STANDING COMMITTEE ON INDUSTRY
COMITÉ PERMANENT DE L'INDUSTRIE
[Recorded by Electronic Apparatus]
Tuesday, February 10, 1998
The Chair (Ms. Susan Whelan (Essex, Lib.)): I'm
going to call the meeting to order pursuant to Standing
Order 108(2), a study on labour-sponsored venture
We have before us five representatives from the
different labour funds. There
are translation units in front of the table. What I
would propose is a brief presentation followed by
questions around the table.
Mr. Bachand, perhaps you could begin and introduce
your colleagues. Thank you.
Mr. Raymond Bachand (President-CEO, Fonds de solidarité des
travailleurs du Québec): Thank you, madam Chair. On behalf of my
colleagues I'd like to thank the committee for agreeing to meet
with us this morning in spite of a very busy timetable.
We certainly appreciate the fact that you have
scheduled a meeting specifically to hear our concerns.
My name is Raymond Bachand and I am President-CEO of the
solidarity fund. I am accompanied by fellow CEOs of other funds
belonging to the labour-sponsored investment funds alliance.
We have Sherman Kreiner of Crocus Investment Fund of
Manitoba; David Levi, president of Working Opportunity Fund of
British Columbia; Ken Delaney of First Ontario Fund;
and John McEwen of Workers Investment Fund of New
With me I have two eminent colleagues from
Fonds de Solidarité des Travailleurs du Québec. They
are Fernand Daoust, former chairman of the
Quebec Federation of Labour and former chairman of the
fund, and Jean Martin, who is our senior
vice-president at the fund.
As you are aware, the 1996 federal budget introduced a
series of changes to the tax treatment and contribution
levels afforded to labour-sponsored venture capital
funds. Specifically, the changes were made to lower the
maximum contribution level to $3,500 instead of $5,000,
to reduce the federal tax credit to 15%, and to extend the
holding period to eight years for federally chartered funds.
We come before you today to discuss two matters.
First, we wish
to illustrate the proven ability of labour-sponsored
funds to create jobs and maintain employment.
Secondly, we'll discuss the detrimental impact the 1996 budget
measures have had in terms of our ability to attract
investment capital and more importantly our ability to
invest in emerging Canadian companies.
My colleague, Sherman Kreiner,
will illustrate the negative impacts of the 1996 change
on his specific front.
Let us make the
point that the coming budget in February 1998 is
critical not for the 1998 season but because that
budget will make the rules for the 1999 season. It's
key in that aspect.
If we look at Mary Macdonald's statistics, and she
is the Canadian expert on venture capital, industry experts
estimate that venture capital investments will exceed
$1.5 billion this year, while new capital inflows will
amount only to $750 million. So the net outflow will
be $750 million, and if that happens two years in a
row, of course, the fear is that we'll be lacking capital to
invest in Canadian corporations.
Unlike other venture capital pools in traditional
financial institutions such as banks, labour-sponsored
venture capital funds are true labour-sponsored venture
We're happy you invited us here this morning to
illustrate that the labour-sponsored fund
industry is not synonymous with working ventures, which
seems to be the only fund attracting media attention in
this country. We're there not only to maximize the financial
return on the investments of our shareholders, but
we're also there for job creation and economic development
and the social returns. I think we've been very
successful on these two counts.
Let me briefly emphasize the positive impacts of
labour funds, both in
terms of job creation and economic development.
The five members present before you have
invested $345 million in 137 companies in 1997. These
investments have produced 6,800 jobs throughout Canada.
From 1992 to 1996 total employment in Canada has
increased by an average of only 1.2% per year, but by
contrast venture-backed companies have increased their
employment base by an average of 26% each year,
subsequent to venture financing.
funds have become a critical source of capital for
emerging high-growth technology firms. In the first
nine months of 1997, $634 million, nearly 60% of all
venture capital investment, went to high-growth
information technology and life science companies.
Labour sponsored funds are also a critical source
of capital for regions in communities, which I know is
close to your interests and your preoccupations.
In Quebec, for example, we've set up 86 very local funds
to address the $5,000 to $50,000 needs for
entrepreneurs and 16 regional funds to address the
$50,000 to $500,000 needs. These funds are managed locally on
a decentralized basis by business people in the
communities. So through a fund like Solidarity
we get access to capital in very small corporations
in all the regions of Quebec. I know our fellows and
people from British Columbia, for example, do the same.
So that's the impact of labour funds.
Secondly, what's the net return for the
government? Is there good payback?
The solidarity fund commissioned a number of studies on the
economic impact of investment. These studies were done in 1996 and
1997 by the SECOR and Regional Data Corporation. They demonstrated
that the economic spinoffs resulting from the support provided to
fund shareholders proved to be greater and have more of a
structural impact than a general reduction of the individual tax
rate. The effect on employment in particular is twice and a half
times higher and it is recurrent rather than transitory.
The study thus shows that the direct and indirect
impacts for $100 million in uncollected government
revenue leads to the creation of 1,143 person-years
for a tax reduction, versus 2,800 person-years for
government support to labour fund shareholders in the
form of tax credits.
The second set of studies, which have been done
twice, basically show that the government's
payback is between the period of 1.2 to 2.2 years, and
that depends on the methodologies used in the
studies. We've had studies using different
methodologies in the payback. The payback for the
federal government is a bit higher than the payback for
the provincial governments.
We will of course provide you with copies of these
studies so you can have a look at the methodology.
We'd be pleased to answer any questions.
It is our view that labour-sponsored venture
capital funds are making a tremendous impact
in terms of job creation and economic development,
specifically in areas neglected by traditional
financial institutions, such as banks. Labour funds
have typically been very active in rural areas
of Canada and also in the high-tech industry, where
traditional financial institutions have been overly
I'd like to turn to my colleague, Sherman Kreiner,
to complete our introductory remarks.
Mr. Sherman Kreiner (President and Chief Executive
Officer, Crocus Investment Fund (Manitoba)): Thank you,
Madam Chair, members of the committee, I am president
and chief executive officer of Crocus Investment Fund,
Manitoba's labour-sponsored investment fund. I want
to use the Manitoba experience to illustrate
the very dramatic negative impact the 1996 federal budget
changes have had on our ability to meet the venture capital needs
of Manitoba businesses and to create new jobs
and maintain local ownership of Manitoba businesses.
As I recount our experience, I think it is important
for you to understand that according to Macdonald &
Associates, the Crocus fund accounts for 81%—that
is, for $4 out of every $5—of all venture capital
available in Manitoba. Thus, when we are not able to
meet the demand for venture capital, that demand
is not being met in our province.
Since inception in 1993, the Crocus fund has been
extremely successful in raising capital. In a province
of only 1 million people, we, in our first four sales
seasons, raised close to $50 million, peaking at more
than $21 million in the 1996 RRSP season. However, the
combined effect of the key 1996 tax law changes—reducing
the maximum contribution to $3,500 and cutting
the tax credit to 15%—virtually halved, to $11 million,
the amount of new money raised in the 1997 RRSP season.
One of the unanticipated consequences of the changes
was to alter the sales dynamics of the product for our
distributors. Our product is now less attractive for
brokers to sell. Prior to the 1996 changes, brokers
received a $250 commission on the sale of a $5,000
product that had to be held for seven years. After the
changes, brokers' commissions were reduced to $175
with no future commissions on the managed funds
for now eight years. In 1997 our sales by brokers
dropped by $5 million, and the average sale per customer
dropped by over $600.
Once we raise our money, we are mandated by our
provincial legislation to be extremely aggressive in
investing it in small and medium-sized businesses. We
have two requirements. First, 60% of our total investment
assets at the end of a financial year must be invested
in small and mid-sized businesses by the end of the
next financial year, and second, 75% of new capital raised
in any financial year must be invested in SMEs
by the end of the next financial year.
We have dramatically outpaced these legislative requirements.
Since the beginning of 1996, we have been investing
at the rate of $15 million per year. By the
end of 1997, we found ourselves more than $10 million
ahead of schedule. Yet because we raised only $11
million last year, our investment mandate for this full
year is only $8.25 million. We therefore find
ourselves today, on February 10, in full compliance
with our year-end requirements, yet the
demand for venture capital in high-quality
transactions does not abate.
So how good are these investments? We believe
our investment performance underscores
the quality of the transactions being presented to us.
Our one-year real rate of return last year,
at 13.6%, exceeded the TSE 300 average,
and our long-term performance is also quite strong.
The Crocus fund, along with British
Columbia's Working Opportunity Fund, were recently
selected by Maclean's magazine in its “best of
class” grouping of Canadian mutual funds that
provided “superior rewards for the risk”.
We also believe our investments have a significant
impact in promoting economic growth. We currently
have close to $40 million invested in 22 Manitoba
companies. These investments have saved or
created 1,200 jobs and helped maintain 2,100 more.
Fund investments have also provided employee ownership
to approximately 800 Manitoba workers, assuring that their
companies will remain locally owned from one generation
to the next.
Close to half of our investments are in
the manufacturing sector, and $1 in every $5
is in the biomedical and information technology sector.
We have devoted considerable effort to facilitate the
commercialization of research undertaken at our
research centres, including the first joint venture
between the University of Manitoba and its research
scientists in bringing a unique cardiopulmonary
bypass pump to the commercial marketplace. We have
invested in a portable MRI machine that can be brought
directly into the operating room, and in drugs being
developed to combat AIDS.
Strategic equity investments in the Angus Reid Group
and National Leasing have allowed these companies
to keep their headquarters in Manitoba.
When I appeared before this committee several years
ago, I spoke of our successful efforts to work with the
management and union at Carte International, a
200-employee electrical transformer manufacturer, to
prevent its sale to a U.S.-based company that intended
to shut down the Manitoba operation. Our joint venture
with management kept this business operating in
Our special relationship with the labour movement
permitted a collective bargaining agreement to be
reached when time was of the essence. Our expertise in
employee ownership helped facilitate a structure in
which 25 employees now share ownership. Implementation
of a broad-based plan for the remaining employees is
Further, while it was our jobs mandate that prompted
us to attempt an eleventh-hour response to save the
company, I am pleased to report that today this
investment is the best performer in our portfolio.
The Crocus fund's past track record clearly
demonstrates that there is an annual demand for
approximately $15 million of venture capital for
high-quality transactions in the region we serve. As a
result of the 1996 tax law changes, new capital raised
annually is likely to remain at approximately $12
million, with 75% or only $9 million available for new
investment. Capital needed, at $15 million per year,
is now almost doubling the available capital of $9
million per year.
Because we account for virtually all of the venture
capital available in our province, continuation of this
trend will rapidly dry up the supply of venture capital
in Manitoba. Consequently, 1996 tax law changes need
to be repealed to return the level of new capital
raised to 1995-96 levels. Only at that level does
capital needed match capital available.
Thank you very much.
The Chair: Thank you very much, Mr. Kreiner.
Just so committee members know, Mr. Kreiner will be
leaving around 10:15 a.m., so if you have questions for
him, please ask them early. They've divided the
presentation into two parts, but all questions are at
We'll begin with Mr. Schmidt.
