BMO Asset Management Inc. and The Top Funds
Headnote
National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief from conflict-of-interest investment restrictions in paragraphs 111(2)(b) and (c) and subsection 111(4) of the Securities Act (Ontario) to permit pooled fund to invest substantially all of its assets in an underlying investment that is not an investment fund and that is managed by a third-party asset manager, subject to conditions.
Applicable Legislative Provisions
Securities Act, R.S.O. 1990, c. S.5, as am., ss. 111(2)(b), 111(2)(c), 111(4), and 113.
June 14, 2024
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF BMO ASSET MANAGEMENT INC. (the Filer) AND THE TOP FUNDS (as defined below)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Filer, on behalf of each of the Filer and any affiliate of the Filer acting as portfolio manager, and on behalf of BMO Carlyle Private Equity Strategies Fund, a mutual fund trust to be formed under the laws of the Province of Ontario (the Top Fund) for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) exempting the Top Fund from the restrictions in the Legislation which prohibit:
(a) 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;
(b) an investment fund from knowingly making an investment in an issuer in which
(i) any officer or director of the investment fund, its management company or distribution company or an associate of any of them, or
(ii) any person or company who is a substantial security holder of the investment fund, its management company or its distribution company;
has a significant interest; and
(c) an investment fund, its management company or its distribution company from knowingly holding an investment described in paragraph (a) or (b) above
(collectively, the "Related Issuer Relief"),
to permit the Top Fund to invest substantially all of its assets in securities of Carlyle AlpInvest Private Markets Sub-Fund -- I, a sub-fund of Carlyle AlpInvest Private Markets SICAV -- UCI Part II, an investment company with variable capital (société d'investissement à capital variable) established as a public limited liability company (société anonyme) in accordance with the Luxembourg law of 10 August 1915 on commercial companies and registered under Part II of the Luxembourg Law of 17 December 2010 relating to undertakings for collective investment and in which an affiliate of the Filer will have a significant interest (the Underlying Investment).
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 subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (together with Ontario, the Jurisdictions).
Interpretation
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
This decision is based on the following facts represented by the Filer:
The Filer
1. The Filer is a corporation incorporated under the laws of Ontario with its head office located in Toronto, Ontario.
2. The Filer is registered as an investment fund manager (IFM) in each of Ontario, Québec and Newfoundland and Labrador, as a portfolio manager (PM) and an exempt market dealer in each of the Jurisdictions, as a derivatives portfolio manager in Québec and as a commodity trading manager in Ontario.
3. The Filer is the IFM and PM of the Top Fund.
4. An affiliate of the Filer may initially hold a significant interest in the Underlying Investment.
5. The Filer is not in default of securities legislation in any of the Jurisdictions.
The Top Fund
6. The Top Fund will be a trust formed under the laws of Ontario.
7. The Top Fund will be a "mutual fund" under the Legislation.
8. Units of the Top Fund will be offered only on a private placement basis pursuant to available exemptions from the prospectus requirements under Canadian securities legislation.
9. The Top Fund will not be a reporting issuer in any of the Jurisdictions.
10. The Top Fund intends to invest, directly or indirectly, in securities of the Underlying Investment, provided the investment is consistent with the Top Fund's investment objectives and strategies.
11. The Top Fund qualifies to invest in securities of the Underlying Investment pursuant to applicable exemptions from the prospectus requirement under National Instrument 45-106 Prospectus Exemptions (NI 45-106) and/or the Legislation.
12. The Top Fund is not in default of securities legislation in any Jurisdiction.
The Underlying Investment
13. The Underlying Investment will be an alternative investment fund (within the meaning of such term under Luxembourg law) established as a SICAV under the laws of Luxembourg.
14. Securities of the Underlying Investment, if distributed to investors in Canada, will be distributed to such investors solely pursuant to exemptions from the prospectus requirements in accordance with NI 45-106 and the Legislation and may be sold by way of prospectus or private placement in other jurisdictions. The Underlying Investment may be distributed globally.
