It is axiomatic that government has the power to do good in the marketplace and an equal capacity to do ill.
Of course, one of the reasons why PE and VC funds belong to industry organizations like Canada’s Private Equity and Venture Capital Association (CVCA) and Réseau Capital is to encourage the former outcome from legislative initiatives and to bend all efforts to avoid the latter.
VCs often focus on public policies that boost entrepreneurship and innovation or that lower barriers to financing startups. Harvard’s Josh Lerner has referred to poorly conceived schemes in this area as the “boulevard of broken dreams.” However, in Canada there appears to be a consensus that governments have been listening to market voices of late and that well-crafted programs, such as Ottawa’s Venture Capital Action Plan (VCAP), have learned from past mistakes.
Private equity investors also pay attention to the actions of lawmakers. In the United States, the Private Equity Growth Capital Council was founded in 2007 in large part because of emerging legislation aimed at PE firms. Proposals to tax carried interest or impose a higher burden on firms that go public convinced major buyout shops, such as The Blackstone Group, The Carlyle Group, Kohlberg Kravis Roberts and TPG Capital, to form their own advocacy body in Washington.
The CVCA these days has a full public policy agenda. Much of it is concerned with current or forthcoming federal and provincial programs to stimulate the venture capital market. The group also is keeping an eye on trends in international financial regulation – trends that have not yet “come home to roost” in Canada, said the association’s newly installed CEO Mike Woollatt.
Woollatt, who joined the CVCA in February, comes armed with an extensive professional résumé that includes several years spent in academe, in executive positions in business and in government. Immediately prior to his appointment as CEO, he served at Beaconsfield, a management consulting and public affairs firm that he also co-founded.
As CEO, Woollatt will be responsible for stick-handling public policy matters of interest to CVCA members. Along with performing advocacy and consulting with legislators on new initiatives, Woollatt told peHUB Canada that he will place an emphasis on educating government about the market’s positive role in promoting innovation and economic growth.
“Our job is to lift the veil and ensure that the public at large is aware of the many great things that private equity and venture capital firms do for Canada,” he said. “We are much more effective with policymakers when we are able to tell our story.”
Woollatt inherited many of the CVCA’s heaviest policy files from Richard Rémillard, the association’s executive director since 2003. Rémillard departed that job this year, though he continues to work for the CVCA on an advisory basis. He recently launched Rémillard Consulting Group (RCG), a firm that provides advice and research-based solutions to business issues and public policies involving Canada’s financial services industry.
On behalf of the CVCA, Rémillard has been intimately involved in formulating and communicating industry responses to the most significant public policy issues of the last decade – VCAP, Start-Up Visa, Section 116, the SR&ED program, tax credits for labour-sponsored funds, and countless others.
I recently had a chance to sit down with Rémillard and discuss the CVCA’s policy agenda and his perspective on issues appearing on the horizon. The conversation elicited his usual depth of knowledge and good humour, as well as one or two tidbits that might be news to readers.
The CVCA was consulted on the goals and design of VCAP. How important is it to spurring venture capital activity?
Rémillard: VCAP is absolutely critical to the future of Canadian venture capital fundraising and, by extension, the Canadian technology entrepreneurs and startups these funds support. The dollars involved are very substantial compared to what has been raised in the market in recent years. VCAP is also sending a signal to private capital sources, such as corporate and institutional investors, about the importance of venture capital as an asset class. Using public money, it has created incentives for private investors to enter or re-enter the market and ultimately replace government as a major supplier.
Of course, VCAP is an experiment and only time will tell if the Canadian industry can become self-sustaining. But there are encouraging signs. For example, the initial close of Northleaf Venture Catalyst Fund in January brought in Open Text and Canada Public Pension Plan Investment Board. VCAP is in its first inning and there are several innings to go before we see where things end up.
Rémillard: Many Canadian industry members have been anticipating the rollout and might have preferred it happening a little more quickly. Some people observe that it has been two years since the first mention of VCAP in the 2012 federal budget.
However, I think people also appreciate the time that has been put into designing an effective 2:1 matching program, and into negotiations with partners in the private sector and the provinces. I think they’ll agree that it’s important to get it right the first time.
Increasingly, we are seeing things happen. The June announcement by the Québec government that it will negotiate a VCAP-backed fund of funds with Ottawa is very significant. Market speculation has it that Teralys Capital will be the likely manager. There is also a strong expectation that HarbourVest Partners and Kensington Capital Partners may be next in line. What remains, in my view, is the opportunity for a fund-of-funds mandate that involves a partner based in Western Canada.
Start-Up Visa was launched just over a year ago. From your perspective, how important is it to financing innovation in Canada?
