Mutual Funds that Invest in Private Equity? An Analysis of Labour-Sponsored Investment Funds

Abstract

This paper considers the structure, governance and performance of a unique class of mutual funds that receives capital only from individuals, and reinvests this contributed capital in private companies, as opposed to traditional mutual funds that invest in publicly traded companies. It considers the particular class of mutual funds known as Canadian Labour-Sponsored Investment Funds (LSIFs). In contrast to expectations, it is shown that LSIFs have artificially low betas, returns that have significantly underperformed industry benchmarks, average management expense ratios greater than 4%, and have collectively accumulated $Can10 billion (£4.3 billion) as at 2005 since their statutory inception in various Canadian jurisdictions in the 1980s and 1990s. It is shown that these incongruous data are directly attributable to the LSIF statutory governance structure.

Keywords: Mutual funds, Venture capital, Government sponsorship, Risk, Return, Fundraising

JEL Classification: G23, G24, G28, G32, G38, K22