[Recorded by Electronic Apparatus]
Monday, November 20, 1995
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[English]
The Chair: À l'ordre, s'il vous plaît.
We're pleased to have with us today before the finance committee, which is undertaking its pre-budget deliberations, leaders from the labour-sponsored investment fund community. This is an issue that I know is very important to you and to governments of all levels.
One of the challenges we face on this is that over the years very generous tax credits have been granted for investing in a labour-sponsored venture capital fund. If a person invests $5,000 they receive a federal tax credit of 20% and an Ontario tax credit or other provincial tax credit of 20%, which means that their net cost after tax for that $5,000 investment is only $3,000.
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If at the same time that $5,000 is invested in a registered retirement savings plan and the person investing is in the 50% tax bracket, then the deduction from income tax by virtue of putting it into the RRSP is 50%. So your net after tax is $2,500, but then you take the two tax credits, the federal and provincial, which are $1,000 each, and the net cost for a person in a 50% tax bracket is only $500 for that $5,000 investment.
Assuming that all the funds of the labour-sponsored investment fund are invested in treasury bills at 5% interest, the gross income on that $5,000 would be $250; after tax it would be $125. This would be a return on investment after tax of $125 on something that cost you $500, or net 25%.
If you are in a tax bracket above 50%, the highest tax bracket in Ontario, your net cost would be about $340 instead of $500.
I think all of us realize that governments at both levels have created very generous incentives for investment in these particular vehicles. As I understand it, these vehicles were formed from an idea put forward by the Canadian Federation of Labour in 1984. The idea was that workers could invest their funds in a vehicle that would be professionally managed but would in turn create jobs by investing in small and medium-sized businesses, the area where those union people were working, and thereby help to create jobs and stimulate the economy.
We have asked you to be with us today because I think all of us support the idea that workers who invest in their communities and help create small enterprises are doing a worthwhile thing. We ask you whether the tax incentives should remain as they are. We ask you whether the funds have in fact been doing their job of investing in Canada and creating economic opportunity for future generations of Canadians, or whether there are some changes we should be looking at.
With us tonight we have a very distinguished group of witnesses.
[Translation]
With us from the Fonds de solidarité des travailleurs du Québec is Mr. Fernand Daoust, Chairman of the Board of Directors and Mr. Raymond Bachand, Senior Vice-President.
[English]
From the Working Opportunity Fund of British Columbia we have Mr. David Levi, president and chief executive officer. From the Crocus Fund of Manitoba is Mr. Sherman Kreiner, president and chief executive officer. From the First Ontario Labour-sponsored Investment Fund we have Mr. Ken Delaney, president. From the Canadian Medical Discoveries Fund we have Dr. Calvin Stiller, chairman and chief executive officer. From the Integrated Growth Fund is Senator Consiglio Di Nino. From Vengrowth Investment Fund we have Mr. David Ferguson, vice-president. From Capital Alliance Ventures Inc. we have Richard Charlebois and Mr. Denzil Doyle. From CI-CPA Business Ventures is Grant Brown, president. From DGC Entertainment Ventures is Robb Hindson. From the Working Ventures Canadian Fund is Mr. Jim McCambly, president. Mary Macdonald is president of Mary Macdonald and Associates Ltd. Also appearing with the Integrated Growth Fund, along with Senator Di Nino, is Lise Foley, vice-president.
We welcome you.
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Who would like to begin? I thought maybe we'd have three or four minutes from each group here and then we would have an opportunity for members to make a presentation.
[Translation]
Would you care to begin, Mr. Daoust?
Mr. Fernand Daoust (Chairman, Board of Directors, Fonds de solidarité des travailleurs du Québec): Mr. Chairman, I would like to begin by thanking you and the members of your committee for inviting us to appear before you this evening. I will be speaking on behalf of the four largest labour-sponsored investment funds, including the Fonds de solidarité, of which I am the Chairman of the Board of Directors.
With me, as you mentioned, is Mr. Raymond Bachand, the Senior Vice-President of the Fonds; Mr. David Levi, the President and Chief Executive officer of the Working Opportunity Fund of British Columbia; Mr. Sherman Kreiner, President and Chief Executive Officer of the Crocus Fund of Manitoba; and Mr. Ken Delaney, President of the First Ontario Labour-sponsored Investment Fund.
The labour sponsors of these four investment funds are all associated with the Canadian Labour Congress. Consequently, we share the same vision of the principles and characteristics of these financial institutions and the way in which they were initially set up through enabling legislation passed by the federal government and most provincial governments.
Since our funds are among the longest established and most active, our experience enables us to assess the positive impact of these new financial institutions.
The labour-sponsored investment funds have existed for about 12 years. The fund I represent, the Fonds de solidarité, was the first such fund, and it was set up in 1983. Since that time, the labour unions in other provinces and the federal government have followed our example and have passed enabling legislation to set up more than 17 investment funds in all the provinces, except Alberta and Newfoundland.
Many of these new funds imitate the example of the Fonds de solidarité, while they are at the same time institutions designed to respond to their specific needs, to the features of the provincial economy, the labour population and their own philosophy.
We think that by complying with certain fundamental principles our financial institutions have been able to fulfill their mandate and achieve their objectives.
[English]
Our funds are venture capital corporations sponsored by defined labour bodies. We were established by provincial legislation and see public financial and tax incentives and guarantees of differing sorts.
As with other venture capital corporations, our funds are committed to providing an equitable rate of return to their investors and to providing risk capital in a diversified portfolio. But integrated with this financial commitment, our funds share three attributes that differentiate them from other venture capital institutions.
First, investment decisions are made through a rigorous process that includes a commitment to meeting both economic and social goals. Such integrated goals commonly include a commitment to job retention and job creation, a commitment to regional economic development, the use of social audit as part of a fund's financial analysis of a potential investee firm, and a commitment to changing labour management relations within investee companies.
Second, our funds share a commitment to participation by a broad range of average working people. This means a specific and fundamental commitment to providing economic and financial training to workers. It is important not to underestimate the importance of this feature, along with the important position of labour-sponsored funds in the venture market's continuing role for workers in the economy.
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If workers are to play this role to the maximum benefit of themselves, their enterprises, and their communities, then they need appropriate financial and management education. We take this part of our mandate very seriously indeed.
Worker participation is also promoted in different ways by different funds. For instance, the Crocus Fund of Manitoba is specifically mandated to facilitate employee ownership on a large scale. The First Ontario Fund also targets a percentage of its investments to firms with some level of employee ownership as well as to cooperatives.
Labour-sponsored funds have brought into the Canadian venture capital market a hitherto untapped source of investment capital, namely the money of thousands of working Canadians who would otherwise never have considered investing in this way. In fact, in some provinces labour-sponsored funds represent a large proportion of the available venture capital in some markets, and in in some cases they are virtually the only source of venture capital.
The third unique characteristic of our funds is a commitment to facilitating cooperation between labour and business. The four funds for which I speak share a commitment to promoting innovative approaches to labour relations. There is a direct correlation between the financial and economic education of workers and the introduction of participative management mechanisms on the one hand, and productivity and the ultimate competitiveness of investee firms on the other.
Let us turn now to the concrete impact of labour-sponsored funds in some key areas; first the issue of financing of small and medium-sized Canadian businesses. Speaking for our four funds, we believe all funds should be accountable on this score. For example, both Working Opportunity, British Columbia's labour-sponsored fund, and Manitoba's Crocus Fund finance projects between $100,000 and $5 million. Standard venture capital investments are usually not as low as $100,000. First Ontario, which is younger than the other funds I am speaking for, is committed by legislation to investing at least 40% in small and medium-sized businesses.
The Fonds de solidarité is mandated by our very founding legislation to support small and medium-sized businesses and regional and community development. We are particularly excited about the new regional and local funds we are in the process of instituting across Quebec. We now have 25 local funds in existence, with 50 expected by the spring of 1996 and with 16 regional funds that are, again, in the process of being created. These regional and local funds will advance investment minimums as low as $5,000 to $50,000 and $50,000 to $500,000 respectively.
Many knowledge-based or high-tech companies are very small in number of employees and many of them encounter great difficulties in convincing traditional sources of financing that they have a commercially viable product worth investing in. The Federal Business Development Bank has shown that more than half of all venture capital investments go to technology-oriented commercial concerns. As leading participants in the venture capital market, labour-sponsored funds play a vital role in supporting the research and development and high-tech sectors.
Such support is often part of the very mandate of the fund. Working Opportunity, for instance, focuses on the development of small and medium-sized firms in non-traditional sectors and industries that will bring diversity and high value-added to the B.C. economy. Le Fonds de solidarité has created a network of specialized funds to concentrate on innovative firms in biotechnology, aerospace, the production of environmental goods and services, and other high-tech industries. The Crocus Fund in Manitoba is mandated specifically to support technological innovation in production and is encouraged to support small and medium-sized companies featuring job-intensive, high value-added production.
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[Translation]
One of the main reasons governments support these labour-sponsored investment funds is that they must preserve and protect existing jobs and create new ones as well.
The nature of our institutions is such that we take this part of our mandate very seriously. For example, 167 investments made by the Fonds de solidarité made it possible to create or protect 15,400 jobs and to produce close to 1 billion dollars in value added in Quebec.
Before concluding my remarks, I would like to speak briefly about a final point that should shed some light on any discussion about labour-sponsored investment funds.
Each fund is molded by its own economic, social and political context. Each fund has its own mandate, mechanisms, control procedures and objectives. We can state that each fund makes a great contribution to the economic and social well-being of its province and its communities.
I would like to thank you for your patience. I'm sure we will have a lively discussion this evening.
The Chair: Thank you, Mr. Daoust.
I would like to ask each of our participants for the total investments of their respective funds and the amount currently invested in small and medium-sized businesses?
How much money is invested in the Fonds de solidarité des travailleurs du Québec?
Mr. Raymond Bachand (Senior Vice-President and Chief, Investments and Operations, Fonds de solidarité des travailleurs du Québec): At the moment, our assets total approximately 1.3 billion dollars, and we have 250,000 shareholders. As you know, we have a rule requiring us to invest 60% of the average assets of the preceding year in Quebec businesses with either a maximum of 20 million dollars in equity, or a maximum of 50 million dollars in assets. I don't know how you define SMBs. However, we always comply with the 60% rule.
The Chair: How much of this total have you invested in Quebec?
[English]
Mr. Bachand: As of year-end, we'll be $70 million above our threshold, our rule of 60%.
[Translation]
The Chair: How much would that be?
[English]
Mr. Bachand: So we'll be between $650 million and $700 million.
The Chair: Mr. Levi, were you going to make a presentation?
Mr. David Levi (President and Chief Executive Officer, Working Opportunity Fund of British Columbia): No, I'll respond to your questions.
In British Columbia our rule is that we have to invest 80% of the money we raise, so we actually have a higher threshold than anybody else in the country. We have raised $77 million. There's about $6 million or $7 million of profit, which is why we report $83 million as being the total value of the fund. But the actual fund-raising for which we received a tax credit was $77 million, and by year-end we'll be at about $22 million invested.
I should point out that we have had $35 million of that $77 million for about six months. So we have invested over half of the funds that we've had for at least a year. Again, over time we will invest up to the 80¢ on every dollar we receive.
Mr. Sherman Kreiner (President and Chief Executive Officer, Crocus Fund of Manitoba): We have just slightly over $26 million in our fund. We have invested about $9 million in small and medium-sized business. We have ramped up on a threshold - 20%, 40%, 60%. For this year we were supposed to be at 40%; in fact, we are at close to 75%. We've invested almost twice what our legislative mandate requires.
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Mr. Ken Delaney (President, First Ontario Labour-sponsored Investment Fund): We're in our first year of operation. We got our prospectus cleared in February. We had our licensed union sales people selling for only the last two weeks. So we're really still capitalizing. We've raised just $2 million. We're planning to have a full season this year. We'll be actively investing beginning in March 1996.
The Chair: Could we turn now to Dr. Stiller?
Mr. Calvin Stiller (Chairman and Chief Executive Officer, Canadian Medical Discoveries Fund): Thank you, Mr. Chair, for allowing us to come and talk about what I think is a vital enterprise. I'm just going to make some brief comments with respect to the origins of the Canadian Medical Discoveries Fund and what we've been able to do in the first year.
