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Cambridge Journal of Economics Advance Access originally published online on January 16, 2007
Cambridge Journal of Economics 2007 31(3):445-487; doi:10.1093/cje/bel041
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Right arrow K22 - Corporation and Securities Law
Right arrow G23 - Pension Funds; Other Private Financial Institutions
Right arrow G24 - Investment Banking; Venture Capital; Brokerage
Right arrow G28 - Government Policy and Regulation
Right arrow G32 - Financing Policy; Capital and Ownership Structure
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© The Author 2007. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved.

Mutual funds that invest in private equity? An analysis of labour-sponsored investment funds

Douglas J. Cumming and Jeffrey G. MacIntosh*

* Rensselaer Polytechnic Institute, Troy, and University of Toronto, respectively

Address for correspondence: Douglas Cumming, Associate Professor of Finance, Lally School of Management and Technology, Rensselaer Polytechnic Institute, 110 8th Street, Troy, NY 12180, USA; email: Douglas{at}Cumming.com; http://Douglas.Cumming.com

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.

Key Words: Mutual funds • Venture capital • Government sponsorship • Risk • Return • Fundraising

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

Manuscript received October 11, 2004; final version received September 2, 2006.


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