Industry Committee on Nov. 25th, 2009

[Jean-René Halde]

Except that not everyone is in the business of exporting their products, besides which not every business exports their products on such a large scale. Those businesses that do export the most are certainly the ones that need to make the most adjustments, and quickly. That is harder to do, and our data bear this out.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Halde and Mr. Vincent.

We will now go to Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair, and thank you to the witnesses for coming today.

It's an interesting meeting because all your organizations sound very similar—the names and the things you work on—but I sense your clientele is very different in many ways.

Someone touched on this. There have been several commentators around the world who have actually talked about Canada's relative strength compared to the rest of the world. Coming out of this global slowdown, I know the OECD recently said at the World Economic Forum that Canada would be one of two industrialized countries to come out in a more competitive position than we went in. I think Australia was the other one. Could you just focus a little bit on what we're doing right? I'm not doing this to elicit praise for the government from the witnesses, although that's nice sometimes.

What can we learn about what we're doing right? One of the witnesses talked, for example, about the SR and ED program. In the SR and ED program, we've made some changes that have been pretty positive, I think, but we've been asked for maybe more. We've heard from witnesses in different studies we've done on how the SR and ED program could be improved.

What are we doing right, and how can we learn from what we're doing right, to become even stronger?

[Jean-René Halde]

I can only speak to maybe the two programs that were in the last budget as a means to address some of the issues. I can tell you that those two programs are tremendously successful. One is the business credit availability program that was referred to earlier by my colleague and that I mentioned in my few words. The other one is the famous CSCF, where we're helping the asset-based securities market for auto loans and auto leases. I mean, clearly, there were steps taken that kind of took some of the problems head on, and I see that as being very positive. The BCAP is definitely working, there's no doubt.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Okay.

[Terry Campbell]

I would echo Mr. Halde. We think the BCAP program is a good one. We had been working, both of our organizations, on stronger cooperation before the recession hit, and I think the BCAP program has certainly accelerated and deepened that.

What I would also say—and I'm speaking just for the banks now—as I said in my remarks, is that our industry came into this recession well managed, well capitalized, but also well regulated. I think our perception is, particularly in those areas focused on the stability of the system, ensuring there's liquidity in the system, that the government has been both targeted and appropriately restrained, I guess is the right word, in the sense of targeting measures that focus right in like a laser on where the marketplace had some issues. Not the banks; the banks were solvent. But sometimes the market wasn't working very well. When we look around the world, there has been a fair amount of cohesion among authorities around the world. But if you look at what's happening in the United States and the United Kingdom, where there really was a very serious problem with the banks, the degree of intervention, the enormity of the intervention, is very different from the situation here. So the government, I think, has been very appropriately targeting, and I think that kind of very balanced approach going forward is the right way to go.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Do either of the other fellows want to comment?

[Thomas Hayes]

If I could just say, one of the other comments I made about one of our challenges was there's a lack of syndicate partners in the VC space. One of the exceptions to that statement would be BDC and the continued support the government is providing BDC in the venture capital space. They're one of our key partners throughout Canada. However, I do want to say to my friend here that I wish he'd reopen the office in Halifax—

[Voices]

Oh, oh!

[Thomas Hayes]

—so we'd have some feet on the ground in Atlantic Canada. They are a national organization.

[Richard Rémillard]

Thank you very much for the question.

I'm glad you referred to the World Economic Forum report. The one that came out earlier this year, I think it was late September, classified Canada as being ninth in terms of competitiveness worldwide, and that's not a bad place to be out of 140, 150 countries. When it came to venture capital availability, we ranked 18th, not ninth. The dialogue or the text in that report, which you can check, refers to that as a competitive disadvantage for Canada.

It's not a question of governments doing things wrong or doing things right. I think the issue really is doing more things right. I echo the comments of my friend Tom over there. BDC venture capital has had an increase in its capital authorization, very positive, and the situation we're facing is dire enough to have me at this table saying that we actually need government to do more.

I have one final comment. What is government doing right? One of the absolutely basic building blocks of successful venture capital is a high-tech base from which you can draw out of universities, other post-secondary education institutions, research hospitals--take your pick. Depending on how you calculate it, we're spending $9 billion or $10 billion a year. The problem is constipation. All that stuff is there and none of it's getting out into companies. That's the problem.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I'll ask one short question to Mr. Rémillard.

You talked about setting up a fund. Where we live and work we have to deal with 120,000 constituents, many of whom might have concerns about the government throwing money into a big fund to be loaned to venture capitalists or other people. How would you explain it to one of our constituents who might have concerns about the government putting money into such a fund? And how big of a fund are you talking about?

[Richard Rémillard]

Thank you very much for the question.

We're looking at a minimum of $300 million from the federal government.

What I'd say to your constituents, and please have them call me--

[Voices]

Oh, oh!

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Read your cellphone number into the record.