15. The Underlying Investment will not be a reporting issuer in any of the Jurisdictions.
16. The Underlying Investment will not be an "investment fund" under the Legislation.
17. The Underlying Investment will have a prospectus which will be provided to investors in the Top Fund.
18. The Underlying Investment will produce audited financial statements on an annual basis, in accordance with applicable generally accepted accounting principles, and with a qualified auditing firm as the auditor of those financial statements.
19. The investment objective of the Underlying Investment will be to achieve superior returns principally through long-term capital appreciation by pursuing an evergreen private equity investment strategy, primarily investing in private equity secondary investments, co-investments and primary investments. The Underlying Investment will allocate its assets across a global portfolio of private markets investments (including direct investments in portfolio companies, secondary purchases of interests in funds and direct subscriptions for interests in funds). Under normal circumstances, the Underlying Investment intends to invest and/or make capital commitments of at least 80% of its net assets (plus the amount of any borrowings for investment purposes) in private markets investments. As part of its liquidity management strategy, the Underlying Investment intends to maintain a portion of its net asset value in liquid investments, including, but not limited to, broadly syndicated term loans and other fixed income investments, which may account for approximately 5 to 15% of the net asset value of the Underlying Investment from time to time (subject to fluctuations based on the Underlying Investment's cash requirements). The Top Fund will not participate in the business or operations of the Underlying Investment.
20. The Top Fund will not actively participate in the business or operations of the Underlying Investment.
21. AlpInvest Partners B.V., a third-party asset manager, is the investment fund manager and portfolio manager of the Underlying Investment. The Underlying Investment will calculate a net asset value that is used for the purposes of determining the purchase and redemption price of the securities of the Underlying Investment.
Investments by the Top Fund in the Underlying Investment
22. An investment by the Top Fund in the Underlying Investment will only be made if the Underlying Investment is compatible with the investment objectives and investment strategy of the Top Fund.
23. The Filer believes that an investment by the Top Fund in the Underlying Investment will provide the Top Fund with an efficient and cost-effective manner of pursuing portfolio, asset class, and strategy diversification. The Top Fund will also gain access to the investment expertise of the portfolio manager of the Underlying Investment and the Underlying Investment's investment strategy, which would otherwise not be available to the Top Fund or to the investors in the Top Fund.
24. Investments by the Top Fund in the Underlying Investment will be effected at an objective price. The Filer's policies and procedures provide that an objective price, for this purpose, will be the net asset value per security of the applicable class or series of the Underlying Investment.
25. The Underlying Investment will be valued and redeemable at least as frequently as, and contemporenously with, the Top Fund.
26. The Underlying Investment will be valued and redeemable monthly, provided that redemptions are permitted during the first 12 months of an investor's investment subject to an early redemption fee of 2% of the relevant redemption price. The Underlying Investment will be subject to a redemption limitation of 1.667% of the aggregate outstanding shares per month and 20% of the average number of shares in issue per annum (or such other higher limit that may be set from time to time).
27. The value of the assets of the Underlying Investment will be calculated by an independent fund administrator that has been appointed by the investment fund manager of the Underlying Investment. The net asset value of the Underlying Investment will be calculated monthly as the value of the total assets of the Underlying Investment, less all of its liabilities, including accrued fees and expenses, each determined as of the relevant valuation date. The investment fund manager of the Underlying Investment may also engage independent external valuation advisors in the future to provide positive assurance or other forms of valuation support for the Underlying Investment's valuations. Furthermore, the regulatory regime applicable to the Underlying Investment requires that the valuation of its assets be conducted separately and independent from the portfolio management function.
28. The Filer or an affiliate of the Filer will manage the liquidity of the Top Fund having regard to the redemption features of the Underlying Investment to ensure that it can meet redemption requests from investors of the Top Fund. The Filer expects that liquidity management will be achieved through the use of structuring and terms to manage its liquidity, which may include establishing cash reserves, establishing a basket of liquid investments, setting off subscription proceeds against redemptions and/or utilizing credit facilities. The approach taken will depend on, among other things, the liquidity profile of the Underlying Investment and the anticipated needs of the Top Fund.
29. An investment by the Top Fund in the Underlying Investment will only be made if such investment represents the business judgment of a responsible person uninfluenced by considerations other than the best interests of the Top Fund.