Mr. Werner Schmidt (Kelowna, Ref.): Thank you very
much, Madam Chair, and thank you, gentlemen, for
There seems to be a new pressure, if you will, for
access to capital, from small businesses in particular.
A lot of it is venture capital, it's true, but a lot of
it is not venture capital. A lot of it is expansion
and development. I was rather interested to hear about
your partnership with the University of Manitoba in
particular. There is now a real development, not only
here but elsewhere in the world, about this whole
partnership thing with the private sector and the
government and the universities. Who makes these
decisions for the application of funds from the Crocus
Mr. Sherman Kreiner: Are you asking how our
process works internally in making a decision?
Mr. Werner Schmidt: Yes.
Mr. Sherman Kreiner: We have a staff of investment
professionals who review investment opportunities that
come to the fund. We make an assessment based on our
overall portfolio needs and the quality of the
investment opportunities as to whether we think a
particular investment would be appropriate for
placement by our fund.
That decision is then reviewed by the investment
advisory committee, which includes representatives of
the financial, business, and academic communities in
Manitoba. They basically vet our due diligence and
make a determination as to whether they also think this
is an appropriate investment. Then the decision is
finally made by our board of directors.
Mr. Werner Schmidt: That's good. What I really
wanted to know is who determines the kind of
partnership you're going to involve yourself with.
Mr. David Levi (President, Working Opportunity
Fund (British Columbia)): I think I can tell
you, because we have similar relationships in B.C. We
have been very proactive in building those
relationships, particularly with the universities.
We've done two spin-offs from the universities in the
last year alone, one at Simon Fraser and one at UBC. I
think we've done four or five over the last four or
From our perspective, what we've done is to link up
with all of the various players in the community. That
means the universities and four regional funds where
we're working with the community futures organizations
that are specialists in lending under $50,000 to small
businesses. We're now building partnerships into
specialty funds as well, which will include things like
seed capital, film, and biotech.
I don't know if that answers your question, but I
think it's certainly fair to say that we have been the
proactive player in trying to bring together our
various players within British Columbia to try to get
money into the hands of businesses.
Mr. Werner Schmidt: The reason for the question,
Madam Chair, is to determine where the dominant power
rests in terms of making this decision. Is it
primarily a business decision or an academic decision?
We know right now there's a tremendous shortfall of
money in the academic community. Is there almost an
undue pressure coming from the universities to use the
venture funds as a way of supplementing their
shortfalls in that area?
Mr. Sherman Kreiner: I think these are really
unrelated. One is this money that's available for
research. One of the problems is that, at least in our
province, there's always been a very poor track record
with regard to the commercialization of research. The
public money that has been available has primarily been
made available at the research end, not at the
commercialization end of the spectrum. In addition to
that, there is, not surprisingly, often a considerable
lack of expertise among the research scientists around
We've been very proactive in trying to identify where
those sources are. Then, in addition to the money, I
think we provide a very important value-added resource
to the researchers, which is to help them assess the
business issues they face and a variety of business
decisions they need to make. For example, how long do
you go on developing this product yourself? At what
point do you look to selling it to a larger producer?
Do you do the trials by yourself? Do you have somebody
else pay for the trials? How should the capital
structure of the company be made?
That information is generally not available to the
research community and that expertise generally doesn't
exist in the research community. So, as they have in
British Columbia, we've been extremely proactive in
trying to provide that value-added assistance as well
as our money to the commercialization effort.
Mr. Werner Schmidt: Would it be correct to say
then that none of your money goes into the basic
research part of the university?
Mr. David Levi: That is correct.
Mr. Sherman Kreiner: That's correct for us as
Mr. David Levi: In fact, I clearly understand what
it is you're asking. I was just out at UBC about a
week ago meeting with the president there about this
issue of basic research. You're right; their
difficulty at the universities is that they don't have
sufficient funds to do the basic research. They've
been very successful over the years in tracking how
much basic research ends up in technology that is
transferable into commercial companies.
What the university was asking us to do was to support
them in their basic research so that we would continue
to have the kind of technology transfer that was
possible. It's not possible for us to do basic
research. That's not the business we're in and it's
not the business our shareholders want us in. There is
a shortage of basic research being done.
Mr. Werner Schmidt: I understand that and I think
it's very important that we keep our focus absolutely
clear. I really appreciate the answer.
I have another question. How do you know that your
demand of $15 million is going to be sustainable over
the foreseeable future in Manitoba?
Mr. Sherman Kreiner: I guess there are two
responses to that. One is that looking at the quality
of the outflow we're getting right now, we are
receiving more high-quality transactions requesting
venture capital than we've ever received before. The
second is that companies are on an expansion track or a
growth track when we start investing in them. Many
times they're going to come back for additional
investment beyond the initial investment.
Once we've invested in a company, we are taking on
both an obligation to deal with new companies and
probably a continuing obligation for additional venture
capital for that company. If we look at the last ten
investments we've made, for example, seven of them are
new investments and three of them are add-on
investments. As our portfolio grows to two or three
dozen companies, we're looking at add-on investments
for those companies as well as new deals that are
coming to us seeking capital for the first time.
I actually think that in the normal course, the
portfolio would grow just of its own weight because of
the continuing demands of your existing portfolio
Mr. Werner Schmidt: I think we should ask the
other gentlemen as well. Is that a pretty standard
I know about three and a half years ago this
committee had Mary Macdonald as one of our
witnesses. It became painfully obvious that the money
that had been deposited with the venture capital funds
was not being applied as was intended. What has
Now you're here before us telling us there's a
shortfall of capital. That's the exact opposite
problem to what we had three and half years ago.
What's happening here? We know there are some funds
that aren't investing perhaps quite as successfully as
the Crocus fund.
Mr. Raymond Bachand: To take the Quebec situation,
which is the largest and oldest fund, our rules and
regulations provide that our average investments in a
year have to be 60% of the average assets of the
preceding year. While for ten years the fund used to
respect that rule around the 61% to 62% level, in the
past two years we've raised that to the 67% to 68%
I think that directly
answers your question on our ability to invest the
funds and to reach the community.
As to the future, the unemployment rate in Quebec is,
as you know, quite high, at the 10.5% to 12% level, and
with the way the economy is restructuring in Canada in
general with free trade, our corporations are more and
more oriented towards the export market, and that's
compulsory. They specialize in exports, and they
need capital to do that. If you want to succeed in the
world market in a specialized niche, you need capital,
non-guaranteed capital, which of course is our
business, to sustain your growth.
The Chair: Thank you.
Thank you, Mr. Schmidt.
Mr. Walt Lastewka (St. Catharines, Lib.): Thank
you, Madam Chair. I would also like to thank the
witnesses for appearing this morning.
I have a number of questions, but I want to tell you
up front that I'm really concerned about the amount of
money that is being invested in smaller businesses.
My experience tells me there's a tendency to be close
to the 500-employee mark and the $50-million asset mark
and above, and actually the smaller SMEs aren't getting
This committee has worked diligently with SMEs to
provide venture capital funds for the $50,000 to $1
million SMEs—stretch it to $1.5 million. My concern
relates to the work that's being done to assist SMEs.
I think you mentioned that your average deal size was
$1.7 million for labour-sponsored venture capital
corporations. Many times it's the million-dollar and
the $750,000 SMEs that are looking for assistance; 80%
of the new jobs in Canada are produced by those SMEs,
and I don't see the venture capital hitting the
SME portion. Could you respond to that?
Mr. David Levi: First of all, I can tell you that
we have no companies with over $35 million in assets,
period, in our portfolio. Out of the 42 companies we
have in the portfolio, the initial investment in all
but probably five is less than $1 million dollars.
A number of the investments will require several
rounds. In other words, we'll put $500,000
in, then we'll follow it up with another
$500,000, and potentially up to $2
million on the third round, depending on how successful
the company has been. But the vast majority of the
investments in our portfolio are starting at the
$500,000 to $700,000 range.
What you're seeing with the average of $1.7 million
is, first of all, a skew in three or four companies, in
our case, where we have done $2.5 million and then very
quickly gone up to $5 million. One of our companies
has grown past the 500-employee mark, but the average
employee base of our companies is about 40 to 50
So that's our target market. It is the nature of the
high-tech and biotech sector where we operate that the
companies.... I like to describe it this way: ten
years ago they were babies; they had maybe three,
four, or five employees. Today in British Columbia
we're at the adolescent stage; we have 40 to 50
employees. Tomorrow we will one day have what you have
here in the Ottawa Valley, hopefully, where we'll have
companies in the high-tech sector that have 500 to
1,000 employees. But almost all of our investments are
in small companies.
We also have an active regional program where we
invest in companies that only require $25,000, $30,000,
or $40,000. So we are trying to provide capital at all
levels, to all companies, but we certainly don't follow
any pattern of $50 million.
Mr. Raymond Bachand: If I can add to that,
on Quebec I don't have the median statistic, which I
think would probably be much more significant—and I
apologize but I will get the statistic. But if we
have, let's say, 50 investments of $500,000, and that's
$25 million, and one investment of $25 million, that of
course skews the statistic for the average investment
What we have done in answer to that, because we're
very preoccupied with that, is, of course, as I mentioned,
set up with the local communities 86 funds
for the $5,000 to $50,000 level.
That's managed by the
community people on a voluntary basis.
There's no overhead at all on that.
The 16 regional funds we've set up for the $50,000
to $500,000 level have, in each region, a board of
directors. We have one seat on the board of directors.
They have a specialized staff, of course, of financial
analysts, but they really reach into the region.
These funds, which have been set up now for 16
or 18 months, in the past 12 months have approved
150 investments, investing about $30 million,
and $150 million worth of investments. There's
about a 5:1 effet de levier there.
We think we would never have seen 80% of these investments
in Montreal, because for the local businessman,
it's a very traumatic decision to open up capital.
They have been building their business for 5 or 15
years, and suddenly they need capital and have to
open up to a foreigner, who's going to have a word to
say about their company, and have a seat on the board of
So the closer we are to the community, the better it is.
All the specialized funds as well, the technological
funds we've set up, are in the $500,000 to $750,000 level.
The most spectacular investments, and the most
“media-tised”, of course, are the larger ones,
such as Novabus. In the 650 companies we're in,
only 3, historically, over a 14-year period,
did not respect the either/or less-than-$50-million asset rule,
which is the same rule across Canada. We have in Quebec
another rule, which is an either/or less-than-$20-million
net worth rule.
So we have intervened in a few very large companies,
such as Novabus, that basically were bankrupt
companies—large assets but absolutely zip in net worth.
Novabus, for example, which we started from
scratch and which is today the largest bus company
in North America, restarted the old GM plant
in Saint-Eustache and now has maybe 800 employees in Canada,
about 1,500 across North America. It's now being taken
over by Volvo, which is fine. They're going to set up
in Canada their North American centre for bus technology.
So there are spectacular large-asset companies
with basically zero net worth, or bankrupt companies.
