The VenGrowth Investment Fund Inc. ("VenGrowth I")

May 31, 2011 17:17 ET

VenGrowth Enters Into Letter Agreement with Covington

Special Committee selected the deal after a rigorous process

Definitive merger agreement to be signed upon successful regulatory and legal interventions

Deal targeted to close on or about August 31, 2011

Highlights

- Deal targeted to close on or about August 31, 2011

- Beneficial redemption options for shareholders

- Redemptions can begin immediately on closing

- Increased liquidity to finance redemptions and follow-on investing

- Combined cash and near-cash to increase to approximately $74 million

- MERs expected to decrease by an average of approximately 50 basis points

- No contract termination costs paid by the VenGrowth Class A shareholders

TORONTO, ONTARIO--(Marketwire - May 31, 2011) - The Boards of Directors of the VenGrowth Funds today announced the Funds have entered into a letter agreement with Covington Capital Corporation ("Covington") as the agent for Covington Fund II Inc. ("Covington II"). This deal was selected following a comprehensive Special Committee process where 54 potential parties were approached. The letter agreement outlines a transaction in which Covington II would merge with the five retail VenGrowth funds:

The VenGrowth Investment Fund Inc. ("VenGrowth I")

The VenGrowth II Investment Fund Inc. ("VenGrowth II")

The VenGrowth III Investment Fund Inc. ("VenGrowth III")

The VenGrowth Advanced Life Sciences Fund Inc. ("VenGrowth ALS"), and

The VenGrowth Traditional Industries Fund Inc. ("VenGrowth TIF")

(collectively the "VenGrowth Funds") and the New Generation Biotech (Equity) Fund ("NGBE") in exchange for shares of Covington II (based on the net asset value of the VenGrowth Fund shares, Covington II shares and the NGBE shares on the closing date), with the result that shareholders of the VenGrowth Funds who do not elect to redeem their VenGrowth Fund shares on the terms set out in the letter agreement will become shareholders of Covington II.

"The deal is structured to serve VenGrowth Class A shareholders' interests by establishing a closing date and providing the financial resources needed for redemptions and follow-on financing," said John Crow, Chair of the Board of the VenGrowth Funds and Co-Chair of the Special Committee of the VenGrowth Funds. "We have a negotiated agreement that can be implemented without additional costs to the VenGrowth Funds, and overall fees will be reduced."

Mr. Crow continued, "This deal is proceeding to a definitive merger agreement. A management information circular will be mailed if and when we receive a successful regulatory or other outcome regarding GrowthWorks' solicitation. The Special Committee's position in our application to the OSC is that VenGrowth shareholders themselves should be able to consider and choose the transaction they determine is best for them."

"Covington is very pleased to have negotiated this deal to acquire the VenGrowth Funds," said Scott Clark, Managing Partner, Covington Capital Corporation. "We look forward to signing a definitive merger agreement and putting the deal in front of shareholders for their consideration."

Deal Terms and Conditions

Closing Date

The transaction is targeted to close on or about August 31, 2011.

Negotiated Deal

Covington and the Special Committee of the VenGrowth Funds, along with their respective legal and financial advisors, have developed a comprehensive deal. Due diligence has been substantially completed by both parties.

Increased Cash Resources

Combined cash and near-cash is expected to increase to an estimated total of $74 million before considering public venture investments.

Beneficial Redemption Options

Shareholders in VenGrowth Traditional Industries and VenGrowth III will continue to have no redemption restrictions.

VenGrowth I, VenGrowth II, and VenGrowth Advanced Life Sciences shareholders will have two options – they may elect to immediately redeem up to $30 million in aggregate of their shares for cash at a value that is equal to the net asset value ("NAV") per share at closing less a redemption fee of 25% or, alternatively, they will receive an equivalent value of Covington II shares reflecting the full value of their VenGrowth Fund shares determined at the date of closing. If shareholders request redemptions in excess of $30 million, redemptions will be processed on a pro rata basis.

Shareholders in VenGrowth I, VenGrowth II and VenGrowth ALS that receive Covington II shares may also receive 15% of their shareholdings in cash each year without any redemption fee. Such redemptions are expected to be available approximately six months after closing and continue for four years. These annual redemption options are non-cumulative and will expire if not exercised in any given year. After these four years, there will be no redemption restrictions.

Financing

Financing for the redemption option will be managed through a debt facility, which is being arranged by Covington through entities managed by Paul Capital Advisors, LLC. The debt facility will be $20 million to $30 million with an approximate annual interest charge of 18%. To repay the loan, Paul Capital will receive a percentage of sale proceeds.

These financial resources are expected to be adequate to fund estimated redemptions as well as follow on investment requirements.

Reduced Fees

For most VenGrowth Class A shareholders the ongoing Management Expense Ratios ("MERs") are expected to decrease by an average of approximately 50 basis points.

