The Role and Performance of Labour-sponsored Investment Funds in the Canadian Economy: An Institutional Profile
This research report was prepared to assist the CLMPC's (now the Canadian Labour and Business Centre) Task Force on Access to Capital, which has examined issues pertaining to the financing of Canadian high value-added investment. CLMPC research into labour-sponsored investment funds reflects original, detailed study of these relatively new actors in Canada's financial system.
At the end of the 1980s, the funds accounted for less than 10 percent of venture capital under management. By 1994, labour-sponsored investment funds collectively managed 33.3 percent of all institutional venture capital. By late 1995, assets held by the funds, in aggregate, rose to over $2.0 billion. Furthermore, they are responsible for 15 percent of the total number of venture investments and 28 percent of the dollars invested in the market (1994);
by the end of 1995, fund investment projects totalled 228 valued at almost $823 million. This reflects an increase in the number of those labour- sponsored funds actively investing since the year's beginning (from seven to eleven) as well as investment dollars committed (up by over $240 million);
In 1995, the funds had attracted the savings of 378,600 individual Canadians - 51 percent of whom were organized workers affiliated with sponsoring union bodies;
At the beginning of 1995, the two largest funds - the Fonds de solidarité des travailleurs du Québec with $1.3 billion in assets and Working Ventures with $500 million - were the first and second largest venture capital institutions in Canada respectively;
Since the late 1980s, the funds have been a pre-eminent source of new venture capital - in 1994, 53% of $1 billion in new capital raised for the venture market was acquired by labour-sponsored funds;
Total federal tax revenues foregone due to the tax credit are estimated at more than $140 million in 1995 (a more precise calculation would have to estimate the cost of fund-inspired deposits into RRSPs). Two cost-benefit analyses done in 1994-95 show that government recovers its expenditure on labour-sponsored funds within approximately three to four years;
According to a 1994 Québec study, the Fonds de solidarité was directly responsible for creating or preserving over 15,000 jobs in 167 enterprises in 1993 and stimulating $1 billion in additional value-added. The employment universe of the portfolio of Working Ventures reached 5,600 in late 1995.
The CLMPC report traces the evolution of international models of investment and financing that involve unions and workers, such as the spread of tax-subsidized employee share ownership plans (ESOPs) in the United States. Sweden's supplementary pension system (ATP) and Denmark's employee capital pension fund (ECPF) reveal traits similar to those identified by the CLMPC for Canadian labour-sponsored funds.
In Canada, it was the 1981-83 recession, and persistently high unemployment, that led union leaders to seek alternative ways to support growth and job creation. The Fédération des travailleurs et travailleuses du Québec developed a completely new vehicle, namely, a labour-sponsored fund with a multi-faceted investment mandate. Since the inception of the Fonds de solidarité in 1983, this model has been emulated and adapted to other Canadian jurisdictions. In 1988, the federal government amended the Income Tax Act to set up the first national version, the Working Ventures Canadian Fund. Legislation has also been promulgated to establish funds in all provinces except Newfoundland and Alberta.
At the time of this report, there were eighteen funds in existence. A few are fully active, while most are at the early stages of capitalization and institutional/portfolio development.
CLMPC research has identified ten broad characteristics that are shared, to varying degrees, by all labour-sponsored investment funds. CLMPC drew heavily on the performance of the Fonds de solidarité to illustrate these salient features, given its comparatively long evolution and history.
(i) Responsiveness to public policy concerns
By definition, all labour-sponsored funds must be accountable to public policy concerns as set out in their respective statutes. In all cases, inception has been made possible because of enabling legislation, tax credits and other incentives provided by Canadian governments at both the federal and provincial levels.
Governments elected to support the funds because they appeared to offer a means of advancing certain public policy goals, such as strengthening the national venture capital market and provincial sub-markets, addressing alleged gaps in financing for small business, employment creation and protection, and facilitating a new role for workers and unions in the economy. The funds operate under fairly explicit and enforceable guidelines and sanctions.
(ii) Interest in Canadian private equity markets geared to risk
Labour-sponsored funds may be described as a financial hybrid with characteristics derived from structures in both public and private equity markets in Canada. By 1994, labour-sponsored funds had become a formidable collective force in the institutional venture capital market. "Patient" venture capital is being acknowledged as indispensable to new generations of enterprises and jobs in a changing Canadian economy. By attracting a new supply source - the savings of Canadian households - the funds have helped create large, relatively stable pools of equity capital.
The CLMPC found that, the impact of the funds has been felt chiefly in the area of supply, thus far. In particular, they have provided an important counter to the negative effects of volatile capital flows - in fact, without the shareholder recruitment efforts of labour-sponsored funds in recent years, total national venture market resources probably would have declined. As well, with greatly intensified investing by Working Ventures and British Columbia's Working Opportunity Fund, among others (on top of the already extensive portfolio of the Fonds de solidarité), the presence of the funds as an investor type grew in 1994-95.