This came out of the Medical Research Council of Canada, which I consider to be the crown jewel of Canadian science, a $250 million annual federal investment in health sciences and discovery.
We had the Boston Consulting Group do a study two years ago addressing the issue of why we had this extraordinary disparity between the quality of Canadian science and discovery and the lack of a vibrant health care sector in terms of the private sector. It was identified that the missing ingredient in fact was the availability of pre-venture and venture capital that was knowledgeable.
Canadian medical science rates number one or number two in the G-7 with respect to effectiveness, efficiency, and impact, yet on an overall basis in Canada we were a net importer of medical technology. It was the old Canadian model of hewers of wood and drawers of water. I characterized it in the health care field as we discover, they exploit, and we buy back the product.
So the concept was that if in fact we had knowledgeable funds, we could correct this paradox.
The Professional Institute of the Public Service of Canada, a 34,000-member employee union group across the country that boasts five Nobel Prize winners in its alumni, sponsors the fund.
We raised $14.7 million in the last RRSP season. We will have $10.5 million of that invested by the end of this calendar year, so we'll be about 70% invested.
For every dollar we invest, we will have $4 co-invested. In other words, we'll be associated with $50 million of investment in this vital area of technology transfer from our university and health research institute bases into the private sector.
I'm not going to characterize them on an investment-by-investment basis.
I think Mary Macdonald has more generic knowledge with respect to the impact of venture capital, but I want to make just one point. In the U.S., licensing from universities and from technology institutes associated with academies of higher learning has an extraordinary impact. Indeed, a recent study by MIT has just demonstrated that the licensing of technology into the private sector in the U.S. creates $20 billion of annual investment and 150,000 jobs.
That is not being reflected in Canada. It's to that end that the Canadian Medical Discoveries Fund was formed.
When the MRC created its study group to put this fund together, we did an assessment of management, both north and south of the border, and put together what we thought was in fact the best manager who could be brought to the table to carry out what we believe the legislation enables us and demands us to do, which is to create a return to the investor.
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We consider that there are two investors at the table. One is the investor who writes the cheque with respect to the investment. The other one is society, which is our tax credit. So we feel, in a very serious way, a responsibility to get this out, invest it in good investments that can return market-competitive rates for our investor, and demonstrate that technology transfer will create high-value jobs and profit in economic activity in the private sector.
We were delighted at the investment opportunities. We believe that there are many more than we can possibly handle with respect to the capital available.
We would be happy to respond to any questions.
The Chair: You have $15 million so far. You will have invested $11 million by the end of the year. Is that what you are saying?
Mr. Stiller: We had $14.7 million as of March 1. We will have invested $10.5 million. Subsequent to that, we have raised an additional $3.1 million. We are looking, at the present time, at potential investments of $25 million that we believe meet the test of good, solid investments that should be created in our committee.
I also want to make a comment. When we started out, we looked at the issue of Canadian discoveries that we could commercialize. We have done that. We are delighted both with respect to start-ups, which is the creation of investments right within the university sector, and moving out into the private sector.
These are investments in established companies that we believe have a potential global mandate but are just in the process of announcing the taking of technology from offshore, bringing it into Canada, and marrying it to a technical base in Canada. We believe we can create a base by which the product will be developed and manufactured on Canadian soil for a global mandate.
The Chair: Thanks, Mr. Stiller.
Ms Foley, please.
Ms Lise Foley (Vice-President, Integrated Growth Fund): Thank you, Mr. President.
We believe that the stated objective of the policy is to create jobs and economic activity. In establishing the policy, it was decided to leave the task of finding and analysing investment companies to investment professionals in the private sector. We believe they were valid objectives at the time and are still valid now.
In just a little bit over one year, Integrated Growth Fund has invested 32% of its assets in eight different investments in a variety of industries. Although we have lost some, we invested in real companies with real people, creating job and business growth. In turn, we believe we provided the government with real tax dollars.
We do see two possible distortions that could have been created within the venture capital market: first, taking away the pool of capital used by conventional merchant bankers, and second, reducing the number of investment opportunities traditionally presented to merchant bankers.
LSVCCs are drawing their capital, as Mr. Fernand Daoust mentioned earlier, from the average individual who would not necessarily participate in this segment of the market. We are gathering our capital from a new segment, in comparison to the conventional merchant bankers, who would generally get their pool of funds from wealthy individuals and institutional clients.
In addition, we are not taking business away from the conventional market. We look at investing in small- to medium-sized Canadian companies. The legislation provides us with strict investment guidelines that are not imposed on conventional venture capitalists, who are not restricted to investing in Canadian companies as well. We cover, we believe, a niche in the market.
In supporting LSVCCs, you allow two things to happen. First, you are giving the public in general the opportunity to participate in a segment of the economy that would not otherwise be accessible to them. Second, you're making funding available to smaller companies.
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As I said before, we have made eight investments, which total $4.5 million. Of that $4.5 million, 20% has been funded by the federal government.
One of these investments, for example, is in a company in Simcoe, Ontario. Since we invested there, the company has increased its labour force by 33%, which represents 25 new jobs. Sales have grown from $5 million in 1994 to $8 million in 1995. Income taxes paid by the company went from $150,000 in 1994 to $500,000 in 1995. Payroll tax deductions went from $365,000 to just over $500,000 in 1995.
Another company is called Ontario Video Gaming Corporation. The company is bidding to obtain gaming licences in Ontario. If they obtain their licence, the company estimates to create 15,000 new jobs in Ontario and $550 million in new non-taxed government revenues.
I could go on and on with the companies that IGF has invested in. In one year, our five investments have collectively created approximately 40 new jobs, with a potential of 15 more. This therefore increased payroll expenses and tax remittance. In addition, some of these companies have already shown increases in revenue over the last year, along with increases in corporate income tax.
In a couple of days, we will supply this committee with more information on the investment we made.
IGF believes that it has met its end of the bargain in having rapidly taken a dynamic investment approach. We will continue to do so in the future.
Thank you.
The Chair: Merci, Ms Foley. You have how much in capital now?
Ms Foley: We have approximately $14 million in capital.
The Chair: Thank you very much.
Mr. Ferguson, please.
Mr. David Ferguson (Vice-President, Vengrowth Investment Fund Inc.): Let me start with the financial statistics.
Vengrowth launched its new labour-sponsored fund. We closed our initial funding on March 1, 1995, raising $29.5 million. Since that time, we've raised an additional $3.5 million. So our current fund size is $33 million. We currently have invested in three companies, for a total investment capital of $4 million. We currently have letters of intent outstanding for three more companies, which is equal to $7 million. We expect to close this by September. So our target is to have $11 million invested by the end of December.
I certainly share my colleague's viewpoint in terms of the importance of venture capital as an asset class in terms of helping young, growth-oriented firms achieve their potential, thereby improving economic activity in the process.
The only point I'd like to add is just with respect to the role that labour-sponsored funds are playing in terms of fulfilling a role in which traditional sources of venture capital are exiting.
Vengrowth is a well-established venture capital manager. We've been around for 13 years. We've managed, during our 13-year history, venture capital on behalf of institutional investors.
It's been our viewpoint that despite having produced some very good returns for institutional investors, they're still exiting from venture capital as an asset category for a number of different reasons. One of the reasons is that most institutional investors are going to the outsourcing of capital, which means that they're now relying on outside fund managers to invest their capital.
One of the implications of this is that these external fund managers live and die by their quarterly fund performance numbers. Because of this, they tend to shy away from investments that take anywhere from four to six years to mature.
Because of that, we see, in addition to other reasons, that traditional institutional investors are exiting from venture capital - perhaps Mary Macdonald can also speak to this - and that labour-sponsored funds are coming in where they're leaving.
Thank you.
The Chair: Thank you, Mr. Ferguson.
Mr. Charlebois.
Mr. Richard Charlebois (President, Capital Alliance Ventures Inc.): Thank you very much.
First, from a financial point of view, our total fund size, as of March 1, was $5.2 million. We're currently at $6 million. We have a little more then $1 million invested. There's another million to be invested in the next 45 days. By the end of December we will have approximately $2 million, or 40% of the fund, invested in venture-type situations.
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I would just like to echo Mr. Ferguson's comments on the institutional investors. If one were to look south of the border, much of the support for venture capital comes from institutional buyers for pension plans and insurance companies, among others. I think it has been clear over the last five years that the institutional investors in Canada have left the venture capital market.
I was at a meeting in Toronto last week where there were a number of buyers for large pension plans. It was very clear from the meeting that this situation is not about to change. I'm not optimistic at all that the institutional investors are about to re-enter the venture capital market. I therefore feel strongly that your ongoing support is very important for the health of the venture capital marketplace in Canada.
Thank you.
The Chair: Thank you, Mr. Charlebois.
Mr. Brown.
Mr. Grant Brown (President, C.I. Covington Fund Inc.): Thank you, Mr. Chair.
I have just one correction. The CI-CPA Business Ventures Fund's name is now C.I. Covington Fund. That was changed at our annual meeting. We were referred to as the alphabet fund one too many times, so we changed that.
Thank you very much for the opportunity to discuss this with you this evening. A lot of the comments I was going to make have already been said; however, there are a few other things I'd like to add.
Statistically we, as Vengrowth, closed on March 1, 1995 and raised $15.2 million this past season. Since that time we've invested 34% of that capital in 3 opportunities. It's important to know, on an individual basis, about those opportunities and how they have effectively paid for themselves, or will pay for themselves, on a pay-back for the tax credits.
The first opportunity, as part of our investment, actually moved its manufacturing facilities from the U.S. to London, Ontario, creating 34 brand-new jobs. It won't bee too long, on a $1.5 million investment, before the taxes from those new jobs pay for that particular investment. In addition to that, its research and development and all of its software activities will be handled in London, Ontario, as well. That recognizes Waterloo as being a hotbed for a good source for software developers.
The second investment we did was an absolute start-up, so any jobs created out of that investment.... We committed to $1.5 million, plus an additional $1 million once the fund is of a size to fit within the 10% guidelines. So it's a conditional investment for a follow-on on that one. Again, that was a start-up investment with a company that had actually been looking for capital for about a year and a half.
Since we put our money in our third investment it has created 20 new jobs and an additional $6 million of export product this year. It expects to double its revenues next year.
I think it's safe to say, on an individual investment basis, there ought to be no problem in justifying, on an economic basis, the tax credits on a per-deal basis. The problem is in the uninvested capital sitting in T-bills. I believe if the guidelines that are laid out, particularly in B.C. and the balance of the provinces, are adequate and enforced, it will accomplish what the government wants to accomplish.
The Chair: Thanks, Mr. Brown.
Mr. Hindson, please.
Mr. Robb Hindson (Vice-President, Finance, DGC Entertainment Ventures): Our fund has been in existence for about a year and a half now. We've raised a total of $4.3 million, with $1.7 million in our first selling season and the remainder thereafter. To date, we have made four venture investments, totalling $970,000. We anticipate closing a fifth shortly, which will take the total to $1.4 million. The latter figure represents 32% of our total capital raised to date and 78% of the capital we raised in our first year.
As far as general comments go, we're all aware the labour-sponsored fund program has been subject to a certain amount of criticism in the press. I'd like to argue that most of that criticism has been based on very short-sighted thinking.
To my mind, everybody agrees that the stimulation of the small business sector of the economy is very important to Canada. It's generally acknowledged that this country suffers from a great shortage of true venture capital.
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In the labour-sponsored fund program, I think the government has created a vehicle for stimulating investment that has several unique and very positive qualities.
The first is that the government has been able to attract experienced professional financial managers to the task of investing the funds.
The second is that investors, the government and managers all have completely consistent objectives. None of the three benefit unless the managers are successful in applying the funds to companies and situations where there will be growth and economic pay-back.
Third, at least in Ontario, a very competitive industry has developed. There will be great competition and there is great competition for investor capital. The funds that demonstrate they can successfully invest and create value and jobs will continue to attract funds, while those that don't will not.
Fourth, you have a system that is unusually visible and open to scrutiny by all interested parties.
Last, not from a funding point of view but from an administration point of view, I think it should be a relatively inexpensive program for the government to administer.
