Thank you, Mr. Chair.
Since you've already introduced my colleagues, I won't do that. We certainly represent a team that worked on both the analytical aspects as well as the development, implementation, and ongoing management of the venture capital action plan initiative, or as I'll refer to it, VCAP.
I would like to take a few moments to provide you with a bit of the context for the initiative, some of the process elements that led to the development of the initiative, and some of the preliminary results.
In 2010 and 2011, McKinsey and Company, on behalf of the BDC, and the expert panel reviewing federal support to research and development, which was chaired by Mr. Tom Jenkins, examined the venture capital industry in Canada and found that there was a significant financing gap.
It was largely attributable to key structural challenges facing the venture capital market, including a shortage of experienced managers, subscale fund sizes, and a lack of institutional investment in the asset class. These factors led to persistent low returns, decreased the attractiveness of this asset class, and subsequently limited firms' access to venture capital financing.
The BDC also assessed the forecasted demand from Canadian fund managers looking to raise funds, as well as the forecasted supply of venture capital, and confirmed that there was a significant gap. While the BDC had been supporting the venture capital industry for some time, it was recognized that new approaches would be needed to address the structural challenges in the market.
These analyses led to the announcement in budget 2012 of a commitment of $400 million for venture capital activities, for which the government would conduct further analysis before defining its approach. The government rolled out an extensive consultation process, receiving 75 submissions through an online portal, and hosting meetings with more than 250 industry stakeholders in Toronto, Montreal, Vancouver, Calgary, and Halifax, which included a number of members from Réseau capital and the Canadian Venture Capital and Private Equity Association.
In addition to these domestic perspectives, meetings were also held in Boston and Silicon Valley with a number of top-tier venture capitalists and other participants in the market. The government also conducted analyses on international best practices in Israel, Australia, Europe, and the United States.
As with any consultation, while there are differing opinions, consensus formed around some of the following overarching themes, which informed the design features of the venture capital action plan:
The new approach should be private sector-led and market-based, focused on demonstrating superior returns to investors. Although welcome, the funding announced in budget 2012 would be insufficient on its own to create a sustainable industry, and would need to lever significant resources from the private sector. Institutional investors left the venture capital asset class due to poor returns and the absence of large funds that fit their investment mandates, and they would likely only return if incented to do so in a different kind of structure. Venture capital in Canada was shifting away from early-stage investments towards later-stage companies where it was perceived that risk was lower. The funding in budget 2012 should be deployed to increase the number of private sector-led funding sources for venture capital funding managers. Investment should focus where Canada has existing strengths, such as information technology, life sciences, and clean technology. Finally, some funding should be deployed quickly into the market, given the immediate capital needs of innovative companies.
In early 2013, the VCAP was launched. It included a commitment by the government of up to $350 million to create four new private sector-led funds of funds with private sector investors and interested provinces. It also included $50 million for investment in four existing high-performing venture capital funds as a means to quickly flow capital to the market.
Selection processes were designed to allow the government to leverage the knowledge, expertise, and capital of private sector partners. A private sector expert panel was named to lead a competitive selection process for the general partners to manage the funds of funds, and for the general partners of the high-performing funds.
The panel established the information requirements for applications, defined the selection criteria and evaluation methodology using industry benchmarks, and shortlisted candidates for in-person interviews prior to making final recommendations to the Minister of Finance. In the case of the selection process for the funds of funds, recommended candidates made presentations to and were vetted by initial lead investors. Fund managers were selected by all lead investors, including governments.
While the funds of funds have sectoral priorities—information and communication technologies, life sciences, and clean technology—these importantly reflected investor interests, fund managers' experience, and dominant market opportunities.
During the design of the VCAP, the government considered various venture capital models from international jurisdictions, including those that had incentives to leverage private sector investment. While a variety of incentive models have been used across the world in different jurisdictions, including those that allow the private sector partners to purchase the public sector position, the government chose a different incentive structure.
In addition to the incentive structure, a number of other elements were negotiated by all lead investors, private and public. Negotiated elements enshrined in partnership agreements include the selection of the fund managers and the compensation arrangements for fund managers, including management fees.
The VCAP has already been successful in achieving many of the intended outcomes. It has secured the expertise of four talented funds-of-funds managers, including HarbourVest, a U.S.-based leading global manager which has opened an office in Toronto, and Kensington Capital Partners, which has established a new office in western Canada. These new office locations are important, because venture capital tends to be heavily involved in its local market.
Although fundraising started early, investors wanted to commit only once fund managers had been identified and vetted. The VCAP attracted a spectrum of diverse private sector investors, many of whom were new or returning to the asset class after a long absence. Fund managers were successful in attracting sufficient interest from investors based in Canada. A critical mass of domestic investors is an important signal of confidence in the domestic market to foreign investors, and it helps VC fund managers tap a broader pool of investment.
The government's investments in the fund-of-funds model leveraged significant private sector investment, both at the fund-of-funds level and at the underlying funds level.
The four funds of funds have surpassed their target sizes and have raised a total of more than $1.35 billion in new venture capital financing, including more than $900 million from the private sector. Each fund met its fundraising target in less than 18 months, which compares very favourably with industry standards.
Yesterday, the Minister of Innovation, Science, and Economic Development released VCAP data demonstrating that, as of March 31, 2016, the VCAP funds of funds had committed $693 million of their total capital to funds and companies. This includes $555 million to 17 Canadian funds focused on different stages of company development and industry sectors. These 17 funds have gone on to raise a total of almost $2.5 billion for investments in entrepreneurs at the underlying funds level. In fact, 126 innovative, high-potential Canadian companies across various sectors all over the country have already received more than $420 million in financing.
You will have seen the Auditor General's report and the government's responses, so I won't reiterate those findings. Together, Innovation, Science and Economic Development, BDC, and Finance Canada have developed an action plan, which you have also seen, to respond to the recommendations of the Auditor General and follow through on those commitments. Should the government develop a new initiative similar to the Venture Capital Action Plan, we would certainly consider the Auditor General's findings and recommendations as part of our analysis and development.
I am pleased to note that the performance measurement framework has been updated and that VCAP data is available online on ISED's website. These address the Auditor General's recommendation on increased metrics and reporting.
I hope this information assists you in your understanding of the VCAP. We thank the Auditor General and his team for the report. We will act on these recommendations according to our commitments in the action plan.
We would be happy to respond to any questions from the committee. Thank you.