Public Accounts Committee on Sept. 29th, 2016

[Neal Hill]

That's correct, yes.

[Pierre Poilievre, Conservative, Carleton, ON]

When the private or class A investor is repaid, is it a share buy-back by the company?

[Neal Hill]

Rarely. The proceeds are generated, typically, when either the company goes public, and therefore their stock is liquid and the investors are able to sell their shares for cash, or they're acquired, and then the shares are then traded for cash or stock in the acquiring company, which then can become cash.

That's typically what happens. When the company down below reaches an exit event, as it's called, then those dollars flow back up to the fund that's invested into them, and that fund, in turn, pays their investors, one of which might be one of the VCAP funding issues.

[Pierre Poilievre, Conservative, Carleton, ON]

Right, so the class As get paid out. They get a prescribed return, and then the government gets paid out, and then the manager gets a bonus if he's done all that.

[Neal Hill]

Exactly.

[Pierre Poilievre, Conservative, Carleton, ON]

Okay. Then with respect to the question of early stage, as I understand it, the Auditor General defined venture capital as investments in early-stage enterprises. The Globe and Mail, though, had a report today on the VCAP and said, and I will quote from it, that the money also made its way down to “later-stage 'growth' investments (accounting for 35 per cent of the VCAP capital committed)”.

Can you explain how a third of the money went to late-stage investments if it was supposed to be for early-stage investments?

[Richard Botham]

The agreements with the fund-of-funds managers specify the types of venture capital firms that they can invest in based on those firms' strategies, and those strategies extend from the early stage through the growth stage. That was part of the program from its legal inception.

[Jérôme Nycz]

I would suggest that there's very little late-stage money available in Canada. Fifty per cent of the money going into the late stage is coming from American funds. The size of funds in Canada is pretty small, so even the stages are much smaller in Canada. The size of cheques going into the later stage are half the money that an American company would typically have. At each stage, it's half of the money—

[Pierre Poilievre, Conservative, Carleton, ON]

I don't mean to interrupt. It's just that the parameters of this program are very important, because we have extremely advanced capital markets in this country. I don't think there's any argument to be made that there is a generalized shortage of available investment for companies that are seeking it, across the economy.

The market failure purportedly addressed by this program is for venture capitalists and defined by the Auditor General in this report as “early stage”. Is there mission creep here into areas that go beyond the purported market failure that we were supposed to be addressing?

[The Chair, Conservative, Kevin Sorenson]

Also, in 2012, was it easy capital? Was there easy credit? Was there availability? Or was that part of the reason that we came out with this?

[Richard Botham]

I'll start. Sometimes there is a lot of variability in the way that people use terms. “Growth capital” has a different meaning for different actors. Is there mission creep? No, because there are legal contracts that define the scope of the investments that fund-of-funds managers can make.

I'll turn to Neal, who would know more, but generally we're talking about series A rounds. We're talking about $2-million to $10-million investments in companies. The growth stage in the context that we're talking about means still relatively early and relatively small tickets. Others would be talking about a growth stage that is far beyond what these funds are operating in.

Neal.

[Neal Hill]

Growth-stage venture capital is what we're talking about, this being a venture capital program. Out of approximately 60 venture capital funds that are active in Canada now, there are only about three that have as their primary focus the growth stage. One major one of those happens to have been in the market when this initiative got under way. There's a bit of an accident of timing in terms of the concentration in that stage so far. We actually expect the concentration at that stage to decline as we go forward and additional commitments are made to earlier-stage funds and we return to a heavier early-stage focus.

[The Chair, Conservative, Kevin Sorenson]

Thank you.

We'll move to Mr. Harvey, please.

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

I have only one quick question, really. I'm following up on Mr. Poilievre's earlier question. Seeing as how this money was generated initially from the consolidated revenue fund, is it not felt that it's necessary...? I follow Mr. Poilievre on this. I believe that we, as government, should be monitoring what the total cost of borrowing or the total cost of investing is.

The initial investments that went there came from consolidated revenue, and we should be monitoring that year over year, at least at different increments throughout the life of the investment, to determine what the total cost of that investment was. That's not only what the total cost was of the initial investment, but also the net cost associated with that investment.

Mr. Botham, I just want to ask you, do you believe that it is important or not important to Canadian taxpayers to know that they're getting tangible value for that asset, recognizing that venture market capital is a very risky business? I totally agree that the federal government has a responsibility to be in that marketplace, but I also think the Canadian taxpayers have a right to know how that investment is performing versus where that other money could have been.

[Richard Botham]

I think there's a narrow specific answer to that and a more general one. The narrow specific one is that the Government of Canada does not track a dollar of debt that is raised against a specific dollar of expenditure. It is not possible to say x dollar in x program is related to x dollar of debt raised. That's a difficult impediment to get over, but that being said, clearly Canadians have an interest in the debt levels of their governments, and that is transparent. There are costs to carrying that debt, and there is no doubt about that.

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

The cost incurred with borrowing and the debt in 2012...because that's essentially what we did. We borrowed the money that we invested.

[Richard Botham]

I'm sorry, it isn't quite that way as the explanations have happened because—

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

What I'm saying is the money that flows in—

[Richard Botham]

—but the money that flows in.... Sorry.

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

There's still a tangible cost to that money that was invested.

[Richard Botham]

There was money committed.

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

There was a tangible cost to the money committed.

[Richard Botham]

I'm making a distinction that's real. There's money committed. The money flows, as we've explained, over time through share purchases, some of which have happened, some of which will happen this year, and some of which will happen next year—

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

I understand that.

[Richard Botham]

—and as that money flows in, or prior to it flowing in, government goes and raises money in the markets. It's not a question of tracking down when the government went to the market in 2012 and the cost of that capital—