Scan these two press release headlines sent minutes apart on May 25th, 2017.
Headline no. 1:
Headline no. 2
I think you will sense there’s a story there - Purpose is both buying shares and selling shares on the same day.
Here’s how I understand this story:
A year after Som launched Purpose Investments, he started a publicly-traded closed-ended fund called NexC Partners. If you are familiar with the EdgePoint story, NexC was modelled after Cymbria. NexC wanted to raise money from the public, which Purpose would then manage. As a bonus, NexC shareholders would get a stake in Purpose Investments, the amount of which depended on the success of the IPO. NexC ended up raising much less money than hoped - $36.5m. Nevertheless, shareholders got 5% of Purpose Investments at zero cost.
Getting a free option (especially one with no expiration day) is always a good deal - so far, so good. Som Seif was CEO, President and Chairman of publicly-listed NexC from 2013 to 2016. That year, his thinking changed. Purpose had reached $3B AUM. He resigned from NexC. In 2017, NexC decided to sell its 5% stake in Purpose Investments back to Purpose. By that point, Som was a mere director of NexC. Here's the rub: Purpose now has $27B in assets (a 9x since the public shareholders sold.) The transaction was approved by the “independent board members” of NexC. Nevertheless, it’s difficult not to surmise that Som Seif had some role in these decisions. At a minimum, he controlled Purpose, he could have refused to take part in a transaction where public shareholders were essentially being robbed of an opportunity. The reasons offered by NexC to sell their stake are hollow: “achieving liquidity”, “rewarding shareholders with a special cash dividend.” Is it credible that Purpose Investments - headed by Som Seif and newly accountable to OMERS would have bought back shares if it wasn't to their advantage?
NexC’s stake in Purpose had grown to represent 16% of its NAV. This is hardly a problem. You can contrast the NexC outcome with the actions of the EdgePoint people. Cymbria has maintained its stake in EdgePoint for now over 15 years. The original shareholders have been rewarded exponentially for their faith. I own it, it’s a buy and forget investment. In fact, right now, EdgePoint’s appraised value is exactly 15.95% of Cymbria’s NAV.
That NexC transaction viewed in ISOLATION raises questions. But at the same time, Som Seif was selling a stake in Purpose to OMERS. In the associated press release, Som is quoted as saying:
"We have seen tremendous growth in our business since our inception four years ago, and this new relationship with OMERS will provide us with the capital we need to advance our business faster and further. The opportunity in front of us now, to gain market share and to be the benchmark by which our peers are measured, is bigger than it has ever been.”
If he sincerely believed that, you can imagine how treacherous it is that on the same day, his Purpose had cashed out his original partners. Someone got screwed that day - either the NexC shareholders or OMERS. The venture arm of OMERS responsible for the Purpose investment was headed by Som’s bosom buddy John Ruffolo.
Since I first wrote this post, I have become aware that both transactions were done at the same price (ie NexC exited at the same price as OMERS bought in). I do wonder whether NexC was aware that OMERS was going to be providing capital to Purpose. In summary, the NexC people had to be convinced they had to get rid of their stake Purpose Investments while OMERS had to be convinced an investment in Purpose is the greatest thing since sliced bread. Vexing! NexC provided great returns to its shareholders - returns in the teens over its 4 year as a listed company. It just could have been so much more!
Here’s a poignant quote by Som Seif when NexC launched.
My goal with NexC was to give investors an opportunity to be an investor in Purpose. I have a long term plan that I will execute on and whatever we raise would make me happy.
He changed!