We've done quite a few of them. We're the only ones
in the market in Quebec doing those turnarounds
in redressement situations, which are
the speciality of the labour fund. We should not
forget that part, turning around situations.
I'm sorry about the length of the answer.
Mr. Walt Lastewka: I may be wrong. Afterwards
I'd like to get an answer from Mr. Delaney as well.
Thank you, Madam Chair.
The Chair: Thank you. Madam Lalonde.
Ms. Francine Lalonde (Mercier, BQ): My thanks to all of you.
Thank you, Mr. Bachand.
I must say that I was very enthusiastic when the solidarity
fund came into existence even though at the time I was in a rival
labour federation that did not exactly share the same vision.
Granted, this federation also decided at a later date to set up its
This fund derived from a pragmatic approach taken by the
Quebec Federation of Labour following the crisis that had a
profound effect on Quebec. The 1981-82 recession had a very strong
effect on Quebec, it was felt as deeply as the 1990-91 recession in
Ontario. The employment situation was the subject of reflection and
this led the QFL to ask the Lévesque government of the time to
provide assistance in setting up the solidarity fund.
I can testify here today that in Quebec, whenever there is a
serious problem facing industry, business and even in the field of
culture, people spontaneously turn to the solidarity fund with its
team of analysts—by no means a negligible thing—who can come to
a decision about whether or not workers' money should be invested
in a particular undertaking.
The question was put by Mr. Lastewka and in your answer you
referred to SOLIDE. I'd like you to tell us a bit more about this
analysis which is, I think, very important for Mr. Martin.
It claims that the support from the two governments to the
fund shareholders generates two and a half times more jobs than an
equivalent reduction in personal income tax rates and also that
government support to the fund shareholders has recurrent effects,
contrary to the reduction of the individual taxation rate.
I'd like you to elaborate on that and since I'll be putting
all my time at your disposal, I'd also like you to respond to
detractors who claim that when you raise too much money, you are
unable to invest this money and that as a result you end up opting
for investments with very little risk.
My third question is what are you doing for the year 2000? Are
you drawing this problem to the attention of the businesses you
Mr. Raymond Bachand: Thank you, Ms. Mercier. You've raised
three very different subjects.
As far as the economic studies go, you know that on two
occasions we carried out studies demonstrating that the governments
of Quebec and Ottawa recover their investment in one or two years.
After the most recent study done by SECOR, the deputy minister of
Finance of Quebec expressed to us his satisfaction with the good
return on investment for governments. Liberal economists, and I'm
not using the term in its political acceptance but rather in the
ideological meaning, claim that the best thing to stimulate an
economy is lowering taxes. For this reason we are asked to compare
$50 million or $100 million in tax credits for workers' funds in
relation to a general tax reduction. On my way back in the
airplane, I was a bit worried. I talked to our economists and we
decided to commission the study. You have this study before you and
it shows that a tax reduction does not generate the same sort of
payoff for the economy and for governments as the granting of tax
credits to workers' funds.
I'm not an economist myself, but I know there are a number of
factors providing an easy explanation for this. When there is a tax
reduction, a part of this money is spent by consumers travelling
abroad and another part is saved in ways that are non-productive
for the economy, whereas 100% of investments in workers' funds are
injected into business capital. The most productive thing for job
creation and economic development is having our businesses invest
in modernization so they are better able to meet competition and
become more productive. This is what creates jobs and economic
So any government effort to encourage the modernization and
capitalization of business is fundamentally more productive for the
economy than other measures. This is clearly demonstrated in the
study. So workers' funds do prove to be profitable for the
shareholder because of a double return on investment, a reasonable
return. We don't provide them with a maximum return but with a
reasonable rate of return and there is also the tax credit; the two
taken together provide one of the best returns.
Businesses have access to capital that was not previously
available for their development and the government recovers its
money within a year or two. So it is a well-balanced system.
Legislators must be careful when they attempt to change the balance
in this system. Tax credits were brought down to 15%. For a
workers' fund set up like ours, it may be that a 30% tax credit, or
15 and 15%, is a reasonable level, but that is certainly not the
case for a fund like the New Brunswick one which is starting up and
needs 40%. We know that in other provinces where shares are sold
through brokers, the 30% level is far more problematic.
As far as our investment capacity is concerned, I think I
already answered your question when I said we are maintaining at
67% or 68% the 60% rule imposed on us. I think it's also important
to mention the importance of having a bond portfolio to stabilize
the fund's yield. From the standpoint of public policy... You know
that the solidarity fund has 330,000 shareholders. It's a business
with more shareholders than Bell Canada or CP Rail. They are
workers who put in $2,000 a year on the average with an average
account of $8,000 or $9,000 in the solidarity fund.
It was very important for the ministries of finance at the
time when the solidarity fund was set up to make sure that these
workers would not lose their money. Half of the solidarity fund
shareholders, when they contributed to the fund for the first time,
were buying the first RRSP they ever bought.
Two or three years later, they're purchasing their second or
third RRSP. So the creation of a workers' fund like the solidarity
fund improved saving habits in Canada and Quebec and this was also
a policy objective. We know that the savings rate in Canada is very
low. It is a way of getting workers accustomed to saving and then
they diversify their portfolio, take out a second RRSP, etc.
It's important for the fund to have a yield. The income
portfolio has a stable yield of 8% to 12%—between 9% and 11% over
the past 14 years—whereas the growth portfolio varies from -2% to
+30%, depending of course on the economic cycle, the two providing
our average yield.
As a general rule, our income portfolio amounts to 40%. That
is a reasonable proportion. The rule varies from province to
province and it's a very important one.
Ms. Francine Lalonde: And the year 2000?
Mr. Raymond Bachand: Our systems were designed recently so the
year 2000 does not give rise to any problems. We think that
companies are becoming increasingly sensitized. Of course, when we
are making large investments, we do make a point of finding out
whether businesses have taken or are taking the necessary steps.
There are a certain number of businesses that will have
difficulties. It's very important for us to sound the alarm.
The Chair: Thank you, Ms. Lalonde.
Mr. Alex Shepherd (Durham, Lib.): Thank you. What
I want to talk about is performance. One of the
interveners mentioned comparing the Crocus fund with
the TSE 300 composite index at 13%. I presume that's
one of the best of the labour-sponsored funds and that
you thought that was a great return. I suggest you're
comparing yourself with some of the biggest companies
in Canada and the question of risk has to be factored
Aren't you really competing with the mutual fund
business in this country, which is directly investing
in small-cap firms right now? I can think of a number
of mutual funds that now zero in on what they would
call a “small-cap fund”, which is what I hear you
doing. I hear some of their performance ratings are
much better than what you're talking about. And they
don't get a subsidy. Why should you get a subsidy when
Mr. Ken Delaney (First Ontario
Fund (Ontario)): I'd like to answer that one in the context of
Ontario, because I think that is where a lot of the
small-cap mutual funds you're talking about operate.
It is true that there are a number of small-cap funds
out there. Typically the entities that they look to
invest in are the ones that have been identified by
some of the large brokerage houses as companies with
high growth potential. They may be at an early stage
but they've been able to find themselves a big,
well-connected, powerful underwriter who's capable of
bringing together a number of small-cap mutual fund
investors, and it's usually just at a pre-initial
public offering stage that these investments go in.
What we do at First Ontario—and I know it is
what a lot of other labour funds do—is find
investments, and if it is ultimately going to become an
IPO, even earlier than that...in other words, often
when small-cap mutual funds are brought in, it's a time
when venture capital money is perhaps even looking to
exit at that time. They also look for more private
placements. One of the things we do, for example,
is restructurings and/or turnarounds, something
Raymond Bachand talked about earlier.
I'll give you an example of one in Ontario, a company
called Indalco. This is an aluminum company in
Mississauga that got a little offside with some of its
bank covenants because it borrowed a lot of money to
build a new smelter. It took about 18 months to
get the smelter up and running instead of the planned 6
months. For that initial period of time it wasn't
generating revenue and the bank was getting impatient
and wanted to shut it down.
We were able to step in at that point and help them
refinance. By the time the deal closed, they had laid
off all of their 40 employees. I'm happy to say
that not only have all those 40 employees come back, but
an additional 40 were hired, so there are 80 people
employed there. An investment like that would never be
considered by a small-cap mutual fund. Doing a
restructuring, a turnaround, is simply too much work.
It takes too long, you have to negotiate with trade
creditors, and you may have to bring in a new bank or
negotiate with the old one.
So I think there are a number of gaps in
the capital markets that labour funds fill that
small-cap mutual funds don't, because these kinds of
situations—restructurings, very early stage—typically
are not underwritten by the big brokerage houses.
Those are the investments that are typically looked at
by small-cap mutual funds.
Mr. David Levi: I need to respond to this.
When they say “small-cap”, I think we have to be really
clear about what it means. The small-cap fund in
Canada has an average asset base of between $100
million and $150 million for the company it's investing
in. That's versus the blue chips, which on average would look at
$500 million to $1 billion as their
At the time of our
initial investment the companies we're
investing in tend to have a value of somewhere
between $5 million and $20 million, so we are the
critical seed money that takes it to the point at which
the small-cap companies would invest. In our case we
have five companies, all of which have small-cap mutual
fund investors at significantly higher prices and
at significantly later times in the process than when we
We recently took public a company that is
now held in small-cap funds.
When we invested in this biotech company,
the valuation was $17 million.
Because its valuation is now $100 million, it just got the
opportunity to have small-cap companies look at it.
It's on the Toronto Stock Exchange.
We are not in competition at all with small-cap funds.
Small-cap funds will look only at public
companies, and most of the companies we invest numbers
in are private
they will not look at anything that approaches
the $20 million to $30 million range in
I think we have to keep in mind that this
is the one area in which there has been a tremendous gap in the
marketplace in Canada. If you go back five years,
when the funds first started to get rolling, venture
capital put out roughly $300 million. This
year they put out $1.5 billion. In a single year
that's what we put out as a venture capital
industry across the country. It was $1.5 billion.
This is part of the machinery that allows these small
companies to grow at the rapid rates we've seen in
Canada over the last five years. The outside
independent research that's been done by people such as
Mary Macdonald—and you were asking earlier about
the extra capital we had three years ago—shows very
clearly that it may have taken
a bit of time, a year or two, for us to get the
capacity to make these investments, but today
we're investing five times more annually than we
were investing five years ago, in the highest
technology companies, the biotech industries—all the
industries that are going to diversify the Canadian
The driving force, if you talk to technology
companies, is their requirements for risk capital. The
reason there are risk capitalists today is solely
because of labour-sponsored funds. I have to say this
is probably one of the best decisions—not because I'm
in the industry—government made 10 years ago, when they started these
funds. The view of the industry—I'm
talking now about the venture capital industry, not
including labour-sponsored funds—is that the amount of
venture capital that's been raised outside labour-sponsored
funds has been stagnant for the last 10
There has been a marginal increase in private venture
capital funds in relationship to the amount of money
that's been raised by labour-sponsored funds, and it's
been absolutely critical to the growth of all of these
success stories that people look at across the country
in our high-tech sector.
