated Managers may request that the manager of an Underlying Entity establish a stand-alone vehicle (“Stand-Alone Vehicle”) exclusively for the benefit of the Fund and/or other investment funds (the “Affiliated Funds”) managed by the EnTrust Affiliated Managers. Such Stand-Alone Vehicle would be managed by the manager of an Underlying Entity and have investment objectives similar to the Underlying Entity. The Stand-Alone Vehicle is a parallel investment entity holding the same or similar securities, in similar proportions, as its corresponding Underlying Entity. However, the only investors in the Stand Alone Vehicle would be the Fund and the Affiliated Funds. Having a Stand Alone Vehicle can benefit the Fund and the Affiliated Funds because where an investment fund has, in effect, a single investor, such investment fund is not subject to certain risks and uncertainties that result from a pooled investment. For example a Stand Alone Vehicle can be fully invested and not maintain cash on hand for funding redemptions, since the Filer and the EnTrust Affiliated Managers can work together to manage any redemptions. The Stand Alone Vehicle is not subject to the risk that it will be forced to sell positions that it would otherwise prefer to keep in order to meet redemption requests. Additionally, a Stand Alone Vehicle can be customized for the Filer and the Affiliated Funds for example by excluding a specific portfolio investment that would be included in the portfolio of an Underlying Entity.
19. Being members of the same corporate group, the Filer and the EnTrust Affiliated Managers share facilities and key decision makers. Although they are managed by separate legal entities, the Affiliated Funds and the Fund may be considered to be under common management. Because of this, the Fund and the Affiliated Funds may be considered “related investment funds” within the meaning of the Substantial Security Holder Rules. Paragraph 111(2)(b) contains a prohibition against an investment fund knowingly investing in a person or company in which the investment fund, alone or together with one or more related investment funds, is a substantial security holder. Such prohibition precludes the Fund from investing in the Stand-Alone Vehicles and may preclude it from investing in Underlying Entities in instances where it, along with the Affiliated Funds, invests directly in an Underlying Entity.
20. Investments by the Fund in a Stand-Alone Vehicle or an Underlying Entity will be effected at an objective price. According to the Filer’s policies and procedures, an objective price, for this purpose, shall be the net asset value per unit (“NAVPU”) of the Stand-Alone Vehicle or the Underlying Entity, as applicable.
21. It is not anticipated that the Fund by itself will become a substantial security holder of any Underlying Entity or Stand-Alone Vehicle.
22. Investments by the Fund in a single Underlying Entity or in a Stand-Alone Vehicle will not represent more than 10% of the Fund’s net asset value (“NAV”).
23. It is anticipated that the Underlying Entities and Stand-Alone Vehicles in which the Fund invests will have certain restrictions on redemptions, thereby helping to manage any potential liquidity challenges. For example, such Underlying Entities and Stand-Alone Vehicles are not obliged to process redemption requests above certain thresholds, with the intended effect of relieving the manager of the Underlying Entity or Stand-Alone Vehicle from having to liquidate portfolio investments in unfavourable circumstances in order to fund redemption requests. Furthermore in the case of a Stand Alone Vehicle, the Filer and the EnTrust Affiliated Managers would manage any redemption request so as to maximize returns to the Stand Alone Vehicle, and thus avoid premature or untimely liquidation of portfolio investments.
24. The Filer and the EnTrust Affiliated Managers actively monitor the holdings of the Fund and the Affiliated Funds in the Underlying Entities and Stand-Alone Vehicles. The Filer expects that any assets directed by the Filer and the EnTrust Affiliated Managers to any manager of an Underlying Entity, which would represent in excess of 20% of the assets of such Underlying Entity, would be subject to restrictions on redemptions as described in the preceding paragraph. The Filer also expects that where the aggregate direct holdings of the Fund and the Affiliated Funds (and the holdings of any Stand Alone Vehicle) represent in excess of 20% of the combined assets of the Underlying Entity (and any Stand-Alone Vehicle), the assets held by the Underlying Entity (and any Stand-alone Vehicle) would be highly liquid and no more than 10% of those assets will be illiquid assets, as defined in National Instrument 81-102 – Investment Funds (“NI 81-102”).
25. The Filer anticipates that any Underlying Entity and Stand-Alone Vehicle in which the Fund invests would itself have adopted or be subject to concentration guidelines such that the Underlying Entity or Stand-Alone Vehicle would not invest in excess of 20% of its net assets in any single portfolio investment. Any manager or sponsor of an Underlying Entity in which the Fund invests provides offering documents describing the investment and operational guidelines adopted by such manager or sponsor in the management of an Underlying Entity, or by extension, a Stand Alone Vehicle, and the Filer carefully reviews such offering documents. The Filer thus satisfies itself that the Fund’s investment portfolio has adequate portfolio diversification and liquidity, taking into account the portfolio diversification and liquidity policies of the Underlying Entities or Stand-Alone Vehicles, as the case may be.
