Canada income equity fund eyes C$100-plus mln IPO

* IPO seen raising more than C$100 million

* IPO may be part of a trend in income trust investing

* At Nov. 30 there were 155 income trusts worth C$110 bln

By Pav Jordan

TORONTO, Dec 23 (Reuters) - Brompton Funds Management is creating a new fund to take advantage of tax changes scheduled for the once-popular income trust sector, and targets a C$100 million ($95 million) IPO early next year.

Sources said Brompton would start shopping the new Canadian High Income Equity Fund around in January, and hoped the IPO would close the following month. The fund will invest in income trusts it sees as potential takeover targets.

"The investment manager believes that over the next 12 months, the 130 non-REIT income trusts with an aggregate market capitalization of over C$90 billion may become takeover targets due to their attractive valuations or are expected to convert to dividend paying corporations," Brompton Funds and investment manager Bloom Investment Counsel Inc said in a preliminary prospectus posted to Sedar, the Canadian document filing system for companies.

As of Nov. 30 there were 155 income trusts in Canada with market capitalization of about C$110 billion.

The trusts pay their profits out to unitholders in the form of regular distributions to unitholders. But many are seeking new owners or converting to corporations ahead of changes in 2011 that will rob them of the tax-exempt status that made them a popular investment early this decade.

Brompton said in the filing it plans to sell the fund for C$12 per combined unit, with each unit consisting of one unit and one warrant to purchase one unit.

Brompton could not comment further on the deal.

Canada pension funds and private equity are eyeing income trusts with steady earnings as homes for cash held over during the economic crisis as acquisitions bubble up again after a recession-induced deep freeze.

The fund will be in the vanguard of those wishing to take advantage of opportunities in the income trust sector, although it is not the first of its kind.

Just last week O'Leary Funds Management raised C$112.8 million in an initial public offering of 9,400,000 units, also at C$12 a unit, with its O'Leary Canadian Equity Income Fund.

O'Leary is also counting on finding deals among income trusts that became undervalued -- some say by as much as 30 percent -- after an investor exodus from trusts when the government announced the tax changes.

"I do think that there is opportunity there given that a number of these income trusts may be acquisition targets for pension funds and other private equity players," said Richard Steinberg, who heads mergers and acquisitions at one of Canada's biggest corporate law firms, Fasken Martineau.

"I think if they are successful early on, it may encourage others for similar purposes. Clearly, if this offer is oversubscribed, I think it will give a real impetus to others to put together similar funds."

The filing said the Canadian High Income Equity Fund investment manager will build a portfolio primarily of income trusts to focus on "businesses offering high distribution rates, mispriced assets and potential takeover targets."

It predicted initial sector allocation: Oil and Gas Trusts (30 percent), Power and Pipeline Trusts (25 percent), Business Trusts (15 percent), REITs (15 percent) and Dividend Paying Equities (15 percent).

The syndicate of agents for the offering is being co-led by CIBC World Markets Inc. (CM.TO) and RBC Capital Markets (RY.TO), and includes BMO Capital Markets (BMO.TO), National Bank Financial Inc. (NA.TO), Scotia Capital Inc. (BNS.TO), TD Securities Inc. (TD.TO), Canaccord Capital Corporation (CF.TO) HSBC Securities (Canada) Inc., Raymond James Ltd., Desjardins Securities Inc., Dundee Securities Corporation, Manulife Securities Inc (MFC.TO), Research Capital Corporation, Blackmont Capital Inc. and Wellington West Capital Markets Inc. (Editing by Janet Guttsman) ($1=$1.05 Canadian)