Our experience is similar to Lise's, where we really do think we've created generally a new source of capital. We think it's a good system for applying the capital. The problem we have is that while - to use a very trite phrase - tiny acorns do grow into oaks, they take a while to do so.
There has been a fair bit of testimony around this table that people are taking the job of getting the money invested seriously. It is getting done, but the reality is that these are complex vehicles. They're expensive, take time to create, and have to attain a critical mass before they can start creating a properly diversified portfolio.
I would strongly urge the government to consider taking a long-term perspective when evaluating LSVCCs and recognizing the value we can bring.
The Chair: Thank you, Mr. Hindson.
Mr. McCambly, please.
Mr. Jim McCambly (Chairman of the Board, Working Ventures Canadian Fund): Thank you, Mr. Chairman, members of the committee.
By the way, I'm president of the Canadian Federation of Labour and chairman of the board of Working Ventures Canadian Fund.
We have a detailed report that I will hand out to you giving finite details of investments and the status of our fund. There are also some suggestions regarding some legislative amendments. In the few minutes I have, I'll try to bring you up to date on the Working Ventures Canadian Fund, sponsored by the Canadian Federation of Labour.
Working Ventures is the first labour-sponsored fund outside of Quebec, the first national fund registered and available in all provinces and territories, and the only fund with matching tax credits and investment agreements in five provinces, with investments in or affecting all provinces in Canada. Working Ventures has now been in existence for five years, and we've achieved or exceeded the expectations and objectives of the fund.
Share capital in the fund started to grow much more rapidly in the second and subsequent years of operation; however, the original legislation in Ontario recognizing labour-sponsored venture capital corporations also brought with it virtually impossible investment restrictions. We made less than 5 investments until those restrictions were changed, but have now completed 52 investments, totalling $133.4 million.
We are establishing new records for equity investment in small and medium-sized businesses. We started with a target of investing some $5 million a month, and are now at or exceeding $9 million a month. We have 20 investment managers and analysts and plan to increase that to some 28 or 30.
You asked what policy objectives are being met through tax assistance. I can tell you that achievements are greater, are being achieved more rapidly, effectively and efficiently than many other types of government-assisted programs.
First, I must emphasize that our fund now has over 90,000 shareholders directly involved in the free enterprise system, investing in Canada's future and helping make the economy grow. We are proud of what we've accomplished in our investments. We have a good flow of investment requests, but we are strongly pursuing additional opportunities through investment promotion meetings. There was one today in London, Ontario, and just over a week ago there was one here in Ottawa with about 130 people in attendance. They will be held in every major community in Ontario, Saskatchewan, New Brunswick, Nova Scotia and Prince Edward Island.
Working Ventures has made 100% of the venture capital investments in Atlantic Canada in the last two years. We have made one in Newfoundland where we don't have a matching tax credit. We've just opened an office and hired an investment manager in New Brunswick. We plan to open an office in Nova Scotia in the next few months, ahead of the schedule for when we were planning to do it. We have an office in Saskatoon, covering Saskatchewan, where a number of investments have been made. We're actively pursuing equity investments in parts of Canada where virtually no other equity financing is available.
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We're working very hard to support and help create local or regional investment groups that would find and support investment in small businesses, an area where government intervention and support otherwise have been quite costly and unsuccessful. We have a cooperation and participation agreement with OCEDCO here in the Ottawa-Carleton area. Another is getting quite well advanced in London, Ontario, and there is one in North Bay. A very promising group and program are ready to be launched in Prince Edward Island.
In short, the government incentive is being very effectively put to work, not only through the expertise we have in the field but through the hundreds of others our fund is encouraging and mobilizing to create economic activity. Honey attracts flies. Money attracts entrepreneurs.
In response to your question, do we distort the market, the answer is no. We have created a new market. We have created badly needed risk capital for a previously very conservative market of high-worth investors that nearly dried towards the end of the 1980s.
Annual investment by shareholders is restricted to under $5,000, previously $3,500, creating an opportunity for involvement of average Canadians but at a much higher shareholder service cost than for other venture funds with large investors, or even regular types of mutual funds. Also, the tax credit encourages a pool of investment risk capital but it does not distort the businesses in which an investment is made, as do other types of government support. Grants to businesses, forgivable loans, interest-free loans, loan guarantees, all can distort the actual business receiving the investment.
You asked if the government or the people of Canada are getting value for the tax credits supporting labour-sponsored venture capital corporations. Well, they clearly are. Never before have tens of thousands of Canadians made the decision to put some of their discretionary income into risk capital for business investment in Canada. Never before have average- to lower-income Canadians been able to pool their resources and hire the best investment advisers as if they were millionaires to invest directly in small Canadian businesses with growth potential.
One cannot predict how successful these investments will be, how much they will grow, how many jobs they will create, or how many jobs the spin-offs from these investments will create. We know from other statistics that venture-backed businesses outperform all others in growth. Over a five-year period...released last year...these companies increased by 42% per year; their sales by 55% per year; their exports by 70% per year; and taxes by 72% per year. The current figures for Working Ventures' first $133 million investment are as follows: number of people we have employed, 5,575; payroll, $178.9 million; sales, $895.2 million; exports, $371.4 million, or 41% of sales; research and development, $40.4 million, or 4.5% of sales.
Some people question the size of the Working Ventures Canadian Fund. I want to try to offer to you several virtues of a large labour investment fund.
First, diversification is a fundamental risk management strategy. We are able to provide diversification through a broadly based portfolio. We have established critical mass, allowing Working Ventures to provide significant amounts of capital to fast-growing companies without creating undue risk to the portfolio. A large fund allows us to diversify by industrial sector, to have personnel with specialized investment expertise, not only to invest in different sectors but to add value to the small and medium business.
About appetite for risk, only a large fund can readily accept the risk of both very small investments and very large investments. Large investments are absolutely essential to finance large-scale, globally competitive firms. In fact, you will note that we have requested in our regulatory change that on occasion we would like to exceed the $10 million limit that is there.
.1950
Fourth, Canada needs venture capital funds with deep pockets. We need to compete with the United States venture-backed firms. The top 20 venture capital firms in the United States average $1.1 billion in size. Forty-eight per cent of all U.S. venture capital is managed by funds larger than $500 million U.S. In Canada we only have two funds that get into that bracket: one is Solidarité in Quebec, and ours is the only one outside of Quebec.
In conclusion, I leave you with the following thought. We're not at war with the United States, Mexico, Asia, or Europe with guns, but we are fighting for business with growth potential, to create wealth, exports, research and development and, most of all, to create and maintain employment opportunities for Canadians. So I would encourage your committee to continue to support labour-sponsored venture capital corporations in Canada.
The Chair: Thanks, Mr. McCambly. You have $133 million in capital?
Mr. McCambly: Yes, in equity investments.
The Chair: How much of that is invested?
Mr. McCambly: We have $500 million in the fund.
The Chair: You have $500 million in the fund and $133 invested?
Mr. McCambly: Yes.
The Chair: Thank you very much.
Ms Macdonald, we look forward to your presentation. You do not represent a venture capital fund?
Ms Mary Macdonald (President, Macdonald & Associates Limited): That's correct.
The Chair: You're our outside expert today.
Ms Macdonald: In some circles I'm known as a bit of a bean counter for the industry, hopefully with a little bit of value-added attached.
I appreciate the invitation to be here tonight. What I thought might be helpful to you in your deliberations, particularly because Mr. Daoust suggested at the outset that each of these funds is a product of its own environment - and having gone around the table, that's abundantly clear - is understanding where these funds collectively sit within the context of the venture capital industry in Canada. As a couple of the witnesses have indicated, we've seen one very important shift over the last six or seven years that has dramatically increased the importance of this group collectively within the marketplace, and that has been a shift in attitude among the institutional investors toward this particular asset class, the venture capital asset class.
When we started tracking this industry back in the mid-1980s, what I would have described as the private, independent fund was the dominant player in the industry - groups like Vengrowth - and at least roughly from 50% to 60% of their capital typically would have come from pension funds and insurance companies. For a variety of reasons, those investors have found it less attractive to participate in venture capital funds in today's environment, in part because of some past performance issues and in part because logically, whether we like it or not, it becomes very difficult for a $30 billion pension fund, for example, to find a way to participate effectively in small equity pools that are making investments of $500,000 or $1 million. So the net result, regardless of the reasons, is that those investors have effectively left the marketplace for the most part.
In hindsight, looking back, I would argue from the perspective of the supply of capital that it's extremely fortunate that the federal and several provincial governments chose to make this vehicle available, because what happened is that those institutions left in the late 1980s, so you can't argue that the labour funds did not displace them but what has happened subsequently is that the labour-sponsored funds have basically grown to fill that gap.
If we look at the total pool of capital under management by the industry as a whole in Canada, it tallies at about $5 billion. So if we look at all assets under administration, it's in the ballpark of $5 billion.
The labour-sponsored funds collectively account for about one-third of that pool today, compared to 17% of the industry back in 1991. I brought a series of charts for you and I'll leave all of these numbers with you.
Perhaps more importantly, if we look at it in terms of capital available for investment in growing businesses, we now have just shy of $2 billion available for investment in Canada. I acknowledge that it's a big number and it has grown quickly. I think to a certain extent we are playing a bit of catch-up now. This is a new phenomenon and a number of funds have raised a lot of money and have been a little slower in catching up in terms of their deployment.
But, again, the labour funds collectively account for more than 40% of that available capital. The relative importance varies across provinces and regions, but when you look at the chart I've prepared here, you can see that in fact in every region of the country these funds are becoming a very important source of capital.
.1955
Coincidentally, the private independent funds that are maturing with the capital they raised back in the 1980s are clearly diminishing in terms of the amount of money they have available to invest.
So in an environment where I think we all support the notion that it's important to have capital available for equity investment in growth companies, as a group these funds have clearly assumed a very important place in the market.
I mentioned the shift by the pension funds away. If I were to draw you a chart of what was going on in the mid-1980s, as I said, you would have seen perhaps 60% of the capital coming in from pension funds. But if we look at the step fashion of the sources of capital into the venture capital industry in the last four years, individuals have become the single most important source. That's clearly in response to the labour-sponsored fund initiative and the availability of tax credits, but again, in the absence of other sources wanting to be such active players in that market, I would suggest that this trend is in fact a very positive one.
I've included some data in this presentation as well on the collective activity by provinces of the labour funds, and you'll see that in fact we are now seeing a ramping up in terms of the aggregate number of investments being made, and in most instances the dollar is being invested in young growth companies at the same time.
You need to be careful with the dollar figures because obviously in a small industry one or two very large deals can give you an aggregate number that's somewhat misleading. But overall we're definitely seeing an upward trend. As Mr. McCambly suggested, every year we do a very significant survey for the Business Development Bank of Canada. Mr. McCambly quoted some of those statistics. The most current survey results are being formally released tomorrow, and I'll be happy to ensure that the committee gets a copy.
Clearly, what has come out of our work in this regard - and we're building some good solid historical data now - is that venture-backed companies outperform the economy by a very significant factor. I'm hoping that with time we can start, for your purposes, to perhaps even articulate the collective impact of the labour-sponsored funds as well.
The growth in jobs, exports, and R and D, all the factors that are clearly important to our economy, are dramatically enhanced, it would appear, by getting the right equation with the equity capital invested from the outside.
So in closing, my message would be that I understand this program is an expensive program and I understand that the committee wants to examine it in full, and I would simply leave you with the message that we now have a complex venture capital industry in Canada. The labour-sponsored funds play a very fundamental and critical role in the centre of it. So if you decide that you need to consider changes, I would simply urge you to consider those changes with great care.
Thank you.
The Chair: Thank you, Ms Macdonald.
Could I ask a question. Mr. Brown referred to the rules in British Columbia for investment. I take it these don't apply in other provinces, Mr. Levi? Perhaps you could explain what those rules are.
Mr. Levi: The rule in British Columbia is that we have to invest 20% in year one, 40% in year two, 60% in year three, and by the end of the fourth year we have to be 80% invested. We must hold those investments we make for a minimum of five years in the eligible companies that we are involved in. So, for example, if we had a company that we were lucky with - if I can put it that way - and invested in, and then ended up selling our shares in the company for about three times what we paid for them, it would result in an expansion from eight jobs to what by the end of the year would be close to sixty jobs in B.C.
