EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, November 2, 1995

.1109

[English]

The Chairman: I call this meeting to order.

As a background to this meeting, and I say this as a new chairman, I understand the committee decided to invite in the banks every quarter to review their progress with regard to lending policies to small business. However, as we recognized in the document that we produced last year, Taking Care of Small Business, the banks are far from being the only source of creative financing in this country, and labour-sponsored venture funds are an important and interesting innovation.

.1110

The report mentioned those funds a year ago, and some of the views were a little critical. One suggestion was that they hadn't done as much to get on with the task of investing as we might have hoped, so as part of our review of financial institutions we decided to add a couple of sessions and invite back members of your industry to give us an update on how it's going. Your initial presentations were interesting, but they raised all sorts of questions. That's why we wanted you to come back to talk to us.

I gather we may have had a slight miscommunication as to what you thought you were doing when you got here. We thought there might be a collective presentation that would last 15 or 20 minutes, but some of you thought that each of you would get 15 or 20 minutes. With a two-hour session, we do not have elastic time. I hope you have regrouped after discovering this slight misunderstanding, and that while we might not get through the initial presentation in 15 or 20 minutes, you will not take 15 or 20 minutes each.

With that, I'll turn it over to you. I invite you to sort yourselves out.

[Translation]

Mr. Fernand Daoust (President of the board of directors, Fonds de solidarité des travailleurs du Québec (FTQ)): Thank you very much, Mr. Chairman. I also wish to thank each of the members of this committee for making it possible for us to appear before them in the context of their work on access to financing of small and medium-sized Canadian businesses.

We represent four leading investment funds sponsored by the trade-union movement. My name is Fernand Daoust. I am the president of the board of directors of the Fonds de solidarité, the oldest and largest of these funds, which was created by the Fédération des travailleurs et travailleuses du Québec.

I am accompanied today by several people, including Mr. Raymond Bachand, the first vice-president, investment and operations, of the Fonds de solidarité.

Allow me as well to introduce to you my colleagues: David Levi, president and CEO of the Working Opportunity Fund of British Columbia; Sherman Kreiner, chief executive officer of the Crocus Fund of Manitoba; and Ken Delaney, president of the First Ontario Fund.

Our purpose in asking to meet with this committee was twofold. First, we wanted to ensure that Members have an excellent understanding of those principles and characteristics of the union-sponsored investment funds that reflect the concept of this financial vehicle as it was initially conceived and embodied in the enabling legislation, both federally and in most of the provinces.

The first part of my presentation will be based on a fundamental consensus reached by the four funds we represent as well as by the Workers Investment Fund, a new investment fund in New Brunswick which is in the early stages of development.

In our view, the characteristics I am about to outline describe an authentic labour-sponsored investment fund. I will show what distinguishes these funds from other venture capital institutions. Finally, I will explain how such a fund enables ordinary working Canadians to make a genuine contribution to social and economic development in all regions and provinces of Canada.

.1115

Our second purpose was to help provide Members with a better understanding of our particular investment funds than you now have. Accordingly, after my initial remarks, each of us will present an overview of the fund he represents, with particular emphasis on what makes his fund unique in its provincial context. And then, finally, we can have a vigorous discussion and exchange of views.

Mr. Chairman, Members, I beg your indulgence if our presentation is a little longer than what you are normally used to, but it is our sincere belief that in view of the examination you are currently conducting of the financing issues facing small businesses, it is essential that you have as much factual information as possible.

A labour-sponsored investment fund is a venture capital corporation that is sponsored by a clearly defined trade union body. It is established by provincial or federal legislation, and enjoys public finance and tax incentives and guarantees of various sorts. Like other venture capital corporations, labour-sponsored funds undertake to provide an equitable rate of return to their investors and provide venture capital in a diversified portfolio. In addition to this financial commitment, the genuine labour-sponsored funds share three attributes that differentiate them from other venture capital institutions.

First, investment decisions are made through a rigorous process characterized by the caution that is implicit in a commitment to meeting both economic and social goals. These goals commonly include as well a commitment to job retention and job creation; a commitment to promote regional economic development; the use of a social audit as part of a fund's financial analysis of firms that might be supported financially; and a commitment to changing labour-management relations within the companies supported by the funds.

The second defining attribute of labour-sponsored investment funds is a commitment to participation by a broad range of ordinary working people. This means distinct structures and marketing initiatives aimed at working people. It also means direct marketing to union members. Participation by working people entails a clear commitment to provide training in economic and financial matters to the employees of the companies concerned. It is essential not to underestimate the importance of this characteristic.

