Public Accounts Committee on Sept. 29th, 2016

[TJ Harvey, Liberal, Tobique—Mactaquac, NB]

What I'm saying is that at each point along the way—I understand that all the money does not flow through all at once—and each time that money is committed from the federal government to this fund of funds, as its portion, there's still a cost associated when that happens over the life of the fund of funds. There's still a tangible cost there, along with the cost of administrating that fund, right?

[Richard Botham]

Which is built into the capital cost, but I take your point.

[TJ Harvey, Liberal, Tobique—Mactaquac, NB]

There is a tangible, calculable cost.

[Richard Botham]

My assertion is that it's not calculable. It is in the abstract, but are we going to look at the 90-day bond that's released, the 10-year bond that's released, the 30-year bond, or the 50-year bond? Which one will be used? When governments go to the market to raise money, they do not tag that debt to a specific expenditure. It's used to cover government expenditures over time. In principle, I completely understand what you're saying. There is a cost to servicing debt, but it's not a calculation that can be made in respect to an individual dollar that is spent or invested.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Harvey.

I will now move to Mr. Godin.

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

Mr. Chair, I think that Mr. Harvey has a good question. There is in fact a cost. Now we have to see how that cost is calculated and on what basis. I can appreciate that you have not yet determined how the cost will be calculated, but it is certain that there will be one. We put out $400 million in 2012, and when the time comes to reimburse that amount, the return may not be at 12%—if 12% is the target—because we will not have paid any interest since 2012. I have some understanding of Mr. Harvey's question.

My question is about venture capital. I think that for our society, this financial lever to start up businesses is an investment. It is important for us as a society to encourage innovation, and it is in my opinion one of the missions of Innovation, Science and Economic Development Canada. In terms of results or percentages, your success rate is surely not 100%. What is your level of success?

In other words, of the businesses you have helped, what percentage unfortunately failed, and as a consequence caused the department and private partners to lose money? There are businesses, like the Googles of this world, that have prospered and succeeded, but there are others that unfortunately failed. Can you give me some indication? I understand that there's not much history since 2012, but have you noted any trends? Do you have any forecasts?

[Jérôme Nycz]

Thank you for the question.

We can track the performance of businesses and their lack of performance. Up till now there have been some successes, like Shopify, which was in the portfolio of one of the funds. That business was able to have a liquidity event. Up till now, four companies have failed. So they are out of the portfolio, they are a write-off for the funds. As the program progresses, some investments will not generate returns, but others will provide value added. There are companies that succeed well in the portfolios, and their investments will increase in value.

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

Will there be compensation?

[Jérôme Nycz]

That is the objective of the program. I think that the selection of the funds of funds was done well. I think that the funds that are receiving funding at this time have a good investment team. The return on investments this year is higher than 5%. When we launched the program or even when we performed the strategic analysis at the BDC, it was less than 5%.

So there has been an improvement in the return on that category of investments, which is very positive, because this is what will allow us to bring in other investors who may see returns in this area. There are some very encouraging preliminary signs.

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

Indeed, that is very encouraging.

Thank you.

[The Chair, Conservative, Kevin Sorenson]

Thank you, Mr. Godin.

Ms. Mendès.

[Alexandra Mendes, Liberal, Brossard—Saint-Lambert, QC]

Thank you very much, Mr. Chair.

Let's go back to The Globe and Mail article, because I would like to conclude on a positive note.

Gentlemen, you have certainly provided a lot of answers. I had several questions. I have to say that this is not my area and I was a bit lost, but I greatly appreciated the tenor of The Globe and Mail article, which provides a good explanation of the report that was released yesterday.

I'll just go to the last paragraph of the article which talks about the choices of a fund or a fund of funds, or whatever you want to call it, that are going to be made for the next stages. They mention that 79% of the money has been committed to ICT, information and communications technology, and that there's a certain preoccupation with that and that not enough has been put into the clean energy sector or the life sciences sector.

Have you been looking at this? Is this something where you would like to make some changes?