Mr. Alex Shepherd: I know that
some small-cap funds do invest in the same
areas you're talking about.
You talked about the growth, and yet I see
that your own fund is showing a five-year return of
only 5%. Isn't that why we need a
government subsidy? The reality is that the
average person will not invest in your fund.
Mr. David Levi: No, I don't think that's the case
at all. I think people receive the tax
credit directly because this is the only investment
in Canada that you have to hold
for eight years. Even the banks with 100% guarantee
can't attract investment beyond five years, which is where
our GICs are.
The only way to invest in private companies is to do
it for the long term, so the
federal and provincial governments provide incentives
to people to do something they don't normally
do, which is invest for an eight-year period with no
opportunity to withdraw their money.
That's what the incentive is for.
In terms of our rate of return in the early years, we
were primarily investing in treasury bills as we
started to put our money out. Of course, as you know,
most of the treasury bill rates of return have been
In terms of venture investments, our rates of return
have been very high, in fact in the top quartile for
the country. We have a very strong rate of return on
the venture side, and that will start to be noted in
our overall rates of return in the upcoming years.
It's typical of venture capital that the successful
investments take longer than the ones that don't work
out. So you're in a situation where initially your
returns are fairly low and then they are followed by explosive
growth in the later years. We're now approaching those
The Chair: Thank you, Mr. Shepherd.
The bell is just a notification that the House is
beginning. We'll continue with the hearing.
Mr. John Solomon (Regina—Lumsden—Lake Centre,
NDP): Thank you very much. Welcome to our committee. I'm
actually not a full member of the committee, but I had
undertaken to ask the committee to invite you before us
to explain how the working ventures operation is going.
My colleagues asked some
very good questions that I wanted to get into, but
you've responded to them already.
I have a couple of points with
respect to the provincial governments. My sense is
that the provincial governments, in particular the
finance ministers, have not been very forthcoming in
terms of supporting the continuation or reverting back to
the $5,000 and 20% tax credit ceiling. Do you have any
sense about where your provincial governments stand on
this directly, or is this just conjecture on my part?
Mr. David Levi: Perhaps I can start. In
British Columbia the maximum annual investment allowable under
the provincial credit is $10,000. So it's actually
three times higher than it is federally. That's just a
recognition that they would like to see up to the maximum
amount. We have a cap in our province of $40 million
as the maximum you're allowed to raise. They would like
to see us achieve that as quickly as possible each year.
Mr. Sherman Kreiner: I'd just like to echo that.
I believe we have concurrence for this from the
finance minister in Manitoba. Again, the treasury
impact in Manitoba would be negligible with regard to
this increase because our overall annual capitalization
is capped. So whether it gets there in $3,500
tranches or it gets there in $5,000 tranches, the
treasury impact is negligible. I'm quite confident
there's concurrence for this change at the
Mr. Raymond Bachand: Mr. Landry has indicated
publicly in Quebec that he
would follow suit, of course. If the government reverted back
to the $5,000 level, he would match it.
Mr. John McEwen (Workers Investment Fund (New
Brunswick)): In New Brunswick the government is
struggling with a really serious problem. Contrary to
the best advice they could possibly get, they gave
permission to one of the national funds to sell in New
Brunswick. The national fund is sitting with $26
million in the bank and not doing too much. It's taken
$26 million out of the economy of New Brunswick,
sitting with it in the bank, and there's a level of
anger that's not expressed publicly, but privately to
me. They are encouraging us to be the ones
who would do the investments in New Brunswick, where
they are so desperately needed.
The tax credits run out this year, so they have to
reinstate them. They're not forever. So they gave a
five-year...and it runs out this year. They're struggling
with the concern of how they can be the
nice guys to everybody, and of course you can't.
They'll have to take the
bull by the horns and come in behind us and say these
are the people we're supporting. It's a home-grown
fund. It's not a central Canadian-based fund. It is
there to take millions of dollars out of our economy in
New Brunswick, which we're quite disturbed about, and
to provide the operating dollars for another fund.
I'm not going to name them. They're our competitors.
They're not in the market today.
I'll draw your
attention to the press clipping that was passed out. It shows
the direction in which we're going in New Brunswick.
It talks about the alliance
we formed with the National Bank to develop an
entrepreneurial opportunity or an investment
opportunity for the small businesses
in New Brunswick.
You're talking about small and medium-sized
businesses. In New
Brunswick you're not talking about $1 million for
small or medium-sized businesses; you're talking about
a much smaller figure.
The banks have struggled with how they're going to
invest appropriately because they're under a lot of
criticism in New Brunswick. They see us. They don't
see anybody else, but they see us as the entry point in
New Brunswick. We sat down, and we're in the process of
working out the infrastructure and the details of it,
but they're looking to us as the entry point into New
Brunswick, into providing the moneys that are needed
for start-ups, for investment purposes beyond the
I think in New Brunswick we're in a different
position from perhaps the rest of Canada and I think
it's one that's evolving positively. They've had their
bad experience and now it's hopefully going to be a
Mr. Ken Delaney: In Ontario the situation is
different yet again. I think a lot of people were
looking to Ontario to see what they were going to do.
This was the end of what I'll call kind of an
experimental year in terms of LSIF regulation in
Ontario. Ontario was also very concerned about the
accumulation of capital that was not being deployed,
but I think it's important to recognize that even two
years ago, when the committee heard that it was a
problem, it really was not a universal problem; it was
specific to one fund.
What Ontario has done is they have implemented very
rigorous investment pacing rules. Now in Ontario you
have to place 50% of the capital you raise in any RSP
season by the end of that calendar year. In other
words, within ten months you have to invest half of the
money you raise. If you can't achieve that, not only
do you face tax penalties but you are prohibited from
issuing tax credits, which means you are out of the
This is the first year that policy was put in place,
and I think the Ontario government was taking a “let's
wait and see” approach to see the impact of that
particular policy. As soon as the policy was
announced, the one very large fund responded
immediately by saying it was going to stay out of the
market. It stayed out of the market last year and it's
out of the market again this year.
I'm pleased to say that of all the other funds that
have at least $10 million under management in Ontario,
of which there are eight, all eight of them, including
First Ontario, did meet the pacing rules and are out
there raising capital again this year.
With respect to the position of the Ontario government
on increasing the maximum, I can't really speak to that
yet. It's too soon after the end of the experiment. I
think what they wanted to do was to see how successful
their new pacing rules were going to be and then they
were going to develop the policy. Since the rules have
just taken effect, I'm not aware of any position
Mr. John Solomon: Thank you very much.
The reason I asked that question is that my sense is
that the federal finance minister and his officials are
reluctant to increase these sorts of tax credit
situations without the support of their provincial
ministers. It would be most helpful with respect to
your cause of trying to get more money to do some
visiting with your respective ministers of finance to
ensure that they at least have a balanced view of the
situation and would support the issue at the federal
The other question I wanted to ask, if I could,
relates to a commentary by one Terence Corcoran in
the Globe and Mail on January 16, 1998. If you
were not aware of what the issues were in this
particular venture cap element, you might get the view
from this article that maybe this is not a good thing
I'm wondering what your take is on the article. It's
entitled “Labour funds feed on taxpayers” and
it's an uncomplimentary view of the working ventures
program. I don't share Mr. Corcoran's view, but I'm
wondering if you've seen the article and whether you
might provide us with a balanced rebuttal—not as
lengthy as Mr. Corcoran's, however.
Mr. Raymond Bachand: I'm always amazed to see a
newspaper that purports to be a national newspaper and
is a national newspaper that has already decided that
Quebec is not part of Canada. The oldest
labour-sponsored fund in Canada of course is Solidarité.
We've been there for 14 years. The largest in Canada
of course is Solidarité. At $2.2 billion we're twice
and a half as large as Working Ventures.
It's as if we didn't exist. The evaluation rules that
Mr. Corcoran speaks about are total fiction. It's
not because one doctor is accused as a child molester
that all doctors are bad in Canada. We have
specialists. Of course we're all investing in private
companies, except for 20, but 400 companies are all
private placements. We have two audited balance sheets
per year. We have two firms of auditors. We have an
annual inspection by the Commission des valeurs
mobilières du Québec. And twice a year, the
auditors and a group of specialists, internally and
externally, look case by case and make a market value
of the investments, so the value you have in the
balance sheet is the best judgment of the specialists,
as they would typically, of what is the value of the
fund over the years.
Of course we don't have the problems. There's not
going to be a run on the bank. Our shareholders are
not there for eight years; they're there until
retirement or pre-retirement. So it was well thought
of at the beginning and it's still well thought of.
I have quite a few other comments, but I think I'll
let David continue.
Mr. David Levi: Mr. Corcoran has written another
article that was in the Globe and Mail a few days
ago, which dealt specifically with some erroneous
assumptions in terms of how we value the funds and so
forth. You'll find in the package from Working
Opportunity Fund a letter that we've sent to the
Globe and Mail, which rebuts each of the eight
points he's dealing with.
The thing to keep in mind with Terence and with
others in terms of labour-sponsored funds is there is
one fund, it's located in Ontario, and because it's
located in Ontario, it appears it is the only fund that
in particular the Globe and Mail is able to focus
on as the example for labour-sponsored funds.
There are more than 20 funds now across the country.
Most of them are in Ontario, but there are provincial
funds, most of which are represented here across the
country. They have all, with the exception of one,
been able to meet their requirements, and in most cases
go beyond their requirements. In our case in British
Columbia, we have an 80% requirement for investment,
and it has to remain invested for five years in
eligible small and mid-sized businesses. So our
requirements are higher than anybody else's, and we
have consistently, every year, been ahead of our
schedule. That's the case of all the funds that are
There is a difficulty with one fund, but I have to say
the system does work. What I mean by that is poor
management practice has resulted in poorer returns for
that fund, which has resulted in investors making other
investment decisions. Because of the way that
legislation is set up—and it's the same in different
ways across the country—if you don't meet your
requirements, you're not allowed to raise any more
money. They have been out of the market for one year,
and this will be the second year that Working Ventures
will be out of the market. But there is no comparison
between what they have done with $800 million worth of
capital versus what the rest of the industry has done
with about $2.5 billion worth of capital.
I just think it's unfortunate, and you'll notice in my
letter and my comments that it seems.... I had a
discussion with the Globe and Mail once. A
reporter called me from the Globe and Mail to ask
me about funds, and all she could talk about in the
specialty article she was doing was Working Ventures. I
said, “Why don't you call Solidarité? They're twice
as big, they've been around twice as long, and they
have a good track record. Don't take my word for it.”
At that point I'd only been around four years. I said,
“Let's look at somebody larger.” And she said,
“Well, we don't like to call Quebec,” and so on and
so forth. That's the reality of the discussion we had.
It's just very unfortunate that the focus is totally
on one fund when there are 20 others doing the job.
The Chair: Thank you.
Thank you, Mr. Solomon.