Generally
30. The amount invested from time to time in the Underlying Investment by the Top Fund may exceed 20% of the outstanding voting securities of the Underlying Investment. As a result, the Top Fund could be deemed to be a "substantial security holder" of the Underlying Investment within the meaning of section 110 of the Legislation, contrary to paragraph 111(2)(b) of the Legislation.
31. An officer or director of the Filer or of an affiliate of the Filer may have a "significant interest" in the Underlying Investment and/or a person or company who is a substantial security holder of the Top Fund, the Filer or an affiliate of the Filer may have a "significant interest" in the Underlying Investment within the meaning of section 110 of the Legislation, which under paragraph 111(2)(c) of the Legislation, would prohibit the Top Fund from investing in the Underlying Investment.
32. Since the Underlying Investment will not be an "investment fund" as defined in the Legislation, the Top Fund is unable to rely on the exemption from the investment restrictions of section 111 of the Act that is provided under subsection 2.5.1(2) of NI 81-102 for non-reporting issuer investment funds that purchase or hold securities of another non-reporting issuer investment fund (Codified Exemption).
33. No fees or sales charges will be incurred, directly or indirectly, by the Top Fund with respect to an investment in the Underlying Investment that, to a reasonable person, would duplicate a fee payable by the Top Fund to the Filer or its investors.
34. In respect of an investment by the Top Fund in the Underlying Investment, no management fees or incentive fees will be payable by the Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Investment for the same service.
35. The offering memorandum of the Top Fund will be provided to prospective investors in such Top Fund prior to the time of investment, and will disclose: (a) that the Top Fund will invest, directly or indirectly, all, or substantially all, of its assets in securities of the Underlying Investment; (b) the fees, expenses and any performance or special incentive distributions payable by the Underlying Investment; (c) the process or criteria used to select the Underlying Investment, if applicable; (d) that the Filer, an affiliate of Filer or a substantial security holder of the Filer may have a significant interest in the Underlying Investment, and the potential conflicts of interest which may arise from such relationships; and (e) for each officer, director and/or substantial security holder of the Filer or its affiliate, or of the Top Fund, that has a significant interest in the Underlying Investment, and for the officers and directors and substantial security holders who together in aggregate hold a significant interest in the Underlying Investment, the approximate amount of the significant interest they hold, on an aggregate basis, expressed as a percentage of the Underlying Investment's net asset value, and the potential conflicts of interest which may arise from such relationship.
36. The Top Fund's investment in the Underlying Investment will be disclosed to investors in the Top Fund's offering memorandum and, where applicable, periodic reports and financial statements.
37. The Underlying Investment will produce audited financial statements on an annual basis, in accordance with applicable generally accepted accounting principles, and with a qualified auditing firm as the auditor of those financial statements. The Filer will have access to audited financial statements prepared in respect of the Underlying Investment made by the Top Fund.
38. The Filer believes that a meaningful allocation to private equity and other alternative investments provides Top Fund investors with unique diversification opportunities and represents an appropriate investment tool for the Top Fund in achieving that diversification.
39. Securities of the Underlying Investment are not qualified investments for investment by tax-free savings accounts (TFSAs), and trusts governed by registered retirement savings plans, registered retirement income funds, registered education savings plans, deferred profit sharing plans registered disability savings plans and other similar plans, each a defined term under the Income Tax Act (Canada) (collectively, Tax Deferred Plans).
40. The Top Fund will be formed as a trust for the purpose of accessing a broader base of investors, including TFSAs, Tax Deferred Plans and other investors that may not be able to, nor wish to, invest directly in the Underlying Investment.
41. The Top Fund's investment in the Underlying Investment will represent the business judgment of a responsible person uninfluenced by considerations other than the best interests of the Top Fund.
42. Absent the Related Issuer Relief, the Top Fund would be precluded from purchasing and holding securities of the Underlying Investment due to the investment restrictions contained in the Legislation. Specifically, the Top Fund would be prohibited from (i) becoming a substantial securityholder of the Underlying Investment and (ii) investing in an Underlying Investment in which an officer or director of a Filer, or a person or company who is a substantial securityholder of the Top Fund or a Filer, has a significant interest.