26. The Fund and Affiliated Funds will not actively participate in the business or operations of the Underlying Entities, the Stand-Alone Vehicles, their managers or advisers. The Filer does not expect that the assets directed to any Underlying Entity or Stand-alone Vehicle will represent more than 20% of the total assets managed by that manager in its overall asset management business.
27. The Fund will prepare annual audited financial statements and interim unaudited financial statements in accordance with National Instrument 81-106 – Investment Fund Continuous Disclosure (“NI 81-106”) except to the extent that the Fund has received an exemption from NI 81-106.
28. Because the Fund is managed by the Filer and any Stand-Alone Vehicles and Underlying Entities are managed by unrelated third parties, they may not always have the same valuation and redemption dates. The Fund will not accept subscriptions and redemptions on a valuation date where the current value of one or more Underlying Entities or Stand-Alone Vehicles, alone or collectively, representing more than 10% of the Fund’s NAV, cannot be obtained by the Fund. The Fund will also not be available for redemption on a valuation date where Underlying Entities or Stand-Alone vehicles, alone or collectively, representing more than 10% of the Fund’s NAV, are not available for redemption.
29. The holdings by the Fund of securities of the Underlying Entities and of any Stand-Alone Vehicles will be disclosed in the Fund’s financial statements.
30. Since the Fund, the Underlying Entities and Stand-Alone Vehicles do not offer their securities under a simplified prospectus, they are not subject to NI 81-102 and therefore the Fund is unable to rely upon the exemption codified under subsection 2.5(7) of NI 81-102.
31. Any investment by the Fund in a Stand-Alone Vehicle and in an Underlying Entity will be aligned with the investment objectives, investment strategy, risk profile and other principal terms of the Fund. The weighting of the investment by the Fund in a Stand-Alone Vehicle or in an Underlying Entity will be reviewed and adjusted by the Filer as necessary to ensure that the weighting continues to be appropriate given the Fund’s investment objectives.
32. The Fund's investments in Stand-Alone Vehicles and Underlying Entities will represent the business judgment of responsible persons uninfluenced by considerations other than the best interests of the Fund.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Substantial Security Holder Relief is granted provided that:
1. units of the Fund are distributed in Canada solely pursuant to exemptions from the prospectus requirement in accordance with NI 45-106;
2. the investment by the Fund in securities of a Stand-Alone Vehicle or an Underlying Entity is compatible with the investment objectives of the Fund;
3. the Fund will not purchase or hold securities of a Stand-Alone Vehicle or an Underlying Entity unless:
a. at the time of the purchase of securities of the Stand-Alone Vehicle or Underlying Entity, the Underlying Entity or Stand-Alone Vehicle holds no more than 10% of its net assets in securities of other investment funds; or
b. the Stand-Alone Vehicle or Underlying Entity:
i. purchases or holds securities of a “money market fund” (as defined in NI 81-102); or
ii. purchases or holds securities that are “index participation units” (as defined by NI 81-102) issued by an investment fund;
4. no management fees or incentive fees are payable by the Fund that, to a reasonable person, will duplicate a fee payable by a Stand-Alone Vehicle or Underlying Entity for the same service;
5. no sales fees or redemption fees are payable by the Fund in relation to its purchases or redemptions of securities of a Stand-Alone Vehicle or Underlying Entity that, to a reasonable person, would duplicate a fee payable by an investor in the Fund;
6. the Filer, or any EnTrust Affiliated Manager, does not cause the securities of an Underlying Entity or Stand-Alone Vehicle held by the Fund to be voted at any meeting of holders of such securities, except that the Filer, or any EnTrust Affiliated Manager, may arrange for the securities the Fund holds of the Underlying Entity or Stand-Alone Vehicle to be voted by the beneficial holders of securities of the Fund;
7. the assets directed by the Filer, or any EnTrust Affiliated Manager, to any Underlying Entity or Stand-alone Vehicle will not represent more than 20% of the total assets managed by that Underlying Entity’s or Stand-alone Vehicle’s manager in its overall asset management business; and
8. each investor will be provided, in the offering memorandum or similar document of the Fund, with the following disclosure:
a. that the Fund will invest substantially all of its assets in Underlying Entities or in Stand-Alone Vehicles;
b. information as to the fees and expenses payable by or in respect of investment in the Underlying Entities or any Stand-Alone Vehicles that the Fund invests in, including any incentive fees or profit allocations or other allocations; and
c. that investors may receive from the Filer, or an EnTrust Affiliated Manager, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of the Underlying Entity (or Stand-Alone Vehicle) provided that to do so does not contravene applicable securities law or other legal obligations to which the Fund, the Filer, an Entrust Affiliated Manager is subject.
Ontario Securities Commission
Ontario Securities Commission