We get one year's credit for that money invested, so we have to reinvest that now for the remaining four years that it's due. So we have to invest, as I said, 80¢ of every dollar that we receive and it has to remain invested for a minimum of five years with an eligible company for it to qualify.
The Chair: Is British Columbia the most stringent jurisdiction for requiring the amount of your funds that must be actually invested in enterprises?
Mr. Levi: We have the highest requirement, but for example, in Manitoba they initially were at 60% but they have voluntarily agreed to move it up to 75%.
The Chair: Which is the lowest jurisdiction in Canada?
Mr. Levi: The national legislation superimposes a minimum standard on everyone of 60%, and so the jurisdictions beyond that are in a position where they must go beyond 60%. They can't go below it.
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The other key factor is the timeframe that people have to hold the investment, which are the two parts of the legislation. Once again, we are in probably the second most onerous province in the country. We have an eight-year hold period with very limited exits allowed prior to that. You must be unemployed for at least six months, permanently disabled, or die in order to get your money out prior to the eight years.
In Manitoba it is seven years, and in Quebec it's held until age 65. So in that particular case, with the exception of Ontario, where they allow for early redemption, repayment of the tax credit, or redemption at five years -
The Chair: I'm sure these will be some of the questions. Should we look at these rules and try to get uniformity across the country? Are your rules better than those in other provinces, etc.?
[Translation]
Do you have any questions?
Mr. Loubier (Saint-Hyacinthe - Bagot): Yes.
[English]
The Chair: We shall break for two minutes.
.2007
The Chair: Could we come back to order?
[Translation]
We will give all members of Parliament three minutes in which to ask their questions or make any comment. Mr. Loubier.
Mr. Loubier: Welcome to the Standing Committee on Finance.
My first question is for Mr. Daoust or Mr. Bachand, but it is for our other witnesses as well. Apparently some detractors of labour-sponsored investment funds have appeared before our committee. You will even find that some of my Liberal and Reform Party colleagues are critical of labour-sponsored investment funds. In fact, you will see for yourselves.
Two arguments have been put forward by the supporters of that view for several years now. They say, for example, that the Fonds de solidarité is an artificial drain on available savings and that it even squeezes out some private investors who would otherwise be involved in the venture capital market. They say as well that in 1995, the labour-sponsored investment funds which get, among other things, a 20% tax credit, as well as many RRSP-related tax deductions, should be eliminated given the financial problems facing both levels of government.
What is your response to these arguments, Mr. Daoust or Mr. Bachand? I imagine you hear them quite frequently.
Mr. Daoust: I will answer the first part of your question for the Fonds de solidarité, regarding the allegation that our fund would drain out available savings throughout Quebec. The others can answer for their individual funds. I would like to give you some very specific information.
On September 30, 1995, the Fonds de solidarité had 239,000 shareholders. Of these, 64% were union members, either of the FTQ, the CEQ or the CTNU - that must have been before the creation of the CNTU's own fund - and various other unions throughout the province. Hence, approximately two-thirds of the shareholders of the Fonds de solidarité are unionized workers.
.2010
The rest are people doing all sorts of jobs. I don't have specific statistics on this, but we can provide them for you. These individuals may invest a maximum of $5,000 in the Fonds de solidarité. These rules are well known and are virtually identical in each province, I believe.
Our studies show that 25% of all those who invest in the fund, including non-unionized workers, earn less than $30,000 a year. Approximately 50% earn less than $40,000 a year, and 15% earn more than $60,000 a year. So that gives you an idea of the incomes of people who invest in the Fonds de solidarité.
Is the Fonds a drain on savings? The people who invest in it are small-income earners. Generally speaking, these workers can be found in all sectors, and the vast majority of them do not follow the stock market closely. The shares they own in the Fonds are their only investment. They invest to save for their retirement and also because they have some faith in the mission of the Fonds de solidarité, which is to protect and maintain jobs.
So the idea is not to be a drain on savings, but rather to create a great movement of solidarity throughout Quebec, at least among people who are familiar with the labour market because they have a fairly permanent attachment to it.
They are workers who see that some people are underemployed. They are asked to do their part to help create and maintain jobs through their maximum annual $5,000 investment.
Let's do a quick calculation. You have been told that the assets of the Fonds de solidarité were around 1.3 billion dollars and that there were approximately 239,000 shareholders. If you take the total assets and if you divide them by the number of shareholders, you see that the average investment in the Fonds de solidarité is $5,000.
I already mentioned a first amount of $5,000 and I do not want to mix things up. For example, when you have 250,000 shareholders and 1.25 billion dollars, it means that the average per shareholder is $5,000. As a consequence, I do not see how one can speak of a savings drain. It is instead a way of giving ourselves some tools, through the savings of workers, in order to meet the target you are familiar with, which is to maintain and create jobs.
.2015
[English]
The Chair: Thank you, Mr. Loubier.
Mr. Grubel, please.
Mr. Grubel (Capilano - Howe Sound): Thank you, Mr. Chairman.
The Chair: Excusez-moi, Mr. Grubel.
We'll let Mr. Nunez speak now. Do you mind? You'll be next.
Mr. Grubel: By all means.
The Chair: Mr. Nunez.
[Translation]
Mr. Nunez (Bourassa): I would like to welcome and thank the representatives of the labour-sponsored investment funds. It was an excellent submission.
In 1983, when the Fonds de solidarité de la FTQ was created, I was a labour activist at the FTQ and I was in a good position to see for myself the very fast growth of those funds. I also noticed that thousands of jobs had been saved or created in Quebec thanks to the Fonds de solidarité de la FTQ, to the access to the savings of workers and the encouragement of regional governments in Quebec.
Some countries took an interest in these funds. I visited several of those countries, I was asked questions and interested parties came to Quebec. It was fantastic.
My question deals with the financial and economic education of workers. What do the Fonds de solidarité des travailleurs and other funds do with regard to the financial and economic education of workers?
Mr. Daoust: First, Mr. Nunez, I will quote the section 13 of the Act, which says:
- 13. The main objectives of the Fund are:
- 2. to encourage the training of workers in the economic field and to allow them to increase
their influence on the economic development of Quebec;
When the fund invests in a business, the latter is well aware of the way it operates and must accept that the fund provide the type of training I have just outlined.
Now, that means that at a given point, 10, 12 or 15 workers, often accompanied by managers, directors of the business, or supervisory personnel, will take courses on the financial situation of that business with its full co-operation. It is done systematically.
Moreover, the fund, given its mission of economic training, must make sure that where regional and local funds are created, those participating in the operation of those funds get all the economic training needed to be able to make the decisions they have to make in their own areas.
By the way, last year, over almost a year, I think, 1,200 people took training sessions given by the Fonds de solidarity in businesses and other environments. The spokespersons of the fund also take all kinds of other pedagogical measures in different settings in order to get people to understand the way the economy works in Quebec and its importance.
.2020
[English]
The Chair: Merci.
Mr. Grubel, please.
Mr. Grubel: Thank you very much, Mr. Chairman. I think it's about time somebody tried to put a slightly different perspective on this whole wonderful record we've heard here today. For the record and for people who are viewing this program, I would like to suggest that the numbers presented about jobs created, exports, profits and taxes paid are impressive indeed.
However, I think people should realize that these are not net gains. The jobs and the exports are not clear gains to society because the money used in order to create them has come from somewhere. Let's assume it indeed came from workers. Where did the workers get it from? The workers could not spend it if they put it into these accounts. That means the money they otherwise would have spent on Canadian housing, Canadian clothing, Canadian food and Canadian consumer goods will not be spent any longer. In fact, there will be a corresponding reduction in employment by that amount.
We have to deduct from all those successes the amount of jobs lost because workers would have spent the money. If they had not spent it, they would have put it into their savings accounts. There it would have been lent to other Canadians, young Canadians who need mortgage money to build houses.
That money is no longer available because they put it into your funds, ladies and gentlemen.
They could have put it into venture capital funds, where it would have been similarly lent out. It is highly misleading to be told here that all of those gains you were announcing as coming from these investments are net gains to society. More fundamentally, the success you have achieved and that you are, if I may use the words, ``bragging about'' has been achieved because you have been given subsidies.
Man, if I can give enough subsidies, I can create zillions of jobs. It's no great thing to brag that you created these jobs with these subsidies. Where did the money come from that you used to subsidize those jobs?
Well, it came from tax concessions. Can we as Canadians afford these tax concessions today? They are reductions in taxes. We are overspending here in Canada every day to the tune of approximately $100 million, and you brag that you add to it. I think it is not right.
Furthermore, we have a deficit. There is inequity in the tax concessions that are being made. The people who benefit the most are the people with high incomes, not the workers. The workers pay very low marginal tax rates. It is the high-income people who pay so much.
So I believe the real question is what is the optimum rate of subsidy? What is a subsidy that is really needed in order to create all these benefits not captured by the people who otherwise would make this investment?
I am concerned. As in all the other articles the rates of increase in deposits that you are bragging about.... Just envision for a moment that they continue for a few more years. Where is it going to stop? Are you going to find enough risk-adjusted rates of return? That is the question.
Mr. Loubier, I want to tell you, I've listened to you long enough.
Mr. Loubier: You have three minutes -
The Chair: Order!
Mr. Loubier: - to ask a question.
Mr. Grubel: Tonight I am going to say a word.
Mr. Loubier: [Inaudible - Editor] ...question -
Mr. Grubel: I've listened to you long enough. I'm almost done...when I want to be done or when the chairman interrupts me, but I'm almost done, because I have consideration.
.2025
I think this is a big rip-off for society as a whole. It is not in the interest of future generations, which are being burdened at $100 million a day. I would like to know if you have any ideas as to whether and how the growth of these funds can be slowed down or capped.
Mr. Kreiner: There is a fair question in the comments you made: is there a positive return on the taxpayers' investment associated with the activities of these funds; that is, when you look at the cost to government of these funds, the seed equity government has put in, the federal tax credits and the provincial tax credits, is there ultimately a positive return to government associated with the investments the funds have made?
We have a responsibility to answer that question. The answer to that question is yes, and there's evidence to support that, both in research that's been done by Le Fonds de solidarité and by research that's been done by the Canadian Labour Market and Productivity Centre.
They have said let's look at the companies in which these funds invest, let's look at the social assistance costs that aren't incurred because of the jobs that are created, and let's look at the corporate taxes, payroll taxes and sales taxes that go to Treasury as a result of the investments the funds have made. That has shown that both when you look at it on an investment-by-investment basis and when you look at the portfolio as a whole, within three years government breaks even with regard to any investment. After three years there's a positive return to government. That's been shown both with regard to analysis of particular investments and with regard to analysis of the portfolio as a whole.
We need to continue to do those studies for all the investments all the funds make. I'm encouraged that at least the initial evidence is positive. We need to continue to have the burden to show it's positive.
A considered response to that question is, at least at the present time, there's a positive return on the taxpayers' investment associated with the activities of these funds.
Mr. Grubel: I would like to see the studies. How long have the funds been in existence so that you have evidence over three years?
Mr. Kreiner: The Solidarité fund is now a 12-year-old fund, and the most compelling evidence comes from the experience of the Solidarité fund.
Mr. Grubel: Thank you, Mr. Chairman. I apologize for having taken so much time, but I had to get it off my chest.
The Chair: And you got it off very well.
Mr. Grubel: Thank you, sir.
The Chair: Could we come back to you later, Mr. Silye? Do you mind?
Mr. Silye (Calgary Centre): You're the chairman.
The Chair: We're going to start with Mr. St. Denis, please.
Mr. St. Denis (Algoma): Thank you, Mr. Chairman.
This is, I believe, the second occasion when we've had a chance as a committee to get information about the performance of the labour-sponsored venture funds and what their purposes are.
I'd like to ask a question that involves the work of virtually all MPs, which relates to the economic development of their particular ridings or regions. The situation I'm imagining relates to how effective the funds have been in getting to the small and medium-sized businesses. I have the impression it's easier to invest $1 million, $2 million, $3 million and up compared to the $100,000, the $200,000 or even the $50,000 investments that are often needed as well.
