Finance Committee on Oct. 27th, 2016

[Benoit Daignault]

In terms of our services, we are seeing a growing need. I can't speak for the BDC, but we are seeing that there is currently a lot of financial capacity in the private sector, but that they tend to be focused on companies that are doing very well.

However, institutions like EDC and, I presume the BDC, are forced to take care of small riskier businesses or, in our case, very large companies that occupy tougher markets than Canada, that have many needs and that are not supported by the private sector. We tend to be pushed up and down, while the private sector is really very strong in terms of the overall market. In short, we observe that the complementary approach ensures that we are asked for very small needs and for very big needs.

[Michael Denham]

Then again, just to get technical for a second, much like the EDC, we manage our balance sheet as I think you'd want us to. It's very consistent with the Basel agreement and how commercial banks do that. We're very explicit in terms of the risk we're taking. We have all sorts of stress testing, and we make sure we have enough equity on our balance sheet to both support that risk and make sure that we can weather the storm in terms of stress tests.

I say that because it forces us to make some tough decisions as to the type of lending and investing we do, because that economic capital is a constraint.

To answer your question—and this gets back to Monsieur Ouellette's question—in looking at the needs of small business in terms of term loans, the requirements of Canadian start-ups around venture capital, and the requirements of small business around entrepreneur-friendly growth equity, we see a lot of demand for the types of services and solutions that we provide—frankly, more than we can meet right now.

[Steven MacKinnon, Liberal, Gatineau, QC]

Is it a matter of market share? Is it because you do well in this area or because there is a decline?

Based on what you're seeing, are other financial institutions seeing a decline in this regard?

[Michael Denham]

It's a mix of those two things. However, the more important thing, frankly—and I think this is good for Canada—is that the demands on us from entrepreneurs, as they try to grow and start businesses and scale up their businesses, are increasing. The commercial banks are there to support and we're there to support, but what I like about the fact that there's more demand for what we do than we can supply is that it just speaks volumes to how much entrepreneurship there is out there and the growth plans and ambitious start-up plans that entrepreneurs have.

[Steven MacKinnon, Liberal, Gatineau, QC]

We've been told often that the issue of intergenerational business transfers was critical. We have also been told that the tax rules were obstacles to these transfers, especially in agriculture, where intra-familial transfers are not favoured.

Are you seeing the same situation? Do you have any recommendations for us about this?

[Michael Denham]

We haven't studied the fiscal angle per se, so I don't have any recommendations to make with respect to that. All I can do is acknowledge that we see the same thing you see, and the CFIB and other groups have researched this, in the sense that a massive number of companies are going to go through intergenerational transition over the next few years. One of our groups is called Growth and Transition Capital, and well over half of the financing we do there is to support this type of transition.

I'm glad it's on your radar screen. I'd encourage you to look at it. Thoughtful policy in this regard will help, because this intergenerational transition point is going to be very pronounced over the next few years.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you very much.

Thank you to both of you for your remarks.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Dreeshen, go ahead.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

Thank you, Mr. Chair.

Mr. Denham, unfortunately I missed the BDC logo; I was busy watching Connor McDavid.

I am also on the industry committee, and one of the things we've been talking about there has to do with how manufacturing can succeed in some very difficult times around the world. One thing that was mentioned earlier was how to make sure that our businesses understand the opportunities that exist in other places, and that really becomes one of the critical components. Of course, included in that are research dollars, money that goes into universities and other research groups. When I was in Germany about three weeks ago with the science minister, it was interesting to find that, as far as Canada is concerned, we've been investing the same amount of dollars into our universities and research groups as Germany does on a per capita and GDP basis.

The issue is that we don't get businesses that are going to invest in conjunction with them. There are three critical components to this. The first is our geography, as it takes us six hours to fly from one side of our country to the other. The second is jurisdictions, as we have different provincial and territorial governments that seem to get in there, and that was raised earlier as a concern. The other is market access, of course. Germany is the draw. That's where people are going to come. When they look at us, they want to see how many other issues there are and whether they can get into the United States, and how they can get into a 300-, 400-, 500-, 600-, or 700-million-person market? These are the kinds of issues we have, and of course BDC and EDC work together to try to help businesses do that.

You mentioned the limited growth in the 10-year span from 2004 to 2014. I think we have to recognize that in 2008 and 2009 even the banks weren't lending to each other. There was a credit issue. Right now it's a confidence issue. We see that in Alberta, where I am from. There are concerns about the changes that are there. There is money available for the basic businesses that are working today, but there isn't that underlying capital pool that says, “I think that's where we want to go in the future.” Right now the critical mass is really in whether or not we can have that happen.

As an example, the Alberta government had a technology fund, which was designed so that the money would come in and go specifically to projects that were going to reduce greenhouse gases. Then, of course, we come up with the clean coal issue. Right now we have people, listening to politicians and so on, who drive by our coal plants in Alberta and say, “When did you shut that down?” Well, it's not shut down. You can't tell it's running. We have that kind of technology, which we should be selling around the world. Instead, we are tying our hands, because we are picking and choosing winners. How do you make sure that the investments you are putting into business are reflecting the realities of the world and not simply the ideas that we might have here in Canada at this moment?

[Michael Denham]

Thank you for that.

I was in Calgary last week. It was Small Business Week, and I did a bit of a cross-country tour and spent a full day with a number of tech entrepreneurs in Calgary. I found it very heartening when later that week, the Calgary Chamber of Commerce hosted its event, which is a kind of small trade expo, a tech expo, and I think over 1,600 companies showed up to participate, which was a record. Even this week in the news, we saw that there are more start-ups now taking root in Calgary than there ever have been and frankly there are more than in many other regions in Canada, which, again, I think is tremendous. Your points remain valid, but I think we're starting to see some early-stage traction, which is good.

