Letter to Shareholders
April 30th, 2010
To Our Fellow Shareholders,
This letter is intended to provide you with a summary of the proposed restructuring described in the Management Information Circular as well as a summary of our activities over the past year.
Restructuring
In December 2009, the Fund was notified of impending changes to the way the VCC program was going to be administered after this RRSP season. As a result of these impending changes PGF would not be able to raise additional capital under the existing rules, effectively capping the Fund as of March 1, 2010. We plan to launch a new VCC Fund with 2010 Tax Credits later this year.
Capping a Fund consisting of smaller companies creates several opportunities and challenges. The advantages of capping the Fund are that it will decrease the expenses of the Fund and allow the portfolio to mature without future dilution. Both of these items are a positive to the existing shareholders who will most certainly achieve a higher rate of return under this scenario. We expect shareholders to experience the maximum benefit of these changes over the next three to five years.
The most important challenge is to deal with all shareholders fairly as we continue to manage the portfolio. Under the historical structure, simply winding up the Fund may have been advantageous to older shareholders but disadvantageous to shareholders who purchased more recently. Alternatively, halting redemptions and distributing the proceeds on a prorata basis as they came available would have introduced a significant amount of uncertainty as it would probably take up to ten years to fully windup the portfolio.
After considering several options to address this situation, the Board of Directors of the Fund is recommending a new structure for the units of the fund that will be equitable to all shareholders. The proposed restructuring is set forth in the Fund’s Information Circular dated April 30, 2010.
The proposal is to split the existing PGF shares into two new shares - a redeemable share and a common share. The redeemable shares will represent 80% of the GAAP NAV on the conversion date and the common shares will represent the remaining 20%. Shareholders will be able to request redemption of their redeemable shares in essentially the same time frame as they would have prior to the restructuring.
It is our intention to list the common shares on the TSXV in order to provide liquidity for those shareholders who desire it. To provide even more immediate and complete liquidity, the redeemable shares can be converted into common shares on a NAV for NAV basis at any time and sold on the TSXV.
To further demonstrate our commitment to the success of Pender Growth Fund’s new structure, the Manager has agreed to waive all Performance Fees until all of the new PGF redeemable shares have been paid in full or converted into the new common shares.
We recommend all shareholders to vote in favour on this restructuring at the upcoming shareholder meeting to be held on May 31, 2010. We very much appreciate your support and look forward to building the value of this Fund over the next five years to the benefit of all shareholders.
NAV Performance
Last year was a very tumultuous year for the economy and financial markets. As at December 31, 2009, the Pricing Net Asset Value (“NAV”) for Pender Growth Fund was $6.42. This is a decrease of 6.28% since December 31, 2008. There was a dramatic decline in the early part of the year, when markets hit their lows on March 9 then the NAV remained relatively flat for the duration of the year. The decrease during the early part of the year was a result of the decrease in the carrying value of the Fund’s investments, particularly the public companies. Since that time, even though the equity markets have improved dramatically we have not yet enjoyed the benefit of this recovery in the junior public technology market. Typically, in a recession/recovery cycle, larger cap stocks recover before smaller companies. Since year end, the NAV has appreciated to $6.71 as of the date of this letter.
Key Portfolio Developments
At the beginning of 2009, the Fund had $10.7M of cash on hand. This positioned the Fund very well to deal with the economic crisis as it served to buffer the NAV as markets decreased in Q1, but more importantly, it provided the Fund with reserves at a time when investment capital in the technology world was scarce. This enabled the Fund to support its existing investments as well as deploy capital into new opportunities at a very good price. In 2009, the Fund made investments in three new companies and completed follow-on investments in four of its key portfolio holdings.
New Investments
The Fund invested $750,000 in Cytiva, a web-based software company that provides applicant tracking systems to businesses. Before investing, we followed this company for over four years; we believed in the business, respected the proven management team, and finally capitalized on an attractive valuation after the market correction.
PGF also invested $750,000 in Lat49, a web-based geo-contextual advertising platform that allows website publishers to place highly targeted ads on maps on their website. The company has a scalable technology platform that has achieved significant initial revenue traction with an impressive customer list that includes some of the largest newspaper publishers in the United States.
The Funds third new investment of the year was a $750,000 private placement in QHR Technologies. QHR specializes in software designed to improve the efficiency of the healthcare system. The company currently offers an Enterprise Management Software (EMS) and an Electronic Medical Records (EMR) solution a medical software company. The company has an impressive history of profitable growth in a rapidly growing market.
Follow On Investments
In 2009, the Fund completed follow on investments in four companies; BasicGov ($500,000), Cantronics ($500,000), Monexa ($1,000,000) and Tantalus ($445,000). Each of these companies has made significant progress over the year on new products, market development and revenue traction.
Outlook
We continue to be neither bullish nor bearish on the economy, but we are very pleased with the current positioning of the Fund. In changing times like this, competition is fierce and small nimble companies have an advantage as they are able to move more quickly and capitalize on new opportunities.
It’s been a testing decade for the technology sector. It started with a speculative bubble on technology stocks that were going to change the world because investors thought “it was different this time”. Although the NASDAQ decreased 44.2% over the decade, many of these technology companies have started to realize the promise that fuelled the speculation. We believe the next decade will see a return to favour for technology stocks as investors come to understand the progress that these companies have made over the last 10 years.
Additional Information
More information on portfolio developments can be found within the Management Report of Fund Performance. To view profiles of the Fund’s portfolio companies, click here, or to learn more about this Fund or other assets managed by PenderFund, please click here.
Shareholders have the option to receive annual and semi-annual Management Reports of Fund Performance and financial statements. In addition, the Fund is required to maintain a proxy voting record, which you can review by clicking here or by contacting us to request a copy.
Sincerely,
PenderFund Capital Management Ltd.
“Kelly Edmison”, Kelly Edmison, President
“David Barr”, David Barr, Chief Investment Officer