My riding of Algoma is in northern Ontario, and I'll use my riding as an example. Imagine there's a local fund in a particular part of my riding and I invite one of the funds to come to visit my area and arrange meetings with local managers to see whether it would be possible for one of the venture funds to partner with a local fund, to take a local dollar and a venture fund dollar and put them together and get two dollars.
What kinds of conditions, if any, do you impose on the local community or local potential partner fund before you might consider getting involved? Obviously due diligence is an issue. You have your experts, but the local communities have their experts.
Is that easily done, or are there some intrinsic hurdles you feel are necessary before you can get involved in a community? I ask this because letters of invitation will go out to all of you to come to my riding in the next some months.
I would like to hear, though, for the benefit of all of my colleagues, maybe in a positive way, what local areas can do, such as northern Ontario, for example. What can they do to bring you folks out to their regions and involve you productively in getting all the regions of our country up and running?
The Chair: Who wishes to accept that invitation to be the first to invest in Manitoulin Island?
Mr. Levi: I can answer, because I don't have to invest.
.2030
The Chair: We'll start with Mr. McCambly, and then go to Mr. Levi.
Mr. McCambly: Well, I'll try to answer fairly quickly.
I think Jane can probably answer it as well as anyone because she raised the question the last time I was here, and we've been in her riding ever since.
Some hon. members: Oh, oh!
Mr. McCambly: The fact is that you are talking about the most difficult challenge that exists in getting venture capital out into small businesses, where it's not economically viable, where the risk is higher. What you need at the local level is people who are living there and are willing to bring forward the investment, to help it to grow, to be on top of it, to support it, and hopefully to have some money on the table. If someone has a bit of money on the table and we match it or put extra money with it, then we know that somebody is looking after it.
You cannot look after a $50,000 or $150,000 investment in northern Ontario or in some other far-reaching place from Toronto. The history of large historical venture capital funds is that they invest one hour's drive from the office. That's the size of it. We would be happy to work with your community or any other one in which local people - business people, labour people or the two combined - want to create a group of people who will hopefully put up some money to create investments.
Mr. St. Denis: Before anybody else jumps in, I think that's a very good point, Mr. McCambly. The one-hour drive from Toronto, Winnipeg or wherever is an example of a hurdle. A lot of Canadians and businesses are a lot more than one hour's drive from these centres. But my constituents in fact contribute to these funds through their share of the taxes forgone by the federal and provincial governments. Why should they have less of an advantage in accessing these funds than folks in Toronto? When you talked about the money on the table locally, you might require it in, say, Elliot Lake but you wouldn't require it in Toronto. I don't see how that's fair. That's the specific question.
Mr. McCambly: The issue you raised was very small investments.
Mr. St. Denis: Is $100,000 small?
Mr. McCambly: You're darn right it's small.
Mr. St. Denis: Gee whiz.
The Chair: Thank you, Mr. McCambly.
Mr. Levi.
Mr. Levi: I just wanted to say that we've been around only about three and a half years. I expect that in the next month, however, we will be announcing the first of our regional funds, which will be to an area outside of Vancouver. It will be working with the local community and with a group of people who have been doing this for some time. We're really excited by the prospect. The average size of investment is between $5,000 and $100,000, so it's going to be at the small end.
In addition to that, we've also structured internally within our operations. From our office, we do investments as low as $100,000. Each of our investment officers is going to be required to do a small investment as a minimum to ensure that we are doing these investments both centrally and in the community. So we expect to get a fair representation across the province.
Of course, we took our lead again from the Solidarité fund, which is soon to have close to 65 local funds, I think, and another 15 or 20 regional funds. We're working with the community to accomplish that.
[Translation]
The Chair: Thank you, Mr. Levi.
I think Mr. Bachand would like to explain what he is going to do.
[English]
Mr. Bachand: Yes, very quickly.
In Quebec, we are basically in the process of setting up local funds with the regional municipalities for investments of $5,000 to $50,000. We put up the first $250,000, and the community should put up $250,000. Once they have that $500,000, we'll put up all the additional money. This money is managed locally by a committee of business and community people, and we believe they're as intelligent as we are in Montreal when it comes to managing it.
We're also putting up 16 regional funds in the 16 regions of Quebec for investments of $50,000 to $500,000. In that case we're putting up 100% of the capital - $6 million per fund - but again, on the boards of directors of those funds we're going to have two people out of the nine directors. The other seven will be from the community and region. They will be totally autonomous in the decision-making process on what they invest in. The only constraints are going to be our accounting rules, and we're going to be like the inspecteur général to make sure that the money is well spent.
.2035
Mr. St. Denis: Will you come to Ontario?
Mr. McCambly: What Solidarité is doing is illegal in Ontario or under the federal legislation. You cannot download money under the other legislation.
The Chair: So that's the change that should be made, according to you.
Mr. McCambly: We've asked for that consideration, actually.
The Chair: Thank you.
Mr. Bachand: I have just a last ten-second comment. In order to be able to go to the local counties and regions, you have to have a certain size and a certain history. It's perhaps because we've been in existence for a certain number of years and have the size that we can put in the resources and the effort in coaching and setting up these funds. They are very costly to set up, so there are advantages to size, as Mr. McCambly pointed out earlier.
The Chair: Thank you, Mr. St. Denis.
Mr. Discepola.
Mr. Discepola (Vaudreuil): Thank you, Mr. Peterson.
I'll be a bit more diplomatic than my colleague Mr. Grubel, but I share with him an awful lot of concerns.
I heard Mr. McCambly state that in his opinion Canadians are getting a very good deal. I guess that's if you're an investor in these labour-sponsored funds. But my concern is this: are Canadian taxpayers getting a fair deal for the tax dollars they are investing in these funds? Ultimately the money comes from them. So when I hear Mr. Kreiner state that the question we should be asking is whether or not we are getting a fair return on investment and his answer is that it is a positive one, I don't feel reassured as a member of the finance committee.
Also, when I look at the fact that the cost to the Canadian treasury since 1993 has jumped from $54-some-odd million up to somewhere estimated around $100 million today - and that's just the federal treasury - and when I look at most of the funds that are being underutilized, which amounts to roughly 30% to 60%, I wonder whether or not we should perhaps have a moratorium for a year or two while letting you invest the balance or the amount of money that you have in excess.
So I have an awful lot of quick questions, Mr. Chairman. One of them is the question of overhead of these funds. How much does it actually cost to administer a fund? Are any of the investments that the funds have made...? We've heard of the good success stories and of how many jobs have been maintained. My question is whether or not the private sector could fill the gap that is filled by you so that it does not have to cost taxpayers the subsidy that the federal government has to put forth. So for the return on investment, why should we as a government keep on subsidizing it? Wouldn't some of these jobs have been created normally anyway because the small business sector would have been able to find the money elsewhere?
I'm startled at your comment that $100,000 is peanuts. What, then, is the small-business profile that the funds address?
The Chair: Perhaps Ms Macdonald can start.
Ms Macdonald: Perhaps I could provide a bit of context on that last comment, because I think it's very important to differentiate across the segments of small businesses. In the context of venture capital, a big piece of it is really targeted at the small businesses that have very substantial growth potential.
We have data that show technology-based companies, from the time when they get their first round of capital to the time when they are large enough to go public and become a sizeable entity, will typically absorb somewhere between $6 million and $8 million. So I in no way want to diminish the importance of the small investments, but by the same token I urge you not to diminish the importance of some of the larger investments in companies that in fact have very significant growth potential but start with three or five employees and have less than $1 million in sales. You really have two quite different pieces of the market there, and I think it's important to differentiate those.
The Chair: Mr. McCambly, did you want to add to that?
Mr. McCambly: Well, I didn't mean to diminish.... Now, $100,000 is a lot of money to me, too, I'll tell you - or to you, I suppose. But in terms of a return on an investment of $100,000, with 10% or 20% you're looking at $10,000 or $20,000 to do all of the due diligence, to do all of the monitoring, to do all of the work necessary to keep that operative, whereas if the investment was $2 million, the work involved is almost the same.
Mr. Discepola: But that's the same attitude that the banks have vis-à-vis small businesses. I know there's a need for venture capital for the small-business person, and if we always have this attitude that we might as well have one corporate account that's $2 million, we'll never address the....
Mr. McCambly: I'm not saying it's not possible to do those. It's just that you have to find a different way to do it because nobody has done it.
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You talk about the value or the cost of this investment. I happen to have a clipping here that actually was in The Globe and Mail back in December that is talking about investment in small business. I'll take just a little piece of it. It suggests here that Ottawa.... This is through banking and loans and so on.
By the way, Mr. Grubel, that's where you said you'd put the money.
By the way, you're a shareholder, aren't you? Didn't you say that the last time?
Mr. Grubel: Oh yes, I am. Of course.
Mr. McCambly: Anyway, it says that Ottawa will boost the total value of loans it guarantees under the Small Business Loans Act to $12 billion from $4 billion, and then it goes on to say that loans made under the Small Business Loans Act are generally made to high-risk bank customers and are backed by Ottawa, which loses $100 million a year on the program.
Now tell me which is the way to go. That's history. That's down the tube.
I'm not diminishing the fact that we've got a lot of money that we've got to get out. Our toes are to the fire and we're going to keep them there. But at the same time, we're investing in businesses that we expect are going to make it and grow and we're going to help them to do so. We've lost one business, and we've got a couple of others that are a little bit sick. We've got some others that are doing very well.
The point is that we're on the ground to make these businesses work and to help.
When I was personally involved in trying to get this fund started, one of the reasons was that as labour you had to sit around and ask, who is going to invest in this slump economy? We could do nothing. But now we can.
Mr. Discepola: My only comment is that in today's economic context I question anything that needs a tax incentive to be supported.
Mr. Stiller: If I could comment on that, these are very legitimate questions to ask in our current economic setting.
When we initiated our fund, we had the Boston Consulting Group do a study with respect to why Canada was not performing in this area. The issue was where that pre-venture and venture capital would come from. It was identified that in fact one has to have a tax-tracked vehicle in order to prime the pump. That just happens to be the reality of the situation.
It might be that down the road, when the whole issue of the venture capital success in the venture capital industry will have proven itself, it will not be necessary. But it is clear to me today that, certainly in the area of science and technology, it's absolutely required in order to make this thing go.
With respect to the size of investment, I'll give you an example of investment that we haven't announced yet but will be announcing shortly. It was a discovery at one of our Canadian universities. We stepped in and put in $75,000. There was a lot of due diligence for that $75,000. We've now followed that up with an additional $950,000 in that investment, and that thing is ultimately going to be a global enterprise that probably will require $15 million to $20 million, Mary, as follow-on, ultimately to take that and really make it perk.
As a matter of fact, we'll be to your working ventures to co-invest with us on this, because of your size. That kind of initial work requires an enormous amount of grunt work.
The Chair: A number of other members want to ask questions. At the end of the questions, perhaps our panellists could sum up and tell us what changes they would like to see us make to the laws, and also respond to some of the questions to which they haven't had a chance to respond.
Would that be okay with you? Is that okay, Mr. Daoust?
Mr. Daoust: Yes.
The Chair: Thank you.
Mrs. Stewart, please.
Mrs. Stewart (Brant): Ms Macdonald, could you answer what your expectations are vis-à-vis the turn rate of investors when we hit the five-year or the eight-year target, what you expect to happen with investors, whether they'll pull out or stay in? Also, do you think 20% is the required bite from the federal point of view, or is there a percentage we could offer that's less than 20% that would still make the investment attractive to the small investor?
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Mr. Stiller and Mr. Hindson, I understand your funds are quite market-specific. They're medical and entertainment. I wonder if that gives you an edge in terms of attracting capital. What does that do vis-à-vis the demographics of the investor? Do you tend to have a higher-income investor than we might see in a general fund?
Finally, I have a comment. As you are looking for people in small communities who can meet the due diligence you're requiring, you may be aware that the federal government has a program called Community Futures that supports rural centres in particular and works at the small end making local investments of up to $75,000. Local people make those determinations. By law they are supposed to become self-sufficient. You could perhaps utilize that infrastructure quite effectively as you look at particular ways to work at the community level.
The Chair: Who wants to start with that? Do you, Mr. Ferguson?
Mrs. Stewart: I was asking Ms Macdonald for some comments on that first.