Preserving Shareholder Value

No contract termination costs, reserves or adjustments will be paid from or charged to the Class A shareholders of the VenGrowth Funds.

Based on due diligence that has been completed prior to the signing of the letter agreement, the parties have agreed on a portfolio valuation process involving their respective auditors. This process ensures a fair approach to determining relative value at closing in order to protect the interests of the Class A shareholders of the VenGrowth Funds, Covington II and NGBE.

Manager and Sponsor Fees

Negotiated arrangements have been completed under the supervision of the Special Committee with both the VenGrowth Managers and the Sponsors.

Covington will be taking over as Manager of the Funds. The existing management and administration contracts for the VenGrowth Funds will be terminated. No contract termination costs will be paid by the VenGrowth Class A shareholders. Termination costs will be paid out of the ongoing management fees at a rate of 1.4% of NAV - without any increase in cost to shareholders. Overall management fees will be reduced.

Covington II will pay an Incentive Participation Amount ("IPA") of 15% (reduced from the current 20%) for the VenGrowth Funds' investments in the merged portfolio. The IPA is only payable if the full amount of the original cost of the specific investments transferred into Covington II is recovered.

The IPA will be shared equally between Covington and the VenGrowth Manager.

New retail funds raised and managed by Covington will also share fee income equally between Covington and the VenGrowth Manager.

The existing Capital Maintenance Fees will terminate eight years from the date of the issuance of the applicable shares.

The VenGrowth Manager will provide reasonable transition services as required.

The Canadian Police Association and the Association of Canadian Financial Officers will become co-sponsors of the merged Covington II, but the total sponsor fees will not exceed 16 basis points of the combined fund's NAV, which is less than the sponsor fees being paid by the VenGrowth Funds.

Rigorous Process Followed

The Special Committee of the VenGrowth Funds established a rigorous, open and competitive process to find the best deal for VenGrowth Class A shareholders. To aid their work, the Special Committee received independent financial advice from Crosbie & Company Inc. ("Crosbie").

In reviewing all of the proposals submitted, the Special Committee and Crosbie considered, among other things, the following criteria:

  • the liquidity of the merger partner must not risk the ability of VenGrowth shareholders to seek redemptions either immediately or in the future;
  • the valuations and return potential of the merger partner's portfolio;
  • the merger partner's track record for creating shareholder value;
  • the ability to lower expected ongoing management fee structure and MERs; and,
  • how the merger partner intends to finance any liquidity proposed for VenGrowth shareholders.

In the course of their review, Crosbie approached a total of 54 entities, including other LSVCCs, venture capital management companies, private equity groups, pension funds, mutual fund companies, secondary asset buyers, and groups that provide other forms of portfolio financing. Based on an extensive review, Crosbie and the Special Committee concluded that the Covington transaction represented the most attractive alternative for the Class A shareholders of the VenGrowth Funds.

Conditions

Once the definitive merger agreement has been signed, the completion of the transaction would be subject to the following conditions:

  • VenGrowth Class A shareholders approve the transfer of at least $200 million of fund assets to Covington II
  • receipt of all applicable regulatory, shareholder and other third-party approvals and consents.

Non Solicitation, Fiduciary Out and Transaction Expenses

The definitive merger agreement will contain customary non-solicitation provisions restricting the ability of the VenGrowth Funds to solicit alternative transactions. This condition is subject to a customary "fiduciary out" allowing the boards of the VenGrowth Funds to accept an alternative offer that they consider to be superior.

The definitive merger agreement will also include a $1 million break fee payable to Covington.

Covington, the VenGrowth Funds, and the VenGrowth Manager have agreed to cost sharing arrangements associated with certain transaction and merger costs. Both Covington and the VenGrowth Manager have the right to cap their respective costs at $1.75 million. Certain of these costs would be recoverable by the managers if the transaction fails to close.

Finalizing Definitive Merger Agreement and Information Circular

Covington and the VenGrowth Special Committee target to complete a definitive merger agreement and information circular on or about June 9, 2011.

Covington will sign the definitive merger agreement if and when the Ontario Securities Commission or a court orders that VenGrowth shares cannot be voted under support agreements solicited by GrowthWorks or if GrowthWorks agrees not to vote such shares.

Covington Maintains Right to Terminate Letter Agreement

Covington has the right to terminate its obligations under the letter agreement if the support agreements solicited by GrowthWorks can be voted in favour of the GrowthWorks proposal or against the approval of the proposed transaction with Covington; or the definitive merger agreement has not been executed by July 31, 2011.

OSC Hearing Against GrowthWorks on June 1

The Special Committee is proceeding with their application to the Ontario Securities Commission to cancel the GrowthWorks' support agreements. The OSC hearing is scheduled to start on June 1, 2011.

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