(iii) Interest in addressing capital supply barriers to firms in certain sectors
Finding solutions to capital availability problems is a main rationale behind government assistance of labour-sponsored funds. CLMPC research shows that firms facing barriers to sufficient, affordable capital form the client base of the funds. Along with sole financing of small and medium-sized companies, CLMPC research indicates that the role assumed by the funds in leveraging investment and syndication cannot be underestimated. In particular, the experience of the Fonds de solidarité with its specialized, regional and local funds reflects an innovative approach that combines expertise among different financial and industrial partners.
Labour-sponsored funds are taking additional steps to accommodate entrepreneurs and enterprises with special requirements, such as seedings, small dollar deals, and micro-firms. Indeed, this is apparent in the investment mandates of some new funds, such as the Canadian Medical Technologies Fund, which concentrates on early stage health sciences and technology projects.
(iv) Organization and direction by a legitimate labour body
CLMPC research has concluded that a crucial feature of the funds is the degree to which genuine control is exercised by the sponsoring union. This usually involves a labour body that is organized centrally, such as a national or provincial labour federation or union/unions. Along with officially initiating a fund, sponsor representatives must direct all major decision-making through boards of directors and related structures. Unions and union members have been found to play a constructive role in the investment process.
(v) Mandates that guide investments according to economic and social goals
A unique aspect of labour-sponsored funds is that investment decisions are marked by a commitment to socio-economic goals - i.e., obtaining the widest possible array of benefits to the Canadian economy and society. For instance, the investment criteria of all funds emphasize the creation and/or maintenance of employment. This explains their emphasis of small and medium-sized enterprises which have been responsible for most net job growth in Canada in recent years.
The funds tend to give priority to investment projects that feature both job quantity and quality. This is often achieved by concentrating on companies in specific, high value-added sectors, such as manufacturing and processing and knowledge-intensive or technology-intensive industries. CLMPC research found that the funds also highlight other critical economic variables, such as research and development spending and export capability.
Other socio-economic criteria include economic diversification of disadvantaged regions and communities, workplace improvements through employee participation and new human resource strategies, sustainable development, and consumer protection. These goals are pursued through various mechanisms, such as social auditing.
(vi) Capital resource mobilization on a provincial basis
All labour-sponsored funds are bound by strict statutory requirements to turn savings acquired locally over to investments in local production. Some funds, such as Manitoba's Crocus Investment Fund, have featured this as essential to a provincial "capital retention" strategy.
CLMPC research discovered that the funds are having a visible and positive impact on the regional supply of venture capital in Canada. The Fonds de solidarité has been central to making the Québec sub-market the largest in the country. Other funds have helped resurrect weakened sub-markets in the Prairies and the Maritimes. Working Ventures, for example, was responsible for almost 100% of institutional venture capital and investment in Atlantic Canada in 1993-94. Through new vehicles, several funds have also advanced financing for community economic development within provinces.
(vii) Participation by a broad base of average working people
A key objective of labour-sponsored funds is to offer lower and middle income working Canadians a new savings and investment opportunity. The primary way this is accomplished is by attracting shareholders from among the membership of affiliated union sponsors. Taken together, the Fonds de solidarité, Working Ventures, Working Opportunity and the Crocus Fund, for instance, have potential access to an investors pool of over 1 million organized workers.
Through various union-based and at-arms-length strategies (including payroll deduction plans), several funds have been particularly successful in meeting this objective. 40 percent of the shareholders of the Fonds de solidarité, for instance, are blue collar workers.
(viii) A commitment to provide market returns to shareholders
Labour-sponsored fund tend to emphasize capital appreciation for shareholders as an overriding aim by which other social and economic goals are made possible. CLMPC research concludes that fund rates of returns must be considered in the context of venture capital investing which is long-term and high risk in nature. All funds hire venture and finance professionals to ensure good investment returns.
(ix) Involvement of workers and unions in enterprise-based decisions
Many labour-sponsored funds give priority to high performance enterprise techniques and strategies that include employee participation and ownership. A key element for some, such as the Fonds de solidarité, is the delivery of financial and economic training to workers. CLMPC research has found that such training and other innovative workplace programs are productivity-enhancing.
The practice of some funds to also encourage share ownership among employees in investee firms is sometimes an important tool in large-scale restructuring and rescue operations in mature industries. Several new funds will follow the lead of the Fonds de solidarité in acting as a friendly equity partner in partial or full worker buyouts linked to protecting existing employment.
(x) Facilitation of co-operation between business and labour
Labour-sponsored funds also support the objective of increased co-operation between business and labour. Most funds welcome the input and involvement of the business and financial representatives on boards of directors and advisory committees. Some actively promote dialogue and joint action between employers and employees in diverse contexts.
While this CLMPC paper concentrates on a first-time identification of the common institutional features shared by labour-sponsored investment funds - providing data about mandates and investment standards, illustrations of related programs and activity, and documented evidence of performance - the research also suggests specific matters that merit further research. Above all, it is concluded that as the targets of significant public treasury dollars, labour-sponsored funds should be subject to close observation and assessment based on the ten salient qualities outlined in the preceding.
This document was prepared for discussion purposes for CLMPC's Task Force on Access to Capital. It does not necessarily represent the views of the CLMPC Board of Directors or the members of the Task Force on Access to Capital.