Ms Macdonald: As for the turn rate, I don't have any particular expertise in this area but I think it's quite reasonable to assume that the majority of shareholders, when they've held for their period, will exit and will quite possibly repurchase.
Mr. Levi: Technically in British Columbia and Manitoba they cannot turn the fund because they cannot reinvest for two years after taking money out.
Ms Macdonald: Is it for two years? Okay. I'm sorry. I didn't realize that. In jurisdictions where you can sell and repurchase I imagine most people would. From that I deduce - and I'm sure a number of people around this table might not agree with me - that if that's the case it's very important that the hold period be more or less matched with the investment cycle. That is the period of time over which the money is put out into companies, matured and liquidated. I think five years is a bit on the short side for that.
As for how much is required for incentive, that effectively becomes a marketing question. I look at it in terms of the supply of capital and what it's doing. I honestly don't know how much of an incentive it would take, whether 20% on both sides is necessary or whether less would still attract capital. Clearly, reducing the size of the tax credit would reduce the inflow of capital.
Mrs. Stewart: Clearly.
Ms Macdonald: Obviously, if you have x number of people buy at 40% and presumably some smaller number buy at 30% and a smaller number still at 20%. I think that would be a reasonable assumption to make.
The Chair: You asked Mr. Ferguson a question as well.
Mrs. Stewart: It was Mr. Stiller and Mr. Hindson.
What are your demographics? We heard from Mr. Daoust that they have 25% making under $30,000. I wonder if you looked at the demographics in the medical fund, for example.
Mr. Stiller: I don't have those demographics. Indeed, we've had it out for only one year, largely concentrating in Ontario, Quebec and B.C. We're just now getting a national registration outside of Saskatchewan. I can't tell you how specific that is to community and, frankly, I don't know the demographics of our shareholders.
The Chair: Thank you, Mrs. Stewart.
Mr. Silye, please.
Mr. Silye: Thank you, panellists, for making your presentation this evening.
I believe that venture capital should be market-driven, not subsidized by government. I've been a businessman for 25 years and I found that I probably lost more money on investments with incentives behind them. On those where I had to base a rate of return, where they had to return the profit, the pressure was on the person borrowing the money to do something positive with it so he could get it from me again.
Having mentioned the fact that it should be at risk, I also feel that government could introduce a more simplified system of taxation that favours job creation, investment and savings. That's better than having this job creation program through subsidies, as Mr. Grubel so aptly pointed out.
I do have concerns with the labour-sponsored venture capital companies or corporations. It's the different treatment that you get over banks and over other venture capital funds vis-à-vis the federal government's 20% right across the board, matched by some provinces if they wish to. I think it's unfair that you can deduct it as you put it in before it's spent whereas other people have to spend the money by year-end in order to get the deduction.
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I think if you look at the comparison of 1991 with 1994, as Ms Macdonald pointed out, you'll see where the private sector has dropped from 47% to 36%. That's because of this unfair competition, this unfair advantage, your funds have over other funds, or because the risk is too high in venture capital funds, period.
There is a high risk to venture capital. I notice in most of these funds only 25% to 30% of the funds are put into risk venture capital and the balance.... For instance, with Mr. McCambly's company, Working Ventures, out of $500 million in capital, only $133 million is invested in ventures. The rest is where? In treasury bills and short-term bonds. I don't think it's fair that you get a tax deduction just for making safe investments.
Those are my three areas of concern. My two questions related to those areas of concern are these. Do you really believe a tax write-off is necessary in order to raise venture capital versus a tax-free capital gain...if you had a choice? Would that be a better incentive, where there's no risk to the taxpayer or to the government up front?
The other thing I'd like to know, as somebody pointed out to me, is what are the conditions, if you have what I consider to be these favourable advantages over other people, for the recipients of your venture capital moneys? Do they put up stock? What kind of performance requirements do these people have to meet?
Mr. Hindson: I will address one point. You talk about our having unfair advantages relative to banks. I think you also have to consider that we have some disadvantages relative to banks - I won't call them ``unfair'' - not the least of which is that we are compelled to be unsecured lenders. In my business we have certainly spent quite a few hours trying to convince banks to lend on an unsecured basis and the answer is always no. We're dealing in an entirely different market.
It's also important to realize that this program subsidizes investors and not investees. Therefore it isn't subject to the sort of bias I think you're talking about.
Mr. Silye: The other private venture capital funds don't get the same tax write-offs, do they?
Mr. Hindson: First of all, they're few in number and shrinking. Secondly, there are some people who can address this far better than I can, but that money has generally been institutional money looking for large investments. It's not small business venture capital.
Mr. Silye: But look at the chart. Every one that has been subsidized is growing, whereas the private ones are shrinking. Doesn't that tell you something?
Ms Macdonald: May I make a point of clarification there, please? The trend downward on the institutional sources in fact started in 1988 and 1989. One of the very difficult things in looking at these numbers is sorting out.... If you take out the subsidies, I can't project what size that pot would have been, but my guess is the downward slope would have continued.
I think the challenge you face is in finding the right balance and ensuring that in the process of adjusting to what you might consider more appropriate you don't inadvertently eliminate the supply, or dramatically reduce the supply, of equity capital. Clearly, from the economic impact analysis we can show it's quite important. It's a question of striking the balance. I would not suggest these funds are displacing the private sector in and of themselves.
Mr. Silye: But then you talk of equity funds and equity balance. Your mandate is to protect and create jobs. You're interested in growth and economic payback. But only 65% to 70% of your funds go into risk ventures and the balance of it is put into safe territory. Does that not defeat your purpose?
Mr. Levi: I don't think that's a fair commentary.
We'll use my fund as an example. From the outset, it looks as if it's 25% invested in equity. The remainder of the funds are in treasury bills. But the fact of the matter is that of the $77 million we've raised, we've had $35 million of it for less than six months, and of the $40 million we've had for greater than one year, we've invested half of it, and intend to continue investing it at quite a pace. You will see that we are investing very dramatically.
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We're not down at 20% or 30% or 40%; for the money we've invested, we are looking to that 80% rule. We will achieve that for every dollar that's invested and it will remain invested for a minimum of 5 years. Even if it takes us a year or two to get it invested, we will still have to continue to invest that money for a 5-year period.
Mr. Silye: Now, these loans are unsecured and your investment is unsecured. Does the company you're lending the money to put up a matching amount? Do they pledge their assets that they're using the money for? There's nothing, no conditions, no strings? They just have to create x number of jobs or grow?
Mr. Levi: No. We have to be clear about this. We're not lending money to these investors. Ours is an investment in equity capital, so we become partial owners, anywhere from 10% or 20% to 30% or 40%.
Mr. Silye: So your return is to the $5,000 limit.
Mr. Levi: We're investing right at the risk level.
Mr. Silye: Thank you.
The Chair: Thanks, Mr. Silye.
Mr. Bélanger, please.
Mr. Bélanger (Ottawa - Vanier): Thank you, Mr. Chairman.
I have some very quick questions. Some of them are directed to the Working Ventures Canadian Fund and others are general.
First, I noticed in the annual reports of the Working Ventures Canadian Fund a reference in the letter from the president to proposed income tax amendments under which the fund would be required to have a minimum of $100 million invested for the taxation year of March 1995 to February 1996. As far as I'm aware, those amendments have not been made into law yet. Or have they?
Mr. McCambly: There were changes in the law in terms of extending the timeframe that was there, but we are requesting -
Mr. Bélanger: I know, it doubled; it's a two-year rolling.
Mr. McCambly: Yes.
Mr. Bélanger: They have not been adopted as of yet.
Mr. McCambly: No.
Mr. Bélanger: What is the current minimum by law, as it stands today, that Working Ventures should have invested? Is it 60%?
Mr. McCambly: Yes.
Mr. Bélanger: So that's roughly $300 million.
Mr. McCambly: That's right. It's been extended from what it was initially.
Mr. Bélanger: This leads me to a second question.
I've read some of the legislation governing these funds. I've yet to find a clause that would prohibit inter-fund investments. For instance, Dr. Stiller mentioned that his organization has $25 million of solid investments they could make tomorrow if their fund had that money in it. In looking at each other, is supporting each other as an industry something that funds have considered?
A general reflection I'd like to hear some reaction to is this. Are there minima and maxima in terms of size, where being smaller than the minimum would make it rather difficult to maintain an ability to analyse investments, for instance, without incurring a rather costly administrative ratio?
I notice that the ratio for your fund has gone up 5% in the last three or four years, except last year, when it went up almost 30% to 2.6% or 2.7%. That's a lot of money; you're talking about over $10 million there in administration.
Is there a minimum size and is there also a maximum size where you have the problem that you can't keep up investing the money? Some comments on those would be interesting.
The Chair: Who would like to tackle that?
Mr. McCambly: First of all, there's no problem with co-investing with others. We do it with other labour-sponsored funds. We do it with the medical sector. We do it with Ventures West and others.
There are other issues you have raised, though, with regard to putting the money out. Our minimum investment at this point is $260,000 and our maximum is $8.5 million. There are follow-on investments that raise those numbers. I wouldn't have known this a few years ago, but in terms of the $10 million limit that we understood and agreed to at the start, there are times when a company that is very successful can grow beyond that before they go public and they might need extra money. That's covered as well.
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Mr. Bélanger: I was referring to not the minimum or maximum investments, but the size of the fund itself. Should the Working Ventures Fund be capped right now until you have the $300 million invested? Is there a maximum size one should be? I know Le Fonds de solidarité has $1.2 million with 60% invested, so there's no problem. My answer is that I'm not sure there's a maximum here.
Is there a minimum? For instance, a fund that has only $3 million or $4 million is limited to small investments. Is it productive? Has there been enough discussion and experience to establish that there is a threshold in size both ways for labour-sponsored funds?
Mr. McCambly: I covered part of that in my presentation. Looking at the American scene with which we must compete, they have very large funds of $1 billion and over, and about 50% of them are at $500 million and over. We have one outside of Quebec, and that's us. We're not the size of the American funds yet.
I think there is room for a lot larger funds. The problem is twofold.
One, we have money we have to get out. We're doing it. We're ramping up and investing faster than any fund has ever done in Canada, outside of Quebec. We can't go faster than what is reasonable for the shareholders. We have to be prudent and we intend to be.
But I must touch on the other aspect, which is the people who are in the fund. The question is raised as to whether the tax credit is appropriate and so on. Normal venture capital funds traditionally, historically, have five, 10 or 20 large-worth investors, whether they be insurance funds or whatever, putting in $10 million or $20 million each, and they go out and invest that money over a five- or ten-year period. We have 90,000 shareholders and we're looking for 190,000, each with a small amount of money.
I can tell you clearly, for the others who have asked the question, we have matching tax credits in five provinces. We are selling shares all over Canada, and in those provinces where we do not have a matching credit the investment is very small. Where we have it, it's very big.
Part of the purpose of this fund and of this whole notion is to allow and encourage people without a lot of money to be part of the free enterprise system and to be investing in it. That's happening. Believe me, I don't think the level of tax credits that exists will last forever. I think there will be a change. But we must first prove to those people that it is a good thing to invest in Canada's future, and you need the tax credit to do that.
I share your concern in terms of the cost, and we will deal with that. We need to deal with that. But, I tell you, for the small investor, you need the tax credit.
The Chair: Thanks, Mr. Bélanger.
Mrs. Brushett.
Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chairman.
There are three points I'd like to make very quickly, and the first one is to the last speaker here.
If you didn't have the tax credit, do you believe you'd get enough return to satisfy your investors so they'd keep on investing with you and be satisfied clients?
Number two, I'm very concerned you're not dealing with the rural areas. You talk like a banker. It takes too much money and time to service small clients and so on and so forth, and no one has time for these small businesses in rural areas in parts of Canada. So they're neglected again, yet we give the credit to hopefully provide the venture capital.
The third point is that Toronto-Dominion Bank has just taken on a new trust fund that will invest in Canadian research and technology. I'm wondering why we need the medical investment per se with the credit when we have a mutual fund developing here in Canada for promotion of our own technology and science.
Mr. Charlebois: To start with the last issue, the TD fund is being referred to as one that invests in public companies, in most cases medical discoveries. We focus on technology as well, but virtually all of the companies we invest in would be private companies, so they are much smaller and much younger in their phase of development, which is a very different type of investment.
