Labour Fund Renaissance
You have to hand it to the folks who drowned the Ontario labour-sponsored fund industry a couple of years ago; the Dalton McGuinty announcement that the tax rebate would be phased out signalled the end of the sector. A few cogent arguments, although specious, carried the day with the provincial mandarins. The story went something like this:
– labour-sponsored funds have a lower cost of capital as a result of the 30% tax credit, which is distorting the market and driving up valuations at the expense of the traditional venture capital firms;
– the fee structure is too expensive for retail investors;
– the pacing rules force the labour sponsored firms to put money out, even when there aren’t any quality deals to be had;
– the presence of labour-sponsored funds is crowding out the creation of larger and more robust pension fund-backed venture capital firms; shut these labour guys down and the pension funds will get off the sidelines and pour money into the VC general partners to fill in the gap; and
– the returns to retail investors are horrible (due to high fees, pacing and too many dumb investments).
A couple of year later, what have we learned?
1. Despite the promises, there has been no rush to invest in the tech and biotech VCs on the part of pension funds and/or life insurance companies; only a handful are interested in the space. And the funds of funds groups appear so down on domestic tech that they are investing $ in oil and gas equity funds and calling it “venture capital”. Only EDC and BDC have stepped up as major new players across the country, and that probably had nothing to do with what happened to the Labour guys.
2. The amount of capital available to early stage tech and biotech firms in Canada has shrunk, as several GPs appear to be going out of business and the ones who’ve had success in raising new funds will have a hard time making up for all of the firms that are now either at the end of their life or appear unable to raise new funds (JLA Ventures, Ventures West, MSBI, Propulsion Ventures, Priveq, Tech Capital Partners and Garage Canada all come to mind as examples of GPs that did well in their most recent raises).
3. Labour funds can, in fact, make investors money. About a year ago, I bought a Venturelink fund (they are an investor in our Fund btw). Just checked my monthly RRSP statement, and I’m up about 7.5% before taking the tax deduction into account. And VentureLink just announced that they have crystalized their investment in Stone & Co.; on the heels of their success with Coventree last Fall. And the VenGrowth fellows have had some successes in 2006 as well (Travellers Leasing, Quake, HED, etc.).
Had I invested that money a year ago in the Yellow Pages Income Fund, for example, I’d be down over 20% (before distributions of about 8%?). But that’s not fair given the proposed tax changes.
Petro-Canada? Down over 12% before dividends; oil is “just” $55/barrel.
Celestica? Down 30%. And we are only in the 10th (?) year of an expanding world economy.
General Electric? Up about 8% (before 2.6% yield). But, that’s only one of the most successful conglomerates in the world.
Wal-Mart? Up about 2% before the small dividend. But they’re just the largest retailer in the world.
Loblaws? Down ~14% before the 1.7% dividend, and they’re the best retailer in Canada.
Barrick? 0% return before a 0.7% dividend, and Gold is at US$612.
There were lots of places for investors to make money last year, but perhaps its time the pounding on the entire Ontario labour sponsored fund industry came to an end. Most brokers would’ve bet their year’s commission that almost every one of the above household names would surpass the return of a labour-sponsor fund.
It might be time for retail advisors and the Ontario Liberals to have another look.