Mr. Janko Peric (Cambridge, Lib.): Mr. Delaney,
you mentioned that you are not competing against mutual
At the same time, Mr. Levi, you mentioned that you're
focusing on companies with between 40 and 50 employees.
What prohibits you from focusing on even smaller
companies? It seems to me you're smelling like a bank.
In other words, you're taking a very secure or a low
risk. You're not considering a low risk the same as
any other bank. We know that smaller companies with 20
or 15 employees need financial support. Why wouldn't
you consider them?
Mr. David Levi: I wasn't indicating that we only
invest in companies of 40 to 50. I was saying that
the industry has grown in British Columbia to 40
to 50 employees.
Just thinking about your question, I can only say
that less than 25% of the companies in which we've invested
had any bank financing at all at the time of our investment.
These are not companies that are bankable in any way,
shape, or form. In some cases, if it's biotech,
they have no sales, so there is no capacity for financing.
In most cases in the high-tech sector, when we're
investing, the amount of sales are fairly small.
Hence, there are very few receivables available,
so there would be no possibility for bank financing.
If you look at the process of investment, there's the
initial start-up phase, which we are involved with.
We have started five new companies in the last two years
right from scratch. So we are doing those types of
After that initial funding comes in, there's usually
a high-growth period when there's a requirement
for risk capital that banks and mutual funds
will not look at. That is the point in time
at which we generally enter it, the $500,000
to $700,000 initial investment. As the company grows,
we'll invest, on average, three times more over the life
of our investment.
The average value of companies we invest in
is between $5 million and $10 million
at the time of our investment. If you take that
as your growth, you cannot approach the public markets
for small cap funds, as we were discussing earlier,
until you're at about $100 million in capitalization.
We fulfil that function. We take companies
from $5 million to $10 million to $15 million
in assets and we build them up to the point
where they're at $100 million in assets. It's at that
point that not only will the banks look at them but
also mutual funds will look at them.
I have to tell you, the first person who called the
Working Opportunity Fund when it was announced was a
bank manager. He called us because he wanted to lend
money to one of his clients but could not do it,
because he didn't have the equity capital in
place. He wanted us to put up the equity so that he
could loan money to the company.
The same thing is true with the mutual funds.
They're very excited to have us in place,
because it's our venture capital that provides
their opportunity down the road to invest in
the company. So we work very closely with mutual funds
and with banks, but they are always latecomers to
Mr. Janko Peric: Are you focusing on a specific
Mr. David Levi: Each of the provincial funds here
reflect their province's requirements. In our particular
case, our requirement is to diversity the economy of B.C.
So we are now the leading investor in the province
in high-tech and biotech. We're the only
venture capital fund for the tourism industry.
We now have five companies in the tourism sector
that operate in British Columbia. We also do
a broad range of manufacturing investment.
We have partners we've brought in with us
on the high-tech side. There's a lot of interest
usually at the second round, when we've made
an investment at one level, we require more money,
and we're able to bring in international investors.
That's happened in the last couple of years
for the first time. We had Intel Corporation
invest in one of our companies. Two or three
Taiwanese groups have invested in
different companies. We have done second
and third rounds of investment.
So we're bringing international investment
here as well.
The Chair: Thank you, Mr. Peric.
Mr. Werner Schmidt: Thank you, Madam Chair.
I'd like to pursue exactly this line of questioning.
First of all, I'd like to ask the other labour funds
whether they too feel it is their responsibility
to lead, or to influence the direction of, the economy
Mr. Ken Delaney: Speaking for First Ontario,
I think all of us recognize that both levels
of government are big stakeholders in our funds
because of the tax credits. We think that bestows upon us
a special responsibility to fulfil certain public policy
needs. The need that we at First Ontario
think we're filling is to fill certain gaps
in the capital market that otherwise
wouldn't get filled, with a view toward
stimulating economic activity and/or saving jobs.
The one type of investing we do—I know in
Ontario it's hard to get capital for this anywhere
else, including the other labour funds—is
restructurings and turnarounds. There's a very
specific skill set required to do that kind of work.
It takes a long time. There's a lot of negotiating.
On the other hand, as for some of the high-tech
start-ups that David's fund specializes in, that's not
really our specialty, but there are other sources of
capital for that in Ontario.
We in fact have done one here in Ottawa. We did it
jointly with another labour fund, but it's not really
There are other funds in Ontario that have sector
specialties. The Canadian Medical Discoveries Fund is
of course focused
primarily on biotechnology.
So I think there are
different specific gaps that each one of the funds has
tried to fill, but I think the bottom line for all of
us is a recognition that government is a stakeholder.
That does bestow upon us a responsibility to fill some
of those gaps in capital markets that would otherwise
result in lost business activity and lost jobs for
Mr. John McEwen: In New Brunswick, we see it as
twofold. One is to invest in those companies that will
keep the New Brunswick economy strong and well-placed
within the world economy. We're now in a world
economy, and we have to be there as strong as we were
in the past, and hopefully even stronger.
The other aspect we're trying to address in New
Brunswick is the fact that for years and years we had
this basic economy that was often commodity-driven. We
also had attempts by different premiers and provincial
politicians to try to broaden the base of the economy.
Premier McKenna has been no different from any other:
he has made some moves.
We were always well-served by the federal government's
investment in New Brunswick. That investment is now
shrinking, and shrinking quite quickly. On a per-capita
basis, we're probably shrinking faster than any other
region in Canada.
Politicians, business people, and the fund see filling
that gap as one of the major roles. We've got to
generate the investment dollars that are going to
replace those investment dollars that are being
downsized and changed because of the change in
government priorities in Canada. We lost bases and on
and on in all the different investments.
So we see it as twofold. The first one is to maintain
our position in the world economy and hopefully enhance
it by appropriate investments in those industries that
will bring us into the 21st century in the appropriate
position. The second one is to replace those federal
government dollars and investments that are now being
downsized and shrinking even as we speak.
Mr. Werner Schmidt: What does that have to do with
Mr. John McEwen: If people in other parts of
the world were going to invest in New Brunswick, I
think we would not need to have venture capital. I
think investing in New Brunswick business is risky, but
we say that New Brunswick is worth the risk. If we
don't take the risk in New Brunswick and don't invest
in ourselves, in our own province, then I hesitate to
think that someone else will have the sense or good
nature, or whatever you want to call it, to invest in
If we don't invest in New Brunswick, we're not going
to be in any position. The federal government has
withdrawn the investments it made over the years
in New Brunswick. It's downsizing its bases and its
presence. If we're not there, if somebody is not there
to take up the slack, what will then happen—there's no
such thing as a vacuum in nature—is that the economy
will shift in a negative direction.
Mr. Werner Schmidt: I don't think that's my
concern, Madam Chair. The question I have is, what is it
that's going to move the economy forward? We have to
be at the cutting edge of new developments and things
like that. I think that's the issue here. To simply
perpetuate what was.... That's the problem with the
banking community as well: most of the financing is
going into manufacturing and the old type of
It seems to me that the global economy to which you
alluded is moving in other directions. We certainly
need to have some manufacturing still, but the whole
new development, the growth in the economy, is going to
be in other directions.
It would seem to me that the whole
concept behind a venture fund is to see what else needs
to be done, what are the new ideas out there that need
to be financed that the conventional, traditional
financiers will not finance. I think that's the issue.
Mr. John McEwen: Absolutely. There's a small
company in New Brunswick that has now developed new
technology in the gold mining industry. They're trying
to get their technology accepted. It looks like it's
workable. It looks like it's doable. It's brand new.
A lot of people don't want to touch it with a ten-foot
pole. They've come to us and asked for an injection of
capital so they can expand their presence in the gold
mining industry. It's EMR; they have
leading-edge technology and there's no investment
capital available. They've turned to us, and they're
looking for some way whereby we can inject capital into
their company to make sure their leading-edge
technology is put into the marketplace.
The Chair: Mr. Bachand.
Mr. Raymond Bachand: I think, sir, in response to
to your first and second questions, we do have a
responsibility, of course, because our shareholders get a
tax credit; they get a tax credit because we tell them
very clearly we're not going to maximize a return on
investment. We're going to give them a fair return, but
we're going to try to develop the economy and work with
the governments in the sectors.
There are three or four sectors: of course
export-oriented sectors, technological sectors, and even
a sector like tourism—banks; nobody goes into tourism.
Tourism is one of the fastest-growing industries in the
world. Canada has less than its share of the world
tourist industry than its share of the world GNP
industry. It's a very labour-intensive industry and
it's very cost efficient. It costs much less money to
create jobs in the tourist industry than it does in the
very high-tech industries. So we've put a lot of
resources into that.
We've put a lot of resources into helping small
corporations in their export efforts. The Bombardiers
and the large corporations of this world have
all their teams of VPs of international affairs going
around the world. Small corporations cannot do that.
So into eight different industrial sectors
we put complementary corporations, very small
pitch in money with them and together we fund the
effort of going onto the world market to get contracts
and to help them in the export fields. Of course
there are the technological sectors. For example, the
biotech industry exists in Montreal. The Solidarity
fund is present in half of the biotech companies in
Montreal—half of them.
The Chair: Thank you, Mr. Schmidt.
Mr. Eugène Bellemare (Carleton—Gloucester, Lib.): My
questions are for Mr. Bachand and Mr. Delaney.
I'd like to know, Mr. Bachand and Mr. Delaney, what your
definition of a small business is, not an SME but a small business.
Mr. Raymond Bachand: My personal definition of a small
business? It covers a wide range. It depends on whether we use the
definition of the Department of Finance and traditional economists.
When we talk about very small businesses, we are thinking of
businesses that come under our SOLIDE, for example, our local funds
with regional municipalities. This means businesses with between 2
and 15 employees. We have 400 of them supported by the 80 SOLIDE
with capital from $5,000 to $50,000. That would definitely be a
Obviously, the only thing we don't do is provide money for
people who are financing their own job. There has to be a business.
There has to be more than one employee in a business. There must be
at least two, three, four or five employees. Self-employed workers
are obviously very legitimate. That is an outstanding activity, but
I think it is up to the banks to provide credit for the self-employed and
individuals. We have 400 very small companies in our
I don't know whether that answers your question.
Mr. Eugène Bellemare: Yes, and I'm happy to hear it, because
you say that there are 400 of these companies with an average of
about ten employees.
Mr. Raymond Bachand: I don't know what the average number of
A voice: Eight.
Mr. Raymond Bachand: The average is eight employees. The
person in charge of our entire SOLIDE network supplied the answer.
On average, these companies have eight employees.
Mr. Eugène Bellemare: Thanks for the answer. Who exactly are
those workers who invest? Are they workers in the targeted company,
or are they union workers who know that they can invest their
money? They have savings, and they invest them in an industry.
