STANDING COMMITTEE ON INDUSTRY

COMITÉ PERMANENT DE L'INDUSTRIE

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, February 10, 1998

• 0907

[English]

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 capital funds.

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.

[Translation]

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.

[English]

We certainly appreciate the fact that you have scheduled a meeting specifically to hear our concerns.

[Translation]

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.

[English]

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 Brunswick.

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.

• 0910

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 capital funds.

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.

Labour sponsored 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?

[Translation]

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.

[English]

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.

• 0915

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 cautious.

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, Raymond.

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.

• 0920

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 Manitoba.

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 imminent.

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 your discretion.

We'll begin with Mr. Schmidt.

Mr. Werner Schmidt (Kelowna, Ref.): Thank you very much, Madam Chair, and thank you, gentlemen, for appearing.

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 venture fund?

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 five years.

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.

• 0925

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 commercialization issues.

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 well.

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 companies.

Mr. Werner Schmidt: I think we should ask the other gentlemen as well. Is that a pretty standard approach?

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 happened since?

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% level. I think that directly answers your question on our ability to invest the funds and to reach the community.

• 0930

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. Lastewka.

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 the money.

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 employees.

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 in dollars.

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.

• 0935

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 directors.

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.

[Translation]

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 own fund.

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.

• 0940

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 invest in?

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 activity.

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.

• 0945

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.

[English]

Mr. Shepherd.

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 into that.

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 they don't?

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.

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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 capital base.

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 started.

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 companies, and they will not look at anything that approaches the $20 million to $30 million range in overall valuation.

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 economy.

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 years.

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.

• 0955

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 fairly low.

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 later years.

The Chair: Thank you, Mr. Shepherd.

The bell is just a notification that the House is beginning. We'll continue with the hearing.

Mr. Solomon.

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 provincial level.

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.

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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 lending part.

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 good one.

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 market.

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 they've taken.

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 table.

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 for anybody.

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.

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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 here.

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. Peric.

Mr. Janko Peric (Cambridge, Lib.): Mr. Delaney, you mentioned that you are not competing against mutual funds.

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?

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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 investments.

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 this process.

Mr. Janko Peric: Are you focusing on a specific sector?

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. Schmidt.

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 of Canada.

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.

• 1015

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 our focus.

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 Canadians.

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 venture?

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 New Brunswick.

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 businesses.

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.

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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 companies. We 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. Bellemare.

[Translation]

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 small business.

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 portfolio.

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 employees is.

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.

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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 to saving.

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 these organizations?

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 outset.

• 1030

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 fund.

[English]

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.

Madam Lalonde.

• 1035

[Translation]

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 management.

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.

[English]

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?

• 1040

[Translation]

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.

[English]

Mr. McEwen.

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, Madam Chair.

Good morning.

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.

• 1045

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 break.

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 funds.

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 it.

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 here now?

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.

• 1050

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 shortage.

• 1055

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 that?

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 percent.

The Chair: Thank you, Mr. Lastewka.

Mr. Schmidt.

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 statistics.

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 my question.

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 company?

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 that?

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. Shepherd.

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 companies.

• 1100

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 organization?

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 decisions.

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 States.

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.

• 1105

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 quite informative.

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 suggests?

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 two.

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 being raised.

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. McEwen?

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.

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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 doesn't work.

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. Bachand.

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.