The TD fund you refer to will invest in companies any Canadian can invest in, because they are publicly traded on the Toronto Stock Exchange. The types of companies we invest in are not, and that's a fundamental difference.
Mr. Stiller: I'll add to that.
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There are fundamentally different requirements for that fund compared to ours. We welcome that fund. Indeed, we welcome anything involved in the investment of science and technology. But we -
Mrs. Brushett: I'm a co-founder of a biotechnology company that went onto the stock exchange. It was built up from nothing in the rural Maritimes. We took it to the stock exchange entirely on private funds, and lack of capital was no inhibition. We were poor and broke and starving for practically 25 years, but we had a drive to do it, and there was no lack of initiative.
I think today we're forging a lot better partnerships between our research and our commercial companies, but I think you must also take into consideration the fact that we are very close to our American neighbours, where the science, research and technology is so much more available to us. It's controlled by regulations and enforcement that we don't have here in Canada, and we therefore won't reach that level because of that close proximity.
I did want to hear the comment regarding -
The Chair: Mr. Daoust.
[Translation]
Mr. Daoust: If I'm not mistaken - correct me if I'm wrong, but I might add to your concerns - you said that banks, without mentioning them specifically, and traditional risk capital institutions are losing interest in outlying regions and rural regions.
I really want to repeat what Mr. Bachand said regarding what we are experiencing at the Fonds de solidarité. In about two years, all over Quebec, and the same could hold true for the rest of the country, thanks to the Fonds de solidarité, each of the communities forming part of a county regional municipality, that is to say about 15 municipalities, will have access to what we call a SOLIDE, a local employment investment corporation. In addition, each of the 16 main regions of Quebec will have its regional solidarity fund.
So, and this is what is important, not a single place in Quebec, not a single town in Quebec, not a single municipality will not have access to people from that area to take care of venture capital investment. Not one region in Quebec will feel isolated.
When we talk about tax credits, it is important to say that traditional venture capital businesses do not get involved in that kind of thing, for obvious reasons. It is costly and it requires the involvement of people, and the role of those institutions might not be to do that kind of work.
The tax credits we get, which are sometimes criticized, are useful among other things to ensure a presence in all regions. I'm talking about Quebec, but, once again, it could be elsewhere too. Salary dollars must reach a critical mass, a given level to be able to fulfill those functions. On that, I agree with Mr. McCambly.
[English]
The Chair: Thank you, Ms Brushett. We've come to the end of questions.
I understand that some of our panellists might have to catch a 10 o'clock plane. If that's so, perhaps those panellists could sum up first.
You've heard the concerns of members from all sides here. Are the credits too generous? Should we be tighter in our rules on how much must be invested? Should we put limits on what you can raise if you're not up to those limits?
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Should we have uniform laws right across Canada? Is it not insane, when we are such a small country, at least in our economy, that we should have so many different rules governing venture capital funds?
If venture capital funds that are labour sponsored are doing such a good job and we do have a shortage of venture capital, should these benefits be passed on to other venture capital firms that invest in Canada under similar restrictions?
These are a lot of the questions that have come out tonight. I would welcome your response and what message you wish us to take away from your presence here.
Perhaps we could start with you, Ms Macdonald.
Ms Macdonald: I wouldn't presume to pass comment on the specifics at this point, given the role we play in the industry. My message, if I could leave you with one, is I simply suggest that in considering the options available to you, you also take care to recognize that these groups are important in the supply of capital now in Canada, so you need to adjust carefully. Particularly in Ontario, if you look at the data, the labour funds have become the primary source of capital. Therefore adjustments need to be made in the context of ensuring that at the same time we are not having a negative impact on the investment flow into the kinds of growth companies we are all interested in.
The Chair: Thank you, Ms Macdonald.
Mr. McCambly.
Mr. McCambly: First of all, I think it is very important that your committee, or the federal government, talk to provinces with a view to harmonizing wherever possible. You can't do it totally. That is not practical. The Solidarité fund, for example, has rules that were in existence and are quite different from those of some of the ones in other provinces. But there are issues that could quite appropriately, in hold time, retirement, and so on, be harmonized.
The matter I am going to draw particular attention to, very important to our fund, has to do with the rolling clock issue. It is essential that we be on a requirement similar to the provinces'. Remember that we commit to reinvest 80% of the money back in each province that has a matching credit. It is held in those provinces, in their paper money, until such time as we get an active investment there. Then it is reinvested back in the province where the people put the money in in the first place. So it is really important that these conditions get harmonized with the provinces'.
It is absolutely essential that the tax credit or that type of condition be the same across Canada, as it is at the moment. Bear in mind that if there is ever to be consideration, or at any point it gets to consideration, of the changes Mary was talking about there.... Remember that at one point the amount of money going in was a maximum of $3,500 per year. As a matter of fact, it is still that amount in Saskatchewan. They didn't change the law in the province of Saskatchewan. When Mr. Mazankowski was finance minister, he decided, or they decided, to make it $5,000.
So that is something to be thought about, as opposed to thinking of tax credits. One of the very important issues is to be sure that opportunity for average workers to be participants is maintained.
We are very much concentrating on getting into small communities in every region of Canada: Atlantic Canada.... I was telling you about a situation we have in North Bay. We are anxious to work with any community to get into smaller investments. We have requested special types of funds for community.... By law, we cannot do that now. We cannot download. It is something that needs to be looked at.
You made a point on return on investment. I think in five, six, or ten years there will be quite a new understanding of who has been successful in investment. Some others have mentioned that. By that time there will be tens of thousands of Canadians who will have a better understanding of what risk capital means. Even reporters ask me what our interest rate is on the loans we put out. We don't put out loans. We put equity into business, and it's all risk. After that they go and talk to the banks.
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So there's a great need for understanding in Canada about what risk capital really means. I'm sure the finance committee here is most aware and understanding of what real risk is, and that's what we're providing.
The Chair: Thank you, Mr. McCambly.
Mr. Hindson.
Mr. Hindson: I come back to the point that if the government is to continue being in the business of assisting in certain programs intended to stimulate the economy, it's very difficult to imagine a better vehicle than the labour-sponsored venture capital corporation. I know of no other means where the government applies funds in an environment where the eventual utilization of funds is competitive and visible and where the interests of all participants are consistent, as they are through this.
As you are obviously going to consider possible changes to the act, and it's fairly obvious to everybody what shape and form those changes could possibly take, I encourage you very much to recognize the issue of critical mass in these funds. If you're going to consider anything that limits their ability to grow, you have to at least let them get to a level before you do so.
The Chair: Are you suggesting a level? It's been suggested to me by one person that all funds should be capped at $100 million.
Mr. Hindson: In my view, that's an adequate level. It may not be adequate to fulfil the need for venture capital in Canada, but it's certainly adequate for a fund to operate as a successful economic entity, in my view.
I sit here as somebody who has an investment in our fund about equal to the federal government's - not me personally, but my partners and I. We, as a fund sitting with $4.25 million, have certainly spent a fair bit of time looking at the issue. The absolute bare minimum - and I'm sceptical it would really work - is $20 million.
The Chair: Thank you, Mr. Hindson.
Mr. Brown.
Mr. Brown: I just want to go back to some basic points raised initially. There have been some excellent points raised tonight that I will comment on as well, but number one, it's fairly evident that small business does need financing. It has to come from somewhere.
I've spent 15 years in this industry with funds, and I'm not running around all over Ontario raising funds because it's enjoyable. It's a very difficult way to raise funds. It's because the sources of capital for funds investing in this small- to medium-sized business environment aren't available anymore, other than through programs such as this. It's an excellent program in that regard.
It's my belief that the funds that are invested in small businesses are definitely paying for themselves if you look on an individual deal basis. They pay for themselves time over time when you look at the individual investments that are being made.
The problem is the uninvested funds. There are guidelines in place, and probably what needs to be examined is whether the guidelines are tough enough. Should the guidelines be revamped to perhaps allow shareholders to move out of a fund without recapture of the tax credits and move into another fund in order to bring that particular fund onside? If they are offside, it would help in that regard. Maybe that should be examined.
Mr. Discepola raised a good point when he asked, if you don't have the funds invested, should there be a holiday on that particular fund? Well, maybe there should be. That should be examined.
Another thing that should be looked at is the coordination across the provinces. I agree with Mr. McCambly that not all the issues can be coordinated, but there are some that could be at least fine-tuned to make sense between the provinces so that it's a more contiguous program that's applied.
The Chair: Thank you, Mr. Brown.
Mr. Charlebois.
Mr. Charlebois: I'd like to address the minimum fund size issue once again. I would agree that $20 million is the bare minimum. My number would probably be more like $25 million as the minimum economic fund size that makes sense.
I would note that a number of the funds at this table have not yet reached that size. Less than that size, these funds just cannot be sustained over a number of years. The size is simply not there.
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As to fund size at the other end of the scale, our fund has voluntarily capped itself at $75 million. Anything over that we clearly would be...comfortable with.
One thought I would leave with you is that if you are looking for areas you might want to review in the specific rules of these funds, the rule for people who are over 65 years of age, who can invest for two-year full periods instead of five-year full periods, might be one you would want to have a look at to see if it should be changed.
The Chair: Thank you, Mr. Charlebois.
Mr. Ferguson.
Mr. Ferguson: I guess our viewpoint is that we think the legislation is still too new really to evaluate the economic impact and benefit of the program properly. However, we do believe if a labour-sponsored fund does its job and invests within the prescribed period, we can demonstrate the benefits. With the rules in place, over time labour-sponsored funds will approach the 60% and 70% investment rate. If we don't, we incur penalties, which affect the rate of return to investors.
On the subject of the cap, we do not believe a cap should be put in place. We believe a cap will just stop one fund from raising money and redirect investors into a new fund. The effect of a cap is really to take away the decision an investor might make about which fund they choose to go for.
Once again, if a labour-sponsored fund isn't doing its job and investing within the prescribed period, they will incur penalties that will affect the rate of return to investors. Market forces are sufficient to allow investors to decide which fund they want to invest in.
I guess the last point is that we'd like to see some harmonization between provincial and federal rules for labour-sponsored funds.
The Chair: Thank you, Mr. Ferguson.
Ms Foley.
Ms Foley: My colleagues here have said a lot of the things we wanted to leave with the committee tonight. First is that maybe the guidelines or the penalties for investing should be looked at in terms of how much money the fund is investing within the period prescribed by the legislation.
We do look as well at harmonizing federal and provincial legislation. We believe that would be a very good position.
Basically, everything Mr. Brown has said about possible changes that could be looked at is something our fund has been looking at as well.
The Chair: Thank you, Ms Foley.
Dr. Stiller.
Mr. Stiller: I have little to add, Chair, except I think it's a very important process we're going through tonight.
This is a young industry. We have two shareholders. We have our investors and we have the public of Canada, through the tax credit. This is the annual shareholders' meeting we answer to, and I think it's a valuable exercise. Many important comments have come up.
I think we need to govern ourselves in a very careful and open manner. Integrity is everything here.
About size, the size of the pool should equal the size of the opportunity. It seems to me in a self-evident way we should be exercising our own control and discipline in that regard. Where we have the opportunities, we have to get the money out for a period of four years, on average, to show a reasonable return in this kind of investment. The pressure is on us from our other shareholders. It's in your interest as well, from the standpoint of the citizens of Canada, the taxpayers, that we get the money out.
I would say it's a young industry. I think you need to call this shareholders' meeting on an annual basis. Call us to answer on whether we've met not only the spirit but the actual details of the legislation.
The Chair: Thanks, Dr. Stiller.
Mr. Delaney.
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Mr. Delaney: I'd like to make a few comments to sum up.
First, it's important to note that the tax credit is really needed if this is going to be a vehicle to direct capital into venture capital markets. From an individual investor's perspective, this is a retail product that we sell. It's an illiquid, risk-oriented investment. So to think we'd be able to raise significant amounts of money without the tax credit is wrong.
Even other means - such as, as was suggested, looking at capital gains exemption, which is also a tax expenditure, certainly would be less effective - in particular if one of the objectives of the fund is to try to bring new investment capital; in other words, make this available to a broad base of people.