The angle we take with respect to your topic is more local and it relates to local ecosystems that basically are designed to create a flow of research and intellectual property from universities through to commercialization and, ultimately, export sales. There are a dozen or so incubators/accelerators across the country and we've chosen these based on research and, basically, have picked those that we think have the formula right. The role of these groups is to provide that connection. So they're meant to have porosity vis-à-vis the universities and research organizations. They're meant to be a conduit into which organizations like ours and others can invest venture capital.

One key thing, to get at your question, that really defines success is whether there is an anchor tenant to almost provide big company support and offtake for a lot of the ideas and people. The set-up here in Ottawa now is relatively healthy by global standards partly because of the beneficial effects of the role that Nortel and others played over the years.

One reason Kitchener-Waterloo is so robust is that BlackBerry and RIM have left a very positive legacy there. One of the reasons you have a nice sector in Montreal around life science is that big pharma has played a role there.

So there are some key ingredients that you need to make this flow from research and intellectual property through to commercialization work. They are related to venture capital, to the institutions themselves, but also to some corporations that play this role of creating demand for the ideas and also creating a nice flywheel in terms of talent as well, and that's where we're focused.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Denham.

Mr. Grewal.

[Raj Grewal, Liberal, Brampton East, ON]

Thank you, Mr. Chair.

Thank you, gentlemen, for coming this morning. My question is for Mr. Denham.

Mr. Denham, by percentage, what industries do you guys generally support? How much of it is new tech, specifically?

[Michael Denham]

I'm just looking at my notes now. In our venture capital business, obviously, which is in excess of $1 billion now, it's all tech. It's a mix of clean tech, life sciences, health tech, and information technology. Across the rest of our portfolio, it goes to the point that Mr. Barton made around the oil patch and the amount of technology taking place within what we currently define as fairly traditional sectors.

I think, all told, including our equity lending, probably about 15% or so of our total disbursements every year are to companies that are in the tech industry, but that understates the amount of tech we're supporting, because there's a lot of lending to support technology development within traditional industries. I'll get back to you with the number.

[Raj Grewal, Liberal, Brampton East, ON]

How many of your deals does the BDC end up taking equity shares in?

[Michael Denham]

We do, in total, relatively few. We do about 14,000 lending transactions per year, and those are all loans.

On the equity side, we would be doing fewer than 100 per year.

[Raj Grewal, Liberal, Brampton East, ON]

I ask because I was formerly a corporate lawyer, and some of the deals I had had a BDC component in them and some of them, unfortunately, had a bad debt component to them as well, or a writedown, or you guys taking pennies on the dollar for your shares. For what percentage of the portfolio does that happen? How many bad deals, essentially, do you guys do per year?

[Michael Denham]

Our loss rate is about 0.6% of our portfolio—

[Raj Grewal, Liberal, Brampton East, ON]

Okay, so it's very—

[Michael Denham]

—which is a lot higher than for a commercial bank, but that shouldn't surprise anybody, because, again, only 7% of our loans are to investment-grade companies. So we're lending to higher-risk companies, companies that can't get—

[Raj Grewal, Liberal, Brampton East, ON]

But you also do better, too. Your return on investment should be higher as well, on the flip side.

[Michael Denham]

Our net income hovers between about 7% and 9% ROE. Banks are in so many different businesses, but on average our net income per cent, or ROE per cent, would be lower than that of the commercial banks.

[Raj Grewal, Liberal, Brampton East, ON]

I actually agree with Mr. Albas, which I don't generally do very much, but he is a nice guy. In my neck of the woods, in Brampton, which is a high-growth area in population, there are a lot of small businesses. But they are traditional small businesses like trucking companies, a pizza shop that expands to 10 franchises, day cares, etc., which are good businesses. They put food on the table and create jobs, but they would never know about BDC.

I think one of your inherent challenges still is this. When I worked on Bay Street, we did a lot of private deals and we did a lot of deals at the mid-market level, and they always had a BDC/EDC component to them. The true small business owner has no idea what BDC is. A company that comes to mind, Grace Windows and Doors, is doing phenomenal work in the riding and it's expanding, but the owners don't have the expertise to scale their business. They have the expertise to make their product.

What efforts are you guys making to let people know that you're there to help on the advisory side? I think that's extremely important because of the skill set and the knowledge you can provide. The true small-business owner doesn't have that skill set.

[Michael Denham]

I'd love nothing more than to work with and support more entrepreneurs, especially the ones you described. We're highly motivated to do whatever we can to get the word out and raise awareness and have entrepreneurs take advantage of the things we can do. When Mr. Albas asked his question, I took him through a list of things we're doing, and that's in part the answer to your question.

But with respect to the consulting part of what we do, we look at what companies need. It's financing but it is also capability; either capability they'll build themselves for which we provide some learning and training programs, or capability in the form of consulting help, to help them address an issue. We're also trying to get word out on how we can help. We now offer micro-solutions consulting. Even the owners of the smallest businesses up their game with strategic planning, financial planning, technology planning, and human resources planning.

[The Chair, Liberal, Wayne Easter]

You're done.

Mr. Liepert, it's your turn.

[Ron Liepert, Conservative, Calgary Signal Hill, AB]

Thank you, gentlemen, for being here. I would echo earlier comments from, I think, Mr. MacKinnon that the local BDC representative in Calgary has been making his rounds and ensuring that especially we, as new MPs, are well informed on BDC.

Regarding the situation in Calgary, I wouldn't get too excited about all these new small businesses, because my guess is an awful lot of them are owned by highly trained, highly skilled people who have been laid off from the oil and gas sector and who are starting up small businesses, consulting businesses and that kind of stuff. I think that reflected a lot on what happened in Calgary during Small Business Week.

That being said, you don't finance real estate, or do you?