Public Accounts Committee on Sept. 29th, 2016

[The Chair, Conservative, Kevin Sorenson]

Mr. Botham, please.

[Richard Botham]

There are two things.

With the difficulty that was referenced to get participation, I believe, and I can be corrected by the Auditor General and his office, that is in reference to investors. I think what you are referring to is the selection of fund managers. That's just one of the—

[David Christopherson, NDP, Hamilton Centre, ON]

The two aren't related? The investors weren't looking at the way you were selecting the fund managers and having a problem? It's totally unrelated?

[Richard Botham]

I think the criticism of the process is in relation to the selection of fund managers rather than.... The investors are a separate issue.

[David Christopherson, NDP, Hamilton Centre, ON]

Okay. Fair enough.

[Richard Botham]

With the selection of the fund managers, the rationale for including that was twofold.

This was a process that we were developing, in part, as we went. There were significant uncertainties with the reactions of investors. We were trying to make this a process that would meet a perception test in the market for the final outcome and who was selected, and that the fund managers would be seen to be credible.

We wanted to build in flexibility for lead investors to have a role in the selection of the fund managers. If government alone selected fund managers, and then went out to private investors—pension funds, banks, corporations—and said, “Please commit $100 million to this fund manager that you have had no role in selecting or vetting”, then we would have had even more difficulty in raising funds than we did with the challenges we faced that have been highlighted.

We did try to adhere to the normal standards of disclosure, openness, and transparency, which a standard government procurement would follow, knowing that this was not a standard government procurement. Governments were committing, in the end, a small proportion of the capital under management. For every $1 of government funding, the private sector dollars were three times that. That was the reason for that.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much.

We'll now move back to the government side, and we will go to Ms. Shanahan, please.

Ms. Shanahan, you have seven minutes.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Thank you very much, gentlemen, for being with us today.

Thank you, again, to the Auditor General for reminding us what our role is here, and that is not to question policy, much as we might want to question policy of a previous government. The fact is that we are here to review how the policy was undertaken, how the program was undertaken. It really is a learning exercise for us to see if there are any changes we need to make to where the existing program is now, and then what we would want to do in the future.

I get that even though they are big numbers and it's disconcerting, costly, and so on, we're talking about venture capital and new businesses, and there is a cost attached to searching out those new businesses. Not all of them are going to make it—a bunch of them will fail—but we're hoping we're going to get that next Google, are we not? We're hoping that we're going to really encourage the ecosystem here in Canada, so I get that.

That being said, what concerns me is that with regard to the public sector participation, the government's participation, no exit strategy was chosen.

My first question is for the Auditor General.

You mentioned in the report that the absence of early exit options for the public sector partners “could send a message that the public sector's participation is intended to be permanent”, while the intention of course is that we would get out eventually. Could you please explain that a little bit more for us?

[Michael Ferguson]

I think fundamentally we were looking to see whether there was that type of an exit strategy. We had seen that, perhaps, in models used in other places, and we just raised the issue so people would be aware that some could see the lack of a structured exit strategy as a signal that perhaps the government was planning on staying in on a more permanent basis.

I'll ask Mr. Domingue if he has anything else that he'd like to add to what we've already stated there.

[Richard Domingue]

Mr. Chair, I think one can see an exit strategy as the ultimate performance indicator. When the government decides that the system is sustainable enough and the ecosystem is led by the private sector, and it's time for it to divest itself of the investment made by the taxpayers, that's the ultimate performance indicator. It's in that context that we suggest that next time, if there is ever a follow-up to this VC initiative, maybe you'd want to consider an exit strategy.

The way the VCAP was designed did not allow for that, but next time, if there is a follow-up to more public funding in the VC world, maybe you'll want to consider that ultimate performance indicator, which is the exit strategy.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Thank you very much.

I will continue, then, with the gentlemen from the Department of Finance and from the BDC.

We have money invested right now and I'm sure we're not the only ones who are concerned about how those 126 companies are doing and how they're performing. What are the performance metrics being used now?

[Richard Botham]

I'll turn that over to my colleague from Innovation, Science and Economic Development, because their ongoing role is to develop that kind of framework, to report on it, and to make that information public.

Just with regard to the exit strategy, the investment made into the funds of funds is not an ongoing investment. If there is a sense that there is an ongoing commitment that further funds are being made available, that is not the case. It is a single, one-time investment into funds, and for making that investment, there is a return.

There isn't an option for the government capital to be withdrawn from the funds early. That is absolutely true. It was designed so that the investment would actually be deployed and that returns would be provided back to the government. So it's not ongoing forever; it is within the life of those funds.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Would you comment further, then, on what would bring about an exit strategy? When would be the time? Is that a political decision, or...?

[Richard Botham]

I'm a little curious about the notion of an exit strategy, because the Government of Canada is active in the venture capital space through its financial crown corporations, each one of them. Export Development Canada, Business Development Canada, Farm Credit Canada, they are all active in the venture capital space.

Is there a time at which governments will get out of that space? Absolutely, if it is a self-performing industry, but that would be—

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

I don't mean the whole space; for that $400 million.

[Richard Botham]

But I'm curious as to why it's an objective for the $350-million investment in the funds of funds to be withdrawn before the investment is actually made and the returns are received. I'm not certain why that would be an objective.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

What is the expected life of the investment?

[Richard Botham]

It will vary, but it's 12 years on average.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Okay, so there is some timing around that.

[Richard Botham]

Oh, absolutely. It gets deployed in companies. Companies grow, they pay back their investors, and as an investor the government gets a return.

That's just a bit of context, I guess, from my perspective.

[The Chair, Conservative, Kevin Sorenson]

Yes, Mr. Padfield.

[Christopher Padfield, Director General, Small Business Branch, Small Business, Tourism and Marketplace Services, Department of Industry]

Mr. Chair, just to be clear, we have a performance management framework for the initiative. We're happy to share it with the committee, if they want to see it afterwards.

The framework is really built around three key themes: how the VCAP is impacting the venture capital ecosystem; how it's supporting the underlying companies; and how it's building the next calibre of fund managers in Canada. We have a whole series of indicators. It's been complemented by some of the recommendations that the Auditor General made in his report really targeting down in terms of some of the performance of the actual underlying companies and those things. It gives you a bit of a flavour of how much follow-on investment we're seeing for funds after the VCAP and some of the performance of the actual firms within it.

I would be happy to share that, if that would be useful.

[Brenda Shanahan, Liberal, Châteauguay—Lacolle, QC]

Yes. Perhaps you could file that with the committee.

[The Chair, Conservative, Kevin Sorenson]

Thank you very much. Unfortunately, the time is up.

Mr. Godin, you have five minutes.

[Joël Godin, Conservative, Portneuf—Jacques-Cartier, QC]

Thank you, Mr. Chair.

It is my turn to thank the witnesses for taking part in this exercise.

What I find interesting is that this process was prepared in advance, announced and implemented in 2012.

I would like to thank my colleague for having pointed out the good work done by the previous government, but I think there is always room for improvement, and that is why we are here today.

The Office of the Auditor General recommended that the Department of Finance and Innovation, Science and Economic Development Canada expand the venture capital Action Plan's performance measurement framework by considering the inclusion of performance metrics.

How did the OAG develop this list of additional performance metrics? You refer to measures such as “recipient companies' export growth and their financial performances, new patents and patent citations; the number of new or additional key investment personnel and lead investors”.

I do not want to repeat what is in the report, but how did you develop this list of additional performance metrics?