BCDF to stop redemption, convert to dividend distribution model

British Columbia Discovery Fund (VCC) Inc. (BCDF), a venture capital investment fund managed by Discovery Capital Management Corp., is seeking shareholder approval to convert the fund to a dividend distribution model.

Shareholders are specifically asked to approve two measures:

  1. To delete the redemption rights of the Class A Shares with exception of death and pending redemption of Class A Shares coded as DCC400;
  2. To make distributions by way of a tax-free return of capital to the extent possible rather than taxable dividends

The resolutions will be proposed at the Annual and Special Meeting of the Fund scheduled for June 8, 2017.

The board has determined that conversion to a dividend distribution model would be in the best interests of the shareholders and recommends that shareholders vote in favor of the special resolutions.

  • The benefits of having all Shareholders continuing to share in the potential upside of the remaining portfolio of divestiture opportunities; versus the risk that, if some Shareholders are fully redeemed out of the earlier exits, they may miss out on future exits at above the current carrying value.
  • The desirability of maintaining the status quo of distributions to Shareholders by way of redemptions on a “first requested” basis versus the potential unfairness to the “last requested” investors in the event that the last investments of the Fund are less liquid and more difficult to realize.
  • The fact that portfolio exits are episodic and that it is difficult to predict both the timing and value of any particular divestiture.
  • The increased risk to the Shareholders that are last to be redeemed, as the portfolio of investments becomes less diversified and as the Fund may also be left with reduced liquidity if the highest value holdings happen to be realized earlier.
  • The observation that some investors, or their advisors, are more proactive in requesting redemptions, to the disadvantage of others.
  • The need to manage cash for ‘follow on’ investments into existing portfolio companies and for working capital.
  • The likelihood that, having discontinued sales of shares, the Fund will not re-commence sales in the future.
  • The precedent that a change to a dividend distribution model from a redemption model has been proposed and adopted by other similar venture investment funds.
  • Distributing cash by way of dividends does not have any adverse tax consequence to the Shareholders who hold their shares in RRSPs. Although the few Shareholders who hold their shares in non-registered accounts may be subject to tax, as dividends are not expected to be considered ‘eligible’ dividends for tax purposes, this will be mitigated to the extent that the Fund intends, pursuant to the proposed dividend distribution model, to make distributions by way of return of capital to the extent possible.
  • The Manager would receive no additional consideration or benefit under a dividend distribution model when compared to the existing redemption policy.
  • The fact that Shareholders are being given the opportunity to vote on the Amendment of Articles Resolution.
  • The fact that the Board will adopt a cash distribution policy providing that all net proceeds from dispositions of holdings in the Fund’s investment portfolio, after the reservation of funds anticipated as required for strategic follow-on investments and for anticipated operating expenses and liabilities of the Fund will be distributed, to the extent capital is available, by way of return of capital on the Class A Shares.

Ted Liu

Ted Liu, M.Sc. (Mining Enginering), MBA (Finance), is the Editor of Private Capital Journal and the former Editor of Canadian Private Equity. Ted has been passionately tracking Canadian private capital industry since 1992, most recently served as Research Director for Canadian Venture Capital and Private Equity Association (CVCA) from 2013 to 2016.

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