Decision
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 Related Issuer Relief is granted provided that:
(a) the securities of the Top Fund and the Underlying Investment, if distributed in Canada, are distributed in Canada solely to accredited investors pursuant to exemptions from the prospectus requirements in accordance with NI 45-106;
(b) any direct or indirect investment by the Top Fund in the Underlying Investment is compatible with the fundamental investment objectives of the Top Fund;
(c) at the time of the purchase by the Top Fund, directly or indirectly, of securities of the Underlying Investment, the Underlying Investment holds no more than 10% of its net asset value in securities of other investment funds, unless the Underlying Investment:
(i) is a "clone fund" (as defined in NI 81-102); or
(ii) purchases or holds securities:
(A) of a "money market fund" (as defined in NI 81-102); or
(B) that are "index participation units" (as defined in NI 81-102) issued by an investment fund;
(d) no management fees or incentive fees will be payable by the Top Fund that, to a reasonable person, would duplicate a fee payable by the Underlying Investment for the same service;
(e) no sales or redemption fees will be payable as part of the investment by the Top Fund in the securities of the Underlying Investment, unless the Top Fund redeems its securities of the Underlying Investment during a lock-up period, in which case an early redemption fee may be payable by the Top Fund;
(f) the securities of the Underlying Investment held by the Top Fund will not be voted at any meeting of the security holders of the Underlying Investment, except that the Top Fund may arrange for the securities of the Underlying Investment it holds to be voted by the beneficial holders of securities of the Top Fund;
(g) the Top Fund's investment in the Underlying Investment will be disclosed to investors in the Top Fund's offering memorandum and, where applicable, periodic reports and financial statements;
(h) at the time of investment by the Top Fund in the Underlying Investment, the aggregate amount of assets directed to the third party investment fund manager of the Underlying Investment will not represent more than 20% of the total assets under management of such third party investment fund manager as part of its overall asset management business;
(i) the Underlying Investment will produce audited financial statements on an annual basis, in accordance with applicable generally accepted accounting principles, and with a qualified auditing firm as the auditor of those financial statements;
(j) the Underlying Investment has an investment fund manager that meets the due diligence criteria established by the Filer for third party investment fund managers;
(k) the offering memorandum of the Top Fund will be provided to prospective investors in the Top Fund prior to the time of investment, and will disclose:
(i) that the Top Fund will invest, directly or indirectly, all, or substantially all, of its assets in securities of the Underlying Investment;
(ii) the fees, expenses and any performance or special incentive distributions payable by the Underlying Investment in which the Top Fund invests;
(iii) the process or criteria used to select the Underlying Investment, if applicable;
(iv) that the Filer, an affiliate of Filer or a substantial security holder of the Filer may have a significant interest in the Underlying Investment, and the potential conflicts of interest which may arise from such relationships;
(v) for each officer, director and/or substantial security holder of the Filer or its affiliate, or of the Top Fund, that has a significant interest in the Underlying Investment, and for, the officers and directors and substantial security holders who together in aggregate hold a significant interest in the Underlying Investment, the approximate amount of the significant interest they hold, on an aggregate basis, expressed as a percentage of the Underlying Investment's net asset value, and the potential conflicts of interest which may arise from such relationship;
(vi) that investors in the Top Fund are entitled to receive from the Filer, on request and free of charge, a copy of the offering memorandum or other similar disclosure document of the Underlying Investment; and
(vii) that investors are entitled to receive from the Filer, on request and free of charge, the annual financial statements of the Underlying Investment in which the Top Fund invests its assets.
(l) where an investment is made by the Top Fund in the Underlying Investment, the records of portfolio transactions maintained by the Top Fund will include the name of the Underlying Investment, as the case may be, being a related person in which an investment is made; and
(m) the Top Fund will, directly or indirectly, invest in, and redeem, the Underlying Investment at an objective price, which, for this purpose, will be the net asset value per security of the applicable class or series of the Underlying Investment. For greater certainty, the net asset value of the Underlying Investment is based on the valuation of the applicable portfolio assets to which the Underlying Investment has exposure, independently determined by an arm's length third party.
Application File #: 2024/0046
SEDAR Project File #: 6076327