[Jérôme Nycz]

Seventy per cent of investment in venture capital is in the ICT sector. That's the industry norm. The funds of funds have some specificity in terms of areas of focus. HarbourVest is an ICT fund. Kensington has an ICT and a clean tech objective. Teralys has an allocation for a life science fund. We're seeing a normal distribution being established in terms of fund investments. So these funds of funds are making investment in different sectors. Genesys is one life science fund that got some fundraising from the VCAP and you're going to see an increased diversification.

There was a great pent up demand in 2012 because the fundraising was very difficult and some of the funds were IT funds. They got funded quickly, and now you're seeing other funds approaching and establishing relationships, so we're confident there will be diversification, and we're seeing it right now.

[Alexandra Mendes, Liberal, Brossard—Saint-Lambert, QC]

Apparently there's perhaps a possibility of a VCAP2, based on what the article says. I presume that would be based on a somewhat measured evaluation of success. Would you say the department has judged that this has been working well if there is this possible enthusiasm for a VCAP2?

[Christopher Padfield]

I can't speak to ministerial decisions as to whether or not they'll move forward with a second round. That's really for ministers to consider.

[Alexandra Mendes, Liberal, Brossard—Saint-Lambert, QC]

Can you speak to your general satisfaction with the way the fund has been managed?

[Christopher Padfield]

I think for the early indicators, attracting investment and bringing in fund managers, we've checked off a lot of the initial intent of the objectives of the program. I think Jérôme walked through a number of the activities that are coming, such as new offices being put in place for some of the fund-of-funds managers. However, in the long run, we're still looking to see positive returns. We're still waiting to see where some of those longer-term indicators, such as performance measures around firm stuff as well as overall returns for the investments, are going to be. We're still very early days. We're not yet seeing any substantial return data.

[Alexandra Mendes, Liberal, Brossard—Saint-Lambert, QC]

Not yet.

Thank you very much.

[The Chair, Conservative, Kevin Sorenson]

Mr. Poilievre has a question. Then I will ask a quick question, on behalf of our analysts, with regard to the preparation of our report.

Mr. Poilievre.

[Pierre Poilievre, Conservative, Carleton, ON]

I have just a brief comment.

I do agree with Mr. Harvey that the cost of capital is calculable if only by a weighted average in the year in which it was borrowed. I mean, this year we're borrowing $130 billion as a government. It's in two-year, five-year, 10-year, and I think there will even be some 30-year bonds. I'm sure there's a way to weight the average interest on those and calculate what we're actually paying to displace this money over the course of the 12-year life cycle.

I think we've had enough discussion on that. I thank you for all of your answers.

I'd like to move on to the opportunity cost for the money leveraged from the private sector. Do you have any modelling over at Finance to determine if the money contributed to these funds by private sector investors is actually incremental business investment for Canada, or simply money that would otherwise have been invested in the Canadian marketplace but was directed here because of this government incentive that is available for venture capital investments and not available for other forms of investments?

[Richard Botham]

Boy, that's a complicated question, because it speaks to the intent of the investors.

I guess one way I would look at it is this. The incentive structure that was put in place was the subject of very intense negotiations between the Government of Canada, other governments that are participating in this, and private sector investors. From the Government of Canada's perspective, we tried to minimize the level of incentive and at the same time attract capital.

Private sector investors have invested because they feel that the amount they put into this framework will return to them something they could not get otherwise. Absolutely the incentive skewed the investment decisions. It was meant to do that.

[Pierre Poilievre, Conservative, Carleton, ON]

Right.

[Richard Botham]

A number of these are large, sophisticated investors who invest all around the world. An example is CPPIB. Did the money that CPPIB put into these four funds of funds come out of money that they otherwise would have invested internationally in ports, or airports, or roads? I guess so, because they have a fixed amount, but these are international investors, so I don't know how I could come to any calculation of the proportion they might have otherwise put in Canada. It also involves all the major banks, National Bank and some corporate investors.

It's tough for me to make that calculation, but I understand the question.

[Neal Hill]

Could I just tag on one specific thought?

[The Chair, Conservative, Kevin Sorenson]

Go ahead, Mr. Hill.