Mr. Raymond Bachand: At the moment the Solidary Fund has
330,000 shareholders, 63% of whom are unionized and 37% of whom are
not. Clearly, the essential principle underlying the Fund is that
workers do not invest in their own companies but rather diversify
their risk. If a company goes bankrupt and in addition to losing
your job you also lose your life savings, you are in a serious
situation. The principle underlying the Solidarity Fund is that you
put your savings into a common fund which diversifies its
investments in a number of companies. So, as I said, 62% of our
shareholders are unionized. I would say that most of our workers
are average Canadians, the middle class. If you have an income of
$15,000, $18,000 or $20,000 a year, I don't think you pay any
income tax. In that case, the tax credit is less important. In
order for the tax credit to be worth the effort, you must have a
higher income. Most shareholders earn between $35,000 and $55,000.
I could send you the exact figures. These people save on average
$2000 or $2200 a year. They do not come to see us every year. The
average account is between $8000 and $9000. We are not talking
about huge amounts of money, but rather about getting people used
Mr. Eugène Bellemare: If I understood you correctly, these
people make about $30,000 or $35,000 a year.
Mr. Raymond Bachand: I would say that the majority of people
who invest with us earn between $35,000 and $55,000.
Mr. Eugène Bellemare: Has your research shown the impact of
the 1996 budget changes on the activities of the LSVCFs?
Ms. Raymond Bachand: The changes introduced in the budget,
namely the $3500 and the 30%, mathematically, reduced the fund by
approximately $70 million or $75 million. Obviously, the easy
calculations were those involving people who had invested $5000 and
who dropped that to $3500. In the case of those individuals, we can
readily quantify the amount by which they reduced their investment.
Of course, since the Fund was growing, we made up part of
these losses, among other things by our work on deductions at
source in companies throughout Quebec. We have a network. We do not
go through brokers, unlike our colleagues. We have a network of
1500 local representatives who work in companies, and almost half
of our funds come from source deductions. The growth in this area
allowed us to recover some of the amounts we lost.
Mr. Eugène Bellemare: Do you think we should put a ceiling on
the annual amount of funds that entitle you to tax relief?
Mr. Raymond Bachand: I think the best sort of ceiling is not
a dollar limit, but a ceiling on the percentage of funds to be
invested, established by regulation in each province. When a fund
has the capacity required, when there is demand within businesses,
when the economy has the capacity to absorb investment of venture
capital and workers' funds, there should be no ceiling. But our
ceiling is stipulated in our legislation. In other provinces,
ceilings vary. Our 60% rule is based on figures different from
those underlying their 70% rule. We are not measuring the same
thing. They measure on the basis of cost, and we measure on the
basis of overall portfolio value. But if we can invest that much,
it means there is a need in the economy. As long as governments get
a return on their one- or two-year investments, things will work
out for everyone.
Mr. Eugène Bellemare: We are seeing more and more funds, and
I wonder whether we are perhaps creating too many such
organizations, which may end up becoming self-serving. Those who
create the funds have a good job, and create jobs for others and
for themselves, but there are perhaps too many of them. Do you
think this is a real risk? Should we be limiting the number of
Mr. Raymond Bachand: I think there is a problem in Ontario,
but I will let my Ontarian colleague talk about it. There is a
workers' fund in British Columbia. In Quebec, there are two, now
that Fondation has just been established. Fondation has not yet
invested, because it is still in the capitalization phase. Manitoba
had only one workers' fund. I believe that the Canadian system
works by means of federal-provincial agreements that lets each
individual province adapt its funds to its own economy. Quebec and
other provinces were wise in not establishing too many funds at the
As for funds that are as large as the Fonds de solidarité, I
don't think we should be worried about the size of the fund. On the
contrary, large funds make it possible to invest in a way that
provides more effective support for the economy. We are not
concerned that we'll end up with a Kenworth-type situation. We did
not invest in Kenworth because they didn't want us to. As a result
of efforts by Mr. Cauchon, the federal minister, and by Mr. Landry,
and because of the Fonds de solidarité, Kenworth came back to
Canada. And with a fund the size of ours, we can target a 2%
administration fee. That is something we don't deviate from. Our
administration fee is now 2%, including the investors' fee. Our
shareholders do not pay a broker's fee, and our 1,500 local
representatives do not get a commission. They are volunteers. They
are entitled solely to reimbursement of their expenses, and of
their pay if they have to be away from their companies for a day or
two. All our registration, trustee and investment fees are included
in those 2%.
Perhaps it was a good idea not to create too many funds.
Unfortunately, unions in Ontario were unable to agree, and there
are a great many separate funds rather than one large harmonized
Would you like to add a comment?
Mr. Ken Delaney: Yes.
Mr. Bellemare, let me answer the first question
you were going to ask me, about the small companies.
In Ontario now, regulations also require that labour
funds set aside a certain amount of their capital
for what is defined in our Ontario regulations
as “small companies”—companies with less than
50 employees and less than $5 million in assets.
Right now we're required to have 15% of our capital
in those companies. That's increasing, over a
two-year period, up to 20%. So there is a percentage
of capital in Ontario LSIFs required to be
invested in smaller companies.
With respect to the next question, on whether
we have created too many of these funds, I think
at this point the horse is out of the barn.
A whole lot of the funds have been created.
I think one could go back and speculate
on what might have happened if a single fund
in Ontario had been created and Ontario followed
the same path as the other provinces.
It's conceivable that with one fund
there could have been a closer working relationship
with the regulatory authorities, but for
a wide variety of reasons legislation
was written that enabled any labour
organization to sponsor a fund and it opened the door
for anybody who wanted to set one up to find a labour
organization to establish it.
I think what has happened is that instead of close
scrutiny or cooperation between a single fund
and the regulator to weed out and modify behaviour,
the marketplace will make certain decisions.
Some of the smaller funds may not survive.
Is this the most effective way of proceeding,
given the role government plays as a major stakeholder
in providing tax credits? Would it have been better
to create a single fund? It's hard to argue,
but I think at this point it has happened.
I think regulations in Ontario have forced some
changes. Funds that can't invest their money
won't go to market now. There are rules in place
for investing in small companies. I think a good number
of funds will rise to the challenge of fulfilling the public
policy mandate put on labour funds. A small number
of them will not, and those funds will fall by the wayside.
Mr. David Levi: I have to make a comment here.
A critical part of the reason British Columbia set up
the Working Opportunity Fund is because there was
only one other venture capital institution in the
province at the time. We had approximately half,
per capita, the venture capital of the rest of the country.
One of the specific reasons the government wanted the
Working Opportunity Fund to get started was to actually
set up an institution that would become a focus for
venture capital in the province. That we have done.
We now represent a third of all the venture capital
that's done in the province. We've been able to put
together a provincial team of specialists in this
area, which didn't exist before.
So it was a very specific part of the rationale
for setting up the fund in the first place.
The Chair: Thank you very much, Mr. Bellemare.
Ms. Francine Lalonde: Mr. Bachand, I'd like you to tell us
about another aspect of the fund's activities, their efforts to
promote the development of the Quebec economy's productivity.
Members of the industry committee have received a document
commissioned by the Privy Council. The sixth chapter of that
document indicates that there are ongoing productivity problems in
Canada, problems with total factor productivity. Apparently, Canada
has failed in a number of areas: it has not invested enough in
research and development, and it has not done enough to translate
that research and development into investment that promotes
innovation. Moreover, there is another important aspect of total
factor productivity: the new management in businesses. We observe
that when businesses innovate in an area of technological
investment, they are also more likely to innovate in the area of
One thing I know about the Fonds de solidarité is that it does
not just invest money. It also focuses on training employees,
examining management styles, and transforming management by
incorporating more consensus and co-operation. This seems to be in
line with your definition of better company productivity.
Mr. Raymond Bachand: Thank you. I was in fact going to ask the
Chair whether I could say a little bit about financial training.
One truly exceptional feature of the Fonds de solidarité is
the financial training we provide to businesses' employees. We
provide financial training for the employees of each company in
which we invest. We give groups of 20 or so employees a two-day
course, using the financial statements of the company.
What we give them is a basic course in economics. We explain
what a balance sheet is, and what a profit-and-loss statement is.
We explain that “profit” is not a four-letter word, but a healthy
word, and that a company which makes a profit can pay good
salaries. A company that makes a profit can modernize its
equipment, and become more competitive and more productive on the
North American market. At the end of the day, the company president
answers questions by employees. We do this regardless of whether
the company's employees are unionized. In our view, the training we
provide—which is something only we do—has probably changed the
attitudes of both employers and employees, and has certainly
changed the attitude of unions. Of course, the fund is a workers'
fund. It is administered by the FTQ, the Fédération des
travailleurs du Québec.
The fund itself has changed the attitudes of unions in Quebec.
In the 1970s, Quebec had the highest or second-highest number of
person-days lost because of labour disputes in the western world.
But in the last two years, Quebec has had the lowest or second-lowest
number of person-days lost in all OECD countries.
Though there are many reasons for this, there is no doubt that
transforming attitudes and the social climate in a society has an
important impact on companies' productivity. Frequently, we don't
always get plaudits from where we want them. But people from the
Conseil du patronat, and even from the Chamber of commerce—who
have always supported the Fonds de solidarité—are saying that this
is one of the most important roles our fund can play. Perhaps, it
is a role we don't talk about enough. I suppose that we don't like
to brag. Perhaps we have not yet brought about a cultural
revolution in our economy, but we are playing a fundamental role
that is extremely important in our society.
The Chair: Mr. Levi, do you wish to reply?
Mr. David Levi: Unfortunately I misunderstood the
timeframe, and I have an appointment that I have to go
to. I thought we were going to end at 10.30 a.m. So I
just wanted to apologize in advance and thank everybody
for the opportunity to make our presentation. The
vice-president of our fund is here if you have specific
questions about the fund. Again, I apologize. I
misunderstood the time.
The Chair: That's fine. Thank you.
Madame Lalonde, are you finished?
Ms. Francine Lalonde: I would like to illustrate just how
important your role is. When BioChem had problems, you played a
determining role in what is now one of the success stories of
Canada's biopharmaceutical industry.
Mr. Raymond Bachand: The fund often takes action to help
companies that might be going under, or whose headquarters might be
going under. BioChem Pharma is an excellent example of a
contemporary company. I think you all know BioChem Pharma—it has
a market capitalization of over $3 billion, and is one of the
leaders in the field of research on AIDS and hepatitis medication.
BioChem Pharma used to have just a few employees, from
universities. I was administrator of the fund, and people thought
we were paying too much for them, in view of the risks. The Fund
often invests to try and... We have to contribute to developing our
economy, and creating jobs in Quebec.
Sometimes, acquisitions by foreign companies are not such a
bad thing. Sometimes—like when Softimage gets bought up
Microsoft—they can be good for the economy. The problem for our
export companies is getting quick access to worldwide distribution
networks that take their products and give them visibility.
Sometimes, you might be better off as the division of an
international company. We may want to start up a computer plant,
but we may be better off getting IBM to come to Bromont. On a
global scale, I think we will be more successful that way.
So we shouldn't automatically criticize acquisitions by
foreign companies. They are not always bad, and they sometimes give
our own companies an opportunity to gain access to international
markets. But when we have the opportunity of investing in companies
that set up their headquarters right here, and when we can help
them develop so that they buy other companies rather than being
bought up themselves, then they are the developers rather than the
developed, well—those are opportunities we should not miss.