Mary Macdonald has done a very good job of indicating that we do have a very lean venture capital market in Canada, to the extent that it exists at all, and that the labour funds are really filling it in. The CLMPC study and the INRS study go a long way to indicating that the money that has been placed by the various funds do give the government a good return on its tax credit investment. That's important.
With respect to a question you asked about sources of venture capital other than labour-sponsored funds and whether they should get similar treatment, I would just like to point out that in addition to dealing with trying to solve the problem of us having a particularly lean venture capital market in Canada, there are other benefits that some funds are trying to produce as well.
They range from trying to basically raise new sources of capital to appeal to people who otherwise wouldn't make investment, to trying to have a positive impact on industrial relations in the province. A number of funds spend a fair bit of time working with investee companies on training programs, trying to implement high-performance work systems, improved cooperation between labour and management and these kinds of things.
In our case, we plan to target co-op investments and worker ownership investments, again trying to facilitate better labour-management relations. In addition to that, some of the funds have already started to try to solve the problem of getting capital into isolated areas, particularly small businesses.
So a number of criteria should be looked at, and if there's a broad base of public policy needs that are being served by some particular tax expenditure, well, then, good. I think that's great.
In terms of regulation, now that I've mentioned that I think the tax credit is absolutely essential, there are other things you could look at: a holding period, perhaps tighter restrictions on the investment side, getting the money out, and harmonizing would probably make life a little bit easier for everybody.
With respect to other public policy needs you think labour funds should be fulfilling, including getting capital into particularly smaller investments, as has been pointed out quite clearly, the government is an important shareholder in all of these funds. If you think that kind of investment mandate should be part of access, well, it's up to you to tell us that.
Many of the funds have shown a willingness to work with government and to try to respond and fill in the gap on some of these public policy needs.
The Chair: Thank you, Mr. Delaney.
Mr. Kreiner.
Mr. Kreiner: I want to make two points.
One is on the issue of substitution. When you think about that issue, you need to be cognizant of the fact that there are areas in the country that are totally underserved, where there is not a substitution issue. When you look at the maritimes provinces or the prairies, there is a total absence of institutionalized venture capital without labour-sponsored funds. You should keep that in mind as you think about how we compare to the industry generally.
The other point I want to make is that generally the capitalization of the funds is congruent with the need. Basically, with very few exceptions, virtually all the funds are in compliance with the placement requirements that have been imposed on them by their provincial governments. We meet the targeted investment requirements our provincial governments have imposed.
In fact, on an ongoing basis, we negotiate at the provincial level as to how much money we're going to raise each year. We have an effective cap at the provincial level. They have an effective cap at the provincial level.
If you're going to think about capping, it would be better to have that discussion occur at a place closer to the assessment of the need, which is at the level of the provincial government making the assessment as to what is the appropriate amount of money for us to raise in Manitoba to meet the needs for venture capital that exist in Manitoba, as we understand it and as our government understands it.
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The Chair: Thanks, Mr. Kreiner.
Mr. Levi.
Mr. Levi: I wanted to address the points I heard people ask about; first of all, the question of economic size. Having had just a little more experience in raising the money and finding out where you get to the point that your expenses are reasonable within the context of your pool of capital, I would venture to say it's somewhere between $50 million and $75 million at a minimum.
In addition to that, if you apply a cap to the funds, you have to recognize these are dynamic funds. In the case of Ontario, at the end of five years people may roll out. In the case of British Columbia, it's eight years if they don't intend to invest again.
So what's going to happen at some point is that we are not going to grow forever in size; we're going to have to pay out. To maintain a $75 million cap, at some point, if that was a cap somebody had said they'd self-imposed, they will still be raising new funds every year after they get through their first seven- or eight-year period. Capping at an absolute number just doesn't work for these funds.
I want to deal briefly with the tax credits. I bit my tongue here back and forth over the level of the tax credits. This is a critical issue for you, and obviously for us as well.
Let's put this in context. What we're trying to do here is to raise a very small sum of money out of a very large pool of money. That pool of money is the RRSP funds raised here annually. You provide a generous tax deduction to people who invest in RRSPs. Last year in Canada...if I'm not mistaken, the statistics I saw in the paper the other day were that roughly $20 billion went into RRSPs during the RRSP season. With this huge 40% tax credit we received, out of that $20 billion less than $500 million went into labour-sponsored funds. In the province of British Columbia, if I just take 10% of the $20 billion, $2 billion was raised; and out of that $2 billion raised with this great incentive we have we attracted, because we were uncapped last year, a whole $35 million.
So don't expect that this 40% tax credit is going to raise huge sums of money. Within the context of the RRSPs, those people who are looking for investment for their RRSP portfolio, we are attracting a minimal amount. Out of the $200 billion in RRSPs today, less than 1%, $2 billion, has been put into labour-sponsored funds. This is not a huge attraction.
I'm not arguing for a higher tax credit, though I think that argument could come to pass if you were to look at that.
I'm just having some fun.
On the downside of the argument, though, in British Columbia we've had a program that allows for an RRSP rollover for venture capital corporations. There is a 30% tax credit. In fact, because they can be rolled into public companies, there's virtually no hold period on those funds for the investors. Even given those circumstances, they have not been able to raise much money through that program.
These programs work because the incentive is at the right level. It's not attracting huge sums of money within the context of the RRSPs. If we were attracting 10% or 15% or 20% of the RRSP funds out there, I think we would all have grave concerns. Within the context of the venture capital market it is probably, as many have said here, a relationship to the amount of money that is necessary for venture capital in the marketplace.
The issue of cash balances, how much cash we carry in our portfolios, has been raised several times. It's important to remember that when we make a first investment in a company we have a responsibility to make follow-on investments in that company. If you look at a private venture capital pool that has an institutional investment of $20 million or $30 million - we'll take the $20 million number now - and you look at how the industry treats that, when they reach $7 million of investment on average in a $20 million pool they cease to do new investments. They maintain the other $13 million for follow-on investments in the companies they've already made a commitment to.
The advantage of the continual fund-raising we're able to do is that we continually make more and more new investments while caring for those investments we have already made long-term commitments to. There will always be cash balances in our portfolios, because we have to commit to the companies in the long term. That's just the nature of the industry we are in.
On the issue of the investment timetable, this goes together with the issue of provincial harmonization. I would strongly argue that the advantage of the system you have now is something the government has been talking about in other areas.
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At the federal level you have a framework or standard in place for investment funds. You may look at it and argue that the framework is not high enough, but that framework has allowed other provinces to increase the barriers, in our case to 80%, and in the case of Manitoba to 75%. It has allowed us to differentiate the kinds of investments that are necessary in different provinces. We don't have large successorship issues in British Columbia, as they do in Manitoba.
On the other hand, we don't need any more investment and resource extraction in B.C. The fact that the Solidarité fund has restructured a pulp mill in Quebec is important for Quebec, but it would be a waste of time and effort in British Columbia because we have very significant pools of capital that are doing that work. For that reason, we are prohibited from making investments in resource extraction.
While you look to tighten the rules you have at the federal level, maybe that standard isn't complete enough. I would encourage you at the same time to recognize that there needs to be an allowance for provincial success.
The other question, suggested by somebody from Ontario, was that you tighten up on the two-year rollover rule for retirees. I had a long conversation with someone from The Financial Post because it lumped us in with everybody else. That is not allowed in either British Columbia or Manitoba under the legislation there. Maybe this speaks to the fact that the federal legislation, which is the oldest of all the legislation, should be looked at for some of the small pieces that could be tightened up.
Finally, I just want to leave you by stressing the importance of this type of investment. The companies we invest in are not competing internally for markets inside Canada, as 80% of the sales made by companies in which we invest in British Columbia are export sales. They are competing in an international world. They need equity capital to allow them to grow and compete in that world.
Finally, it is the strongest group of companies in Canada in terms of research and development. We have companies with $10 million in sales that are doing $4 million worth of R and D in our portfolio.
There are two areas that were identified in the recent competitive study that was just released yesterday or the day before, where Canada was the weakest internationally. They brought us down from where we would have been to eighth place.
The first major issue was lack of diversification of Canada's exports, which is exactly what these funds target. The second issue was the lack of R and D that's done in comparison to other countries. Again, that's exactly what these funds do. You are a partner in this enterprise, as 20% of the money that goes into it comes from the federal government. While 20% comes from the provincial government, 60% comes from individual Canadians who want to take risk on these opportunities and provide this opportunity.
The Chair: Thanks Mr. Levi.
Monsieur Bachand.
Mr. Bachand: Thank you Mr. Chairman. I've been in the business community all my life and joined the Solidarité fund very recently as a full-time member.
There's 20% to 22% real unemployment in Quebec now. Adult people able to work are out of work. Canadian companies are still undercapitalized. Access to unsecured capital markets - except for very large companies - is not provided. Banks do not play that role, and maybe they shouldn't when their role is not in unsecured capital.
So what happens? Today we have 250,000 Quebeckers who have put away small amounts of money - $4,000, $5,000 or $6,000 - over the years until they retire. We have much more stringent regulations than other provinces. These are average Canadians. Only 15% of them have revenues above $60,000. It's a true solidarity movement.
I think we or the government should realize that this is, in a sense, a unique Canadian institution. It doesn't exist in the United States or in most countries in the world. Labour funds are truly unique Canadian institutions that address truly Canadian problems of creating jobs and capitalizing companies.
I think the real test of the size of the fund is the 60% or 65% test of utilization of the funds. We feel that 60% is an appropriate cap.
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I think there should always be a 30% to 35% amount of money in bonds, not for the reasons David has said, but because of the nature of our shareholders. They are average workers, and for 40% of them it is the first time in the RRSP market. That 30%, 35%, or 40% level ensures a minimum rate of return. It ensures us the minimum revenues to cover our costs and give a basic, very small return. The other return will be variable, depending on the cycles of the economy. It also allows us to take greater risks.
As for the dollar size of the fund, I think there is no cap except for the utilization cap of 60%. Although our thrust is toward small, local, regional, and Montreal companies, some interventions are needed. Tripap is an example. Novabus, a bus company, which was a closed plant of General Motors, has 700 Canadian employees today. It may be the greatest North American bus company. There are a lot of other opportunities like that, but they need a large amount of capital to start with. After that we can pass the bâton to Bombardier, Uniforêt and Tripap, and we've done our role.
As for uniformity, I think this country has learned and should learn that although there are institutions that can happen across the country, local adaptation is probably also a value we should not forget.
[Translation]
The Chair: Thank you, Mr. Bachand.
[English]
On behalf of members of Parliament from all parties, I want to thank you. This has been a very informative meeting tonight, and I think we've learned a great deal.
I can only speak personally, because you've heard different views from members of Parliament around the table. There's so much that appeals to me about what you are doing. You're giving workers an opportunity to perhaps buy their first equity investments. Your funds invest locally, and invest where traditional venture capital funds have not invested.
We know we have a shortage of venture capital in this country. We have not yet seen the product of many of you, because most of you are brand-new. So far, even those of you who are brand-new are very enthusiastic, and those who have been in it a few more years have a track record.
We did not have the capacity tonight to analyse all that has come to the taxpayers of Canada for the tax concessions granted in terms of exports, actual jobs, corporate tax, payroll tax, and everything else. Mr. Kreiner mentioned that there's a three-year payback, and that's not a bad payback if that's what it is. Hopefully the funds that are new will go on to the great successes we see for them in diverse areas, including medicine, entertainment, and elsewhere.
There is one main thing we have to decide as members of Parliament and custodians of the public purse. The one thing that shocked me when I saw these funds is that as a taxpayer in the 50% bracket, I can put up $5,000 and only be out of pocket $500. That's a very generous tax break, and perhaps the most generous I have ever seen in my life. If it is doing a job that cannot be done otherwise, that break is justified. But if the funds are just going into treasury bills, then all of us around the table have agreed tonight it is not justified expenditure on behalf of the Canadian people.
This is an exciting task you've undertaken. You've embarked on a new journey, which has hope for doing things that governments could not do themselves. I suspect it's too early to judge any of you critically. I suspect, as Dr. Stiller said, this might just be the first of many board meetings with you representing the entrepreneurs and us representing the public who puts up the tax money.
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I want to thank you all, on behalf of all members of Parliament, for an excellent meeting. Thank you.
This meeting is adjourned.