[Richard Rémillard]

I would say that what the government is doing can be explained in maybe two ways. Number one, the government is actually investing. It's not lending money to venture capital companies; it's investing in venture capital companies. As an investor, it can legitimately expect a return on its investment. Those are the expectations of the Ontario government, the Quebec government, and the Alberta government that have smaller entities that they have recently set up.

Two, what's this all about? The answer is, if we're concerned about the jobs of tomorrow, jobs in growth areas, value-added jobs, then we have to fund our high-tech industries. If you take out venture capital, there's no funding. It's as simple as that.

To come back to what Siobhan said earlier, the industry in the third quarter of 2009 only raised $65 million across Canada. There was $1 million in Ontario, $32 million in B.C., and $32 million in Quebec. That's not enough to fund very many companies. Right now, today, compared to five years ago, we're funding less than 40% of the companies that we used to fund because the money isn't there.

[The Chair, Conservative, Michael Chong]

Thank you very much, Mr. Lake.

Mr. Marston.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Thank you, Chair.

I think it's quite appropriate that although Mr. Hayes is a very nice gentleman, since I'm invested in GrowthWorks, perhaps I won't direct any questions to him. It might complicate my life, but it won't complicate his.

Mr. Campbell, you're now on the hot seat.

[Terry Campbell]

I'm sure you do invest in banks through your retirement plan.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

One of the things I noted in the conversation was how well regulated our banks are, and we're quite pleased to see this. I recall in the eighties, when in the U.S. there was this move to deregulation of just about everything. We won't start pointing fingers at a particular President. As a result of that, I think we opened the doors, or they did down there, to some of the problems we have today.

When this downturn started to happen, when Chrysler, in particular, was getting into trouble, I dropped by our local Chrysler dealership and asked how things were going. They were starting to come out of it, but they were saying to us that they were having difficulty getting their clients funded. People were being turned down, which they'd never seen before. I wouldn't mind a few comments on that, if you would, and then I'll ask a couple more questions afterwards.

Was there a particular thing happening? If people were employed in industries that weren't at risk, they were still being turned down. That's what I was being told.

[Terry Campbell]

The situation in the auto sector, as you and everybody around this table will know, was just an extraordinary sequence of events, almost cataclysmic, over the last year to year and a half.

Specifically, in terms of auto dealers, I have just a couple of things contextually here. In terms of financing individual customers, the bulk of that financing market was held by the captive finance companies of the auto dealers. Those were precisely the companies that were severely impacted by the financial crisis. They relied upon securitization in the commercial paper market, and that just dried up. So a lot of the problem for dealers, entirely apart from the problems they had with their parent companies or their supplier companies, was that the main suppliers of financing were in crisis.

Banks had a very small part of that market. As you know, banks cannot provide lease financing. We can provide loans. I think we're finding over the period of the last year that our lending to and through dealers is actually going up.

Our motto is that we lend to people who are in a position to pay it back. We'd like to be able to capture more of the marketplace. But there was a significant disruption, not from the banks but from other suppliers of financing, which, quite frankly, had the rug pulled out from under them by the market.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Since I get to share the mike with my friend beside me, I'd best ask you at least one question.

The earlier testimony was that there appeared to have been rationalizations in the venture capital firms. Was that through mergers and acquisitions, or were they just dropping out of the market?

[Richard Rémillard]

Thank you very much for your question.

I guess a few things have happened. First, there has been consolidation both in the retail sector and in other sectors of the business. Second, some have dropped out entirely, and previously active players are no longer around.

Third, what's driving much of the activity is the inability of funds to raise capital. If you take your typical venture capital fund that's out there raising a fund of $100 million from pension funds, from institutional investors, he or she can knock on six doors in Canada. If they all say no, then there's nowhere to go except outside these borders, and that's a process that can take well over a year. Also, you have to maintain an office and infrastructure, everything to run your business, and still raise capital.

So a number of our funds that I know of have simply given up the ghost. They can't raise the capital and are exiting the business. They are managing down their portfolios, and when they get a return, they will wind down.

My counterparts in the United States are predicting a contraction of between 25% and 30% in the American venture capital world. They are facing some of the issues that we are. They're not as acute and they didn't face them quite as early, but that's what they will be going through.

[Wayne Marston, NDP, Hamilton East—Stoney Creek, ON]

Thank you.

[Jean-René Halde]

May I just add to what was said? I absolutely agree with the state of the industry as described by Richard. I mean, we have a terrible string of poor results by the companies, thus poor results for the funds, and thus a lack of ability to raise new funds. Then we go into a pretty vicious cycle.

The one thing happening that I think is positive, and that is probably the only positive light on the horizon, quite candidly, is the fact that the funds will now be much larger. Venture capital is still a relatively young industry in Canada compared to the U.S. One of the things we've learned through this is that starting a great number of small funds was not the right way to go, because you didn't have the financial clout to invest big ticket items into one company and you couldn't afford the right expertise, so we spread a lot of the money around to a lot of small funds.

I think what everyone is saying today is, yes, let's raise more money, but let's do it in much larger funds and much more capable funds. I think that is going to be a plus for the industry.