The Chair: Thank you, Ms. Lalonde.
Mr. John McEwen: If I can, I'd like to follow up
on what my colleague has said about changing attitudes,
training, and those sorts of things. We're just making
our first steps in that direction. The Solidarity fund
is a lot further down the road than we are, but we have
trained 23 agents in our province to have more
awareness of financial matters and how they interrelate
with job productivity and those sorts of things. We
also have an awareness-building within the different
communities, whether it be labour or business.
I refer the members of the committee again to the
package of press clippings. There's one there that
says the National Bank and the fund in New
Brunswick are developing a relationship or strategic
alliance. It's going to make some basic changes in the
economy and, we hope, create a different perception, a
different approach. It's an educational process and
one we intend to follow through on quite strongly. The
announcement of this development came right on the
heels of another announcement by two other banks of
some sort of getting together.
I can tell you that in New Brunswick there has been no
outcry from any of the communities over our
participation. It's a matter of developing awareness
in the small and medium-sized business community,
mostly represented by the Federation of Independent
Business. They more than welcome our presence and they
are working closely with us. A different relationship
develops just by that new dynamic.
We hope to follow the Solidarity fund's lead. In the
training and educational experience, not only within
their own group but throughout the province, it has
made a significant difference in Quebec. It's one we
admire and one we hope to follow quite closely as we
develop. That's probably one of the bigger benefits of
the labour-sponsored venture capital funds.
The Chair: Ms. Brown.
Ms. Bonnie Brown (Oakville, Lib.): Thank you,
I don't want to say anything about the internal
decisions you make as directors of these funds. I have
faith that you know what you're doing. What I want to
hone in on is the fact that you want us, I think, to
lobby the finance minister to revert to the $5,000, 20%
rule. Isn't that the essence of our meeting?
A witness: Yes.
Ms. Bonnie Brown: Okay. So now I'm trying to find
out where you fit in amongst all the players.
It was my understanding that in 1995
serious questions were raised about the amount of
capital you had invested in other companies and the
amount that was actually invested in banks or in
government securities for which no tax break was
needed. I had a feeling that's why the changes were made in
1996, to say, get with the program, fellows, get the
money out there or you're not going to get the tax
Is that your understanding of why the
changes were made, or is it possible that there are other
players out there trying to raise venture capital who
were not too happy with your existence, which was
fairly recent, and were lobbying against you having
that tax advantage that you had enjoyed for a few
years, were lobbying to have it reduced?
I'm thinking of the Corcoran article.
If he's against you,
I'm for you.
It strikes me that it shows there are people who are
out there in society who aren't keen on you having even
the 15% you have now and would certainly rise up if you
were returned to the 20% level. Who would those people
be? Is that an accurate assessment?
Mr. Raymond Bachand: It's probably a fair
assessment. Of course we're tempted to psychoanalyse
the Department of Finance, but all these aspects and these
factors have probably been present in the decision,
plus of course the deficit of the government. There
were cutbacks at that point in all aspects, and the
program, I think, was costing a lot of money, looking
at Ontario growing and not controlling its outgrowth
Ms. Bonnie Brown: I don't want to know about
those. I want to know whether or not there
are people out there that you predict would lobby
against the return to the 20%, people trying to raise
capital from some of the same sources as where you raise
Mr. Raymond Bachand: There are people there that
would lobby against it. I would say yes. There are
people who in general think government should not give
tax credits to anything. So that's one category of
people, the Fraser Institute and all the people they
influence in the community. We have to respect their
opinions, but of course—
Ms. Bonnie Brown: They love RRSPs.
Mr. Raymond Bachand: —labour-sponsored funds are
a unique Canadian institution. They don't exist
anywhere else in the world.
Ms. Bonnie Brown: You don't have to defend it to
me. I'm for it.
Mr. Raymond Bachand: I understand.
Ms. Bonnie Brown: The other thing is I'm
interested in the association. Is the CVCA the
association for all funds that try to raise venture
capital, or is it strictly for labour funds?
Mr. Raymond Bachand: The Canadian Venture Capital
Association is for all—
Ms. Bonnie Brown: Everybody.
Mr. Raymond Bachand: —venture capital.
Among the labour-sponsored funds there's basically one
association of these five funds which are—this is for
the record, so we've got to be careful about how we phrase
it—true labour funds, basically, in which the trade
unions really are present. They are really labour based and
sponsored and things like that. So this is why we make
our joint presentations and have been doing that for the
past few years.
Ms. Bonnie Brown: There are 20 labour venture
capital funds. Five of you are here.
Mr. Raymond Bachand: That's right.
Ms. Bonnie Brown: Do you have some authority from
the others to represent all of them?
A voice: Yes.
Ms. Bonnie Brown: This is what I
don't understand. Do you have your own association and
is it agreed upon that this is the position they would
all hold, or are you just representing the five that are
Mr. Raymond Bachand: I can't answer that, because
all the others are in Ontario, basically.
Ms. Bonnie Brown: Oh. Okay.
Mr. Ken Delaney: I think what happened varies from
province to province. In every province except
Ontario there's a single fund and it was created
between the work of the provincial central labour body
and the government of the day, as well as the federal
government. In Ontario a decision was made to leave it
open, and in Ontario there was not a single fund that
was created by the central labour body, but instead,
anybody who was a venture capitalist who could find a
trade union, no matter how small, could set up a fund.
I think the original funds from the other
provinces wanted to differentiate themselves from those
funds because they thought that having a job creation
mandate as well as just selling an investment and
having access to the tax credit was important to them,
and they developed a statement of principles.
First Ontario is one fund in Ontario that adheres to those
principles, and so we were invited to join the group.
The other funds in Ontario also have an association.
We are also a member of that, because we are a labour
fund and we function in Ontario.
So far the activities of that association
have been focused primarily on some securities matters
and some Ontario-specific issues. But that group was
created as a subset of the Canadian Venture Capital
Association. In fact, one of the members of the
Ontario association steering committee is the president
of the Canadian Venture Capital Association.
I want to come back to your first question. I think
it's fair to say that venture capitalists across
Canada, whether historically they have raised money
from institutions or they have been involved in
the creation of a labour fund, recognize that there is
a shortfall in capital available. Pension funds have
generally moved away from providing venture capital.
Were it not for labour funds, I think both the data
Mary Macdonald has and the anecdotal information
you would receive from any member of the Canadian
Venture Capital Association would support the notion
that without labour funds there would be a severe crisis.
So the fact that the Ontario group does support these
principles of trying to get the maximum raised to
$5,000 and the tax credit restored, and that there's a
member of the Canadian Venture Capital
Association, actually its president, who sits on that committee, I
think speaks to your question about who would be
lobbying for and against.
The fact is that labour funds don't raise money from
institutions, so we would not be competing with other
venture capitalists in trying to raise money.
Historically, they have raised money from institutions,
so I don't think they see the creation of labour funds
as a threat to their going out and raising money. Certainly
the evidence shows the demand for venture capital in
mid-market investing is such that there is not a
shortage of deal flows.
Yes, there will be people who
will be opposed to it, but as I think Raymond points out,
those will be primarily people who believe
government should have no role in shaping economic
activity, and any sort of tax benefit, whether it's
capital cost allowance or whatever, distorts what the
market would ultimately decide.
Ms. Bonnie Brown: Thanks for a very clear explanation.
The Chair: Mr. Lastewka.
Mr. Walt Lastewka: Thank you, Madam Chair. I just
wanted to get a comment from the group.
A few years ago the
industry committee foresaw that
some of the venture capital funds would not comply
with the rules. We were trying to avoid getting into
penalties and so on, and one of the recommendations
made was that the federal tax credit for investment would
be allocated to the funds depending on their past performance.
What I hear from you, from some of the venture capital
groups, is that you are being penalized as a group because
of some venture capital funds not complying
and being penalized, and they are the ones that are getting
all the publicity rather than the good venture capital
funds. You're leaving me with that understanding.
Would you say that would be a positive instrument; for
the government to implement something like that? In
other words, it would almost be rewards based. If you raise your
money and you use it properly, you should get more
investment ability and more tax credit. It would be a scheme
like that. You wouldn't be penalizing the group across the
border but strictly penalizing the ones that are not
applying the principles properly.
Mr. Ken Delaney: I think it's our view
that the problem has
largely been solved. It has been solved on a
province-by-province basis. I'll let Raymond
talk about what happens in Quebec, but it's my
understanding that in most other provinces where
there's a single fund they have a close working
relationship with industry officials on a provincial
level. They sort out what their public policy
goals are there.
In Ontario I think the problem was that one fund
developed a capacity to raise capital that exceeded their
capacity to invest it. I think that problem has now been
solved by the new provincial regulations. So I
think it's our view that there was a problem but the
problem has been solved by existing regulations.
Mr. Raymond Bachand: I agree with Ken that
it's not a regulatory
problem any more. It has been solved by strict rules
within each province. It's more a public policy issue
of how much capital should be raised in these funds. If
you believe Mary Macdonald's study, there will be a
Decisions in the next budget basically set the
path for the 1999 fiscal year. So we have to take a
medium-term perspective on that. If there is a
shortfall of $750 million per year, 1998 is not the
problem; 1999 and 2000 are the problem. With regard to
the $5,000 level, especially for all the funds that
raise their money through brokers, there are a lot of
signals in the brokerage industry that a $3,500 account
is too small. That is one of the things that has hurt
them in gathering capital.
Mr. Walt Lastewka: My next question is very short.
I may be wrong in my calculations, but labour-sponsored
venture capital corporations account for more than
half—I think it's 52%—of the venture capital supply
for Canada. But my understanding is the calculation
for your group is around 30% or 35%. Am I right on
Mr. Raymond Bachand: Our group is about two-thirds
of the labour-sponsored funds in Canada, so that would
be approximately right, two-thirds of fifty-some
The Chair: Thank you, Mr. Lastewka.
Mr. Werner Schmidt: I have two questions. They're
unrelated to each other.
I'm not familiar with Mary Macdonald's study, except
the broad outline of it. As the first question, could
you tell us briefly whether you believe there's a
shortfall of venture capital in Canada, taking the big,
broad picture into account? What ought the proportion
to be of the gross national product of venture capital?
Mr. Raymond Bachand: I don't have the statistics
in my head, but I think Canada is still much behind the
United States in the amount of venture capital
available per GNP or whatever way you want to turn your
Mr. Werner Schmidt: Yes, whatever that may be.
Mr. Raymond Bachand: Also, I think it's really a
precautionary measure if labour funds disappear. For
example, if you cut tax credits totally, in Quebec, for
example, and in B.C., in venture capital there's the
Caisse de dépôt left and that's about it.
Mr. Werner Schmidt: That's not the intent of
Mr. Raymond Bachand: I understand that. I took
the opportunity so that....
We're still much below the States, for example, in
biotech and technological venture capital.
Mr. Werner Schmidt: Okay.
