The Toronto-based investment management firm, Caldwell Investment Management, will be joining the ranks of investment managers who have agreed to pay the upfront costs associated with bringing a closed end fund to market

Although it’s not the first time that the concept has been used, Caldwell Investment Management is still set to join the ranks of investment managers who have agreed to pay the upfront costs associated with bringing a closed end fund to market.

That structure means that all the gross proceeds raised from investors will now be available to the manager to invest in the universe of companies it has selected. On a typical closed end deal, about 6-7 per cent of the gross proceeds get diverted to agents fees (typically 5.25 per cent) and issue costs that run to about 1.5 per cent. Those costs are paid by the fund.

Because of this, approximately $9.30 of the $10 that investors pay for each unit is used for investment. Clients refer to that practice as sticker shock. In the past Brookfield and Manulife have employed a similar structure. This still remains the norm for closed end offerings.

Though the firm pays the costs of going public, all the parties get paid for the work that they do. An important note is that under this model the manager, and not the fund, now pays those costs. Furthermore, Caldwell has raised the cash needed to pay for the upfront costs through a limited partnership from fixed income investors.

In addition, if the manager buys a unit in the market at a discount that is equal to or less than 6 per cent to NAV, the manager will receive that discount. Caps have been placed on how much the manager can earn from such market activities. Find out more here.

The offering for the Caldwell U.S. Dividend Advantage Fund marks the first time that the manager has raised capital from largely retail investors in a closed end format. As manager Caldwell will seek out opportunities from a group of U.S. dividend-paying equity securities that “exhibit a combination of low volatility and high profitability and are expected by the Manager to significantly benefit from the current accelerating U.S. economic expansion.” About 100 stocks meet those criteria.

The goal is to generate a 6 % annual distribution.

(Disclaimer : We are not associated with Caldwell Investment Management)