Rémillard: I believe that Start-Up Visa is going to have a growing impact on Canadian innovation and how it gets financed in future. Start-Up Visa was never intended to be a “big numbers” immigrant entrepreneur program, but rather an initiative that focuses on quality rather than quantity. At present, a sizeable number of members of the CVCA, the Canadian Association of Business Incubation and National Angel Capital Organization have registered to potentially back non-resident entrepreneurs. I expect that number will increase in the coming months.
A key target group for Start-Up Visa is foreign students who are currently enrolled at post-secondary institutions across Canada. In this community, you might find a number of talented young people who want to become company founders. In fact, the first application received by the program was made on behalf of foreign software engineering students attending the University of New Brunswick. The result will be the first venture-backed company in Canada created through Start-Up Visa.
After terminating some old programs, Ottawa in 2014 introduced an Immigrant Investor VC Fund pilot project. Does it also hold promise?
Rémillard: Yes, it holds considerable promise for channelling a substantial amount of money to Canadian entrepreneurs and startups. Ottawa believes that there are many foreign investors who have financial resources that could be directed to a venture capital fund. The current thinking is that we could capitalize a $100 million co-investment fund targeted to early-stage opportunities. In this scenario, individual immigrant investors would commit around $2 million apiece.
Canada-wide consultations about the nature, structure and goals of this very interesting public policy initiative are just winding up. The idea has a precedent in Singapore, so we have an international model and some experience on which to draw. And there may be more than $100 million out there for this kind of partnership. However, there are questions that need answering about how many investors can and should participate, who the fund manager may be, the program’s market scope, etc.
I believe the CVCA’s long-time engagement in business immigration issues has opened up a whole field of endeavour for the industry where opportunities exist at multiple levels. The interface between immigration and venture capital is a testament to the global nature of investing in today’s flat world. Start-Up Visa and the potential immigrant investor fund are examples of this.
Many Canadian GPs believe that the removal of Section 116 from the federal Income Tax Act in 2010 (and related measures) has impacted cross-border deal-making. Do you agree?
Rémillard: There’s no doubt about it. The elimination of Section 116 really opened the doors to foreign investment in Canada’s private equity and venture capital industry. You can see the results in the annual and quarterly market statistics produced by Thomson Reuters for the CVCA. You also hear of many individual examples of improved opportunities for syndicating deals with American and other foreign funds.
Removing Section 116 from the tax code was a major victory for the CVCA and its members. Prior to 2010, we had for several years been encouraging tax authorities in Ottawa to reconsider the measure. And we found a lot of support for our position inside the federal government and among organizations on both sides of the Canada-U.S. border. I think that’s because removal of this unnecessary law was clearly a win-win objective. This allowed us to persevere and speak with one voice.
The CVCA has expressed concern about plans to end federal tax credits for labour-sponsored venture capital funds by 2017. Why?
Rémillard: Many people were puzzled by the 2013 federal budget’s announcement about the labour fund tax credit, especially after what happened in Ontario. I believe Ottawa’s decision to phase out the federal program poses a real risk of constricting the supply of venture capital in Canada at the very moment when VCAP is being implemented to improve supply conditions.
I think it’s also important to note the crucial role that the Fonds de solidarité FTQ and Fondaction CSN have played in the fundraising activity of Canada’s venture capital industry. They have consistently acted as limited partners to national partnerships, not just Québec-based partnerships. So why run the risk of losing them and other retail funds? Also, if federal policymakers seek to bring more stability to Canadian market supply, why cut off retail investors as a key source of capital?
It has been said that Canadian private equity benefits from comparatively light regulation. Do you think the burden is substantially less than in other countries?
Rémillard: I believe the Canadian private equity and venture capital industry stands out from the broader financial sector, which is under threat of “super-regulation” by an army of domestic and international supervisors. I recently wrote about this topic in an article for Inside Policy, the magazine of the Macdonald-Laurier Institute. Generally speaking, my view is that the post-financial crisis move toward “super-regulation” has the potential to stifle all forms of financial innovation.
Fortunately, our private equity and venture capital industry has not been impacted by this trend. Neither have they been the target of specific taxation or disclosure requirements raised by governments in the U.S. and other countries. On this point, Canada has been an island of sanity in a world gone mad. When private equity and venture capital funds are thriving, they are a vital source of innovation and growth in the economy, and the last thing we need are new layers of regulatory oversight and compliance costs that will inhibit activity.
Photo of federal parliament courtesy of Shutterstock
Photo of Mike Woollatt and Richard Rémillard courtesy of Canada’s Private Equity and Venture Capital Association