The other question is a very simple, practical one.
First, how long do you stay in a company that you
accept as a company that you would support with venture
capital, and what are your criteria for leaving a
Mr. Raymond Bachand: We try to make a long-term
venture of the companies in which we invest, but of
course, at the onset—
Mr. Werner Schmidt: How long is that?
Mr. Raymond Bachand: It's five to ten years.
Mr. Werner Schmidt: Okay.
Mr. Raymond Bachand: At the onset you have to kind
of negotiate your divorce clause. Hopefully you'll
stay with them for 13, 14, or 15 years, because we do
invest in second and third rounds until the financial
markets can take over and are efficient to capitalize
the company. That will depend on how fast a company is
is growing. It could happen in three years; it could
happen in ten.
Mr. Werner Schmidt: Is that the criteria, when the
public markets would take over the company?
Mr. Raymond Bachand: There are two or three exit
strategies. It's mostly the sale of the company.
Either the public market takes over or the company is
sold, which is probably the other big chunk of the exit
of venture capital. Or if the company has been going
very well, but not growing strongly, and is very
profitable, the owner can buy it back, which would be
the third aspect. If it's going very well and growing
strongly, then the company needs more capital to
sustain its growth.
Mr. Werner Schmidt: Sure.
The Chair: Mr. Delaney, did you want to add to
Mr. Ken Delaney: I was just going to add the third
exit, but it's okay, Mr. Bachand covered it.
The Chair: Okay, thank you.
Thank you, Mr. Schmidt.
Mr. Alex Shepherd: Somewhere one of the
witnesses mentioned that the targeted companies are
approximately 62% unionized.
Mr. Raymond Bachand: Of our 300,000 shareholders,
I think 62% are unionized and 37% are—
Mr. Alex Shepherd: Of your—
Mr. Raymond Bachand: Of our 150 direct
investments, we have half unionized companies and half
non-unionized. If we take the 600 companies throughout
all the other funds, in the small corporations I'd say
probably 90% of them are not unionized.
Mr. Alex Shepherd: Okay, but if I took your entire
investment portfolio, roughly 50% would be union—
Mr. Raymond Bachand: No, it would be much less
than that; 50% is speaking of the 150 companies we
invested directly in. We are present in 600 companies
through all our technological funds, our regional funds
and our local funds; 95% of their investments are in
non-unionized companies, because most of them are small
Mr. Alex Shepherd: This has always been a mystery
to me. What then is the purpose of the connection
with organized labour? What does it give to your
Mr. Raymond Bachand: With respect to organized
labour in Quebec and the Quebec Federation of Labour,
its main purpose at the outset was to say that if there
are no jobs in this economy in the long term—this was
after the recession—you don't have unions. There was
a shift in the thinking of the trade unions in
Quebec—the FTQ and the CSN took a number of years to
get there—which was basically that the first public
responsibility of the trade union movement in Quebec
was to make sure that the economy worked, that jobs
were created, and that we got out of the recession,
things like that. After we do that, the forces of
the market will work, whether they're unionized or not.
Mr. Alex Shepherd: I guess my concern is this
concept of old economy versus new economy. Often, new emerging
companies, for a multiplicity of reasons, are,
initially at least, unionized. My concern is whether
in fact that either impairs or skews your investment
Mr. Raymond Bachand: Basically all of the new
economy is non-unionized, and we have no problem with
that. What would influence our investment decisions,
of course, is turnaround situations or something like
that in the traditional sector. We are going to look
at this very clearly, especially those like Tripap, the
pulp and paper company in which we have 500 workers, 50
to 60 years old and very experienced. Because it
was in the downsizing of the pulp and paper industry,
which is very cyclical, we looked at that very closely.
But the fact that the company is unionized or
non-unionized does not...we do a very special social
audit in the company when we come in, even in a
non-unionized company. Of course we would not invest
behind the manager who has ideas about not respecting
basic labour laws or about the black market and things
like that. We would not support a company like that.
But besides that, the only aspect I would say in which
there are more delicate situations is if we invest in a
non-unionized company that competes with unionized
companies. It has happened. It creates some
debates, but it has happened.
Fortunately most of the time our Canadian corporations
compete in a local market, but if 75% of their sales
are export-oriented there's of course a good
justification to support them. A local market is part
of their business. Those are the types of companies we
try to support, the ones trying to sell to the United
Mr. Ken Delaney: In our case the connection to
labour is extremely important and is, I think, actually
one of our greatest strengths. Certainly it helps us
raise capital, as Le fonds does. We take people from
the shop floor, train them and arrange for them to be
licensed to sell, and they go back into the workplace
and sell shares in First Ontario. That's how 60% of
our capital gets raised.
The unions support it because they think our fund has
a very specific role to play in filling gaps in the
capital market with a view to creating jobs. The other
thing the unions do that helps us function properly is
that they help us find investment opportunities.
There's one here in Ottawa, a company called
IS2. It manufactures a large piece of capital
equipment called the “digital scintillation camera”,
which is used by physicians in the practice of nuclear
medicine. We invested in the company that designs and
distributes it—the research company. IS2 doesn't
manufacture the equipment. The product itself is going
to be manufactured by a unionized company here in
Ottawa. That was our connection and that's how we
found out about the investment opportunity, through the
union. It's a very good product. It's going to create
a lot of jobs, it's export-oriented, it's going to
lower health care costs, and we found out about it
through the union.
We are also working on a facility in the Niagara
Peninsula that's currently closed. We've reached an
agreement now, and we just have to get some bank
financing in place for an operating line. Within the
next two or three weeks we'll be making an
announcement. This was an investment opportunity we
heard about through the union.
So in our case the union connection is very important,
and I think it adds a lot of value.
As the world of labour relations continues to change and
continues to get more sophisticated, trade unions are
often in a position where they are working in
partnership with management and they are finding out
the capital needs of the enterprises that employ them.
So from our
perspective it's a very synergistic relationship.
The Chair: We appreciate your
being here with us today. It's been
I have just one question, and maybe
you can give your final comments in replying to it.
Mr. Delaney, you said that the problem is
fixed. You said that the problem is fixed by
regulation. I don't often agree with some of the
viewpoints of Terence Corcoran. However, that being
said, I'm a bit concerned that the problem is not
completely fixed when not you particularly but the
Working Ventures fund is facing
a fine of up to $100 million—and
I have to assume that this article is correct.
Is it really fixed, or do we still have a problem with
the largest fund in Ontario?
Also, is that problem going
to cause us more grief down the road, as the article
Mr. Ken Delaney: I'm saying that the problem is
fixed in the sense that the new rules make it
very imprudent and also impossible for a
fund to raise more capital than it's capable of
investing. I say the problem is fixed because
no new capital will be raised by a fund that is unable
to invest it.
The situation with Working Ventures
remains as it is.
The Chair: Okay.
Mr. Ken Delaney: I don't know what you can do
about that. They've raised the capital.
The Chair: So basically for all new venture
capital, all new funds, all new money, the problem is fixed. We
have an old fund in which unfortunately there's a
problem, and it will work its way out through time.
I appreciate your presentation here, as do all members.
I think Ms. Brown addressed one of the very issues
before us, which is in the upcoming budget.
If you have any comments that you'd
like to leave us with, please do.
Mr. Ken Delaney: Just
With respect to Working Ventures, the one thing
that has been suggested is if the rules were changed to
make it easier for people to transfer their money out
of an existing LSIF to another LSIF without a tax
penalty, that might be one way to help solve the
problem that remains, even though no new capital is
Also, I wanted to emphasize that, although I know a
lot of people want to take a sort of wait and see
approach for a little while longer to see what the
longer-term impact of the reduced tax credit will be on our
ability to raise capital and fulfil our mandate of
filling gaps in the capital market and creating jobs, a
change in the upcoming budget will not have any impact
until 1999. If we have to wait until the following
budget, it will be the year 2000, and by then, according
to Mary Macdonald's research numbers and the
anecdotal evidence of virtually everybody in the
business, we really will be in a crisis situation.
I just want to leave that thought with you.
The Chair: Thank you.
Mr. Bachand, did you have anything further, or Mr.
Mr. John McEwen: First, we can defer a
lot of the wrapping-up to be done by the senior and largest
labour-sponsored fund in Canada, which we certainly
recognize and accept. I know everybody in this room
does, so I think it's proper that they be given the
right to do the wrapping-up.
From our perspective, although the problem
regulatorily is fixed, there's going to be continued
fall-out. There's going to be a lot of angst
expressed in the media, and I think everybody has to
deal with it. We have to deal with the Terence
Corcorans, who are blinded, blinkered, but those are
things we can deal with if you'll give us the tools
to do it.
I saw a slogan at a workplace one time.
Somebody had put it up as sort of a joke. It said,
“Beatings shall continue until morale improves”.
If we could take a step
back in time, a suggestion that came forward from these
five funds here today was that you'd
have sort of a regulatory process where you'd have to
buy in. You couldn't set yourself up as a
labour-sponsored venture capital fund just because you
could find a union of 10 or 20 people somewhere who
would sponsor you.
That opportunity is gone, though. I suggest it's
gone and we have to learn to live and survive with what
we have. We would like to have the opportunity in New
Brunswick to be able to provide for the small and
medium-sized business community those investments that
ensure a stronger and healthier economy, a growing
economy. I think if we move the envelope along and
return some of those encouragements we would be
doing a very positive thing for the economy of New
Brunswick. I think this committee can play a big
role in moving, shifting the envelope, changing the
parameters so that it gives us that opportunity.
we can then ignore the slogan that says
“Beatings shall continue until morale improves”. It
I think we need you behind us, and I encourage you to
be there in support, not only in this room but in
support in the appropriate places, because it will make
a difference. You will make a difference for New
Brunswick. There's no New Brunswick representative
here today, but you will make a difference, and we
will all appreciate it. Thank you.
The Chair: Thank you, Mr. McEwen.
Mr. Raymond Bachand: I won't make conclusive remarks,
maybe just two comments. Thank you for receiving them.
I think this is a unique Canadian institution in a
sense. We have people in Montreal coming from all over
the world, delegations trying to see what this
animal is. How does that exist? I can't believe
labour is sponsoring capital. By helping the
taxpayer I think the governments are, on
a long-term basis, if we sustain it, giving Canadian
corporations a competitive advantage and access to
capital. I think that's important for the economy,
especially when we think that in terms of the world economy
basically the real competitor is the United States of
America, with their financial institutions.
The second thought I'd like to leave you with is
this. Please resist the temptation to federally regulate
everything going on across Canada. This is an
institution that is regulated by provinces, with
different regulations adopted by B.C., Manitoba,
ourselves. Now Ontario has solved the problem and it's
working well. I know there are some
temptations to unify our regulations, but I think it
would throw the system into chaos if that happened.
Thank you very much.
The Chair: Thank you very much.
Again, on behalf of the committee, I thank you for
being with us today.
I adjourn the meeting now until 3.30 p.m.
We'll be in a different room at 3.30 p.m., 253-D
Centre Block. Thank you very much.