We help workers understand the processes and concepts associated with investment decisions and the actual impact of such investments. We educate people about the responsibilities and risks involved in their participation, and about the benefits they can obtain.

A labour-sponsored venture capital corporation can be readily identified by a look at its composition. A study by the Canadian Labour Market and Productivity Centre shows that, as of 1995, about 52% of investors are union members. I should also point out that in the case of the four funds here today, 63% of their members belong to a union.

These funds have brought into the Canadian venture capital market a hitherto untapped source of investment capital, namely, the money of thousands of working Canadians who would otherwise never have considered investing in this way. Indeed, in some provinces, labour-sponsored funds account for a significant proportion of the venture capital sub-market and, in some cases, virtually the only source of venture capital.

.1120

The third unique characteristic of these funds is a commitment to facilitating cooperation between management and unions. This can take many forms: representation of both management and labour on investment committees; institutional investments by business groups; promotion of participatory management concepts in financially supported firms, and so on. This philosophical commitment to changing the very nature of labour-management relations reflects an important fact: the labour movement's recognition that it plays an important role as an economic agent in this country and that the world in which we live and work is changing.

The four funds here today share a common commitment to promoting innovative approaches to labour relations. There is a direct correlation between the financial and economic education of workers and the introduction of participatory management mechanisms, on the one hand, and the ultimate productivity and competitiveness of the firms financed by the labour-sponsored investment funds.

Labour-sponsored investment funds have existed for about 12 years. My fund, the Fonds de solidarité des travailleurs du Québec, was the first to be established, in June 1983. It was founded by the FTQ because our central labour body was convinced of the appropriateness of more direct participation in capital markets in the wake of the 1981-83 recession. The FTQ leaders were looking for ways to foster economic development in Quebec. The result was the creation of the Fonds de solidarité, with a mandate to create, maintain and protect jobs in all regions and communities of Quebec, and to stimulate the development of small businesses in all sectors and regions of the Quebec economy.

Since that time, labour unions in other provinces as well as the federal government have followed suit, and 17 of these funds have been created in every province except Alberta and Newfoundland. Many of these funds, and certainly those represented here today, have emulated the Fonds de solidarité as their general model, while developing institutions tailored to the specific characteristics and needs of their own provincial economies, working people and philosophies.

It is important at this juncture to emphasize the fact that not all of the financial institutions describing themselves as labour-sponsored investment funds share in equal measure the attributes I have just outlined. We represent four of the leading labour-sponsored funds, sponsored by major labour organizations in all regions of the country that represent hundreds of thousands of working Canadians in virtually every industrial sector of our economy.

We believe that the major characteristics I have just described define what constitutes a genuine labour-sponsored investment fund and are benchmarks in ensuring that such funds reflect the integrity of this innovative and unique financial instrument.

Let us now turn to the issue that interests this committee, the financing of small and medium sized businesses in Canada. It has been a matter of record for a number of years that these businesses make a major contribution to economic development and job creation in all regions and provinces. We also know that many small businesses have difficulty obtaining financing from traditional sources, including the banks.

To understand clearly how we can have a positive impact in this connection, let us take a look at the actual mandates of our investment funds. One of the major reasons why some governments were led to authorize the creation of investment funds of this nature was to ensure that institutions in the venture capital market would pay more attention to underfinancing concerns, that is, would meet the needs of businesses experiencing real problems in obtaining financing. This meant providing seed capital, assisting micro businesses, carrying out projects involving small-scale financing and supporting high tech or knowledge-based firms.

.1125

Speaking for the four funds represented here today, we believe that all funds should be accountable on this score. Different labour-sponsored funds channel investments to small cap projects in various ways. For example, both the Working Opportunity Fund, British Columbia's labour-sponsored fund, and Manitoba's Crocus Fund finance projects of between $100,000 and $5 million in value. It should be noted that venture capital investments are not usually as low as $100,000.

The fund I represent usually directs investments to small cap projects through separately capitalized equity pools. We are mandated by our enabling legislation to support small and medium sized businesses and regional economic development. While we have always been active in this area, we are particularly excited about the new regional funds we are now establishing in various regions of Quebec. In all, 16 such regional funds are in the works. We just announced in October the formation of the first one, in Sept-Îles. At the municipal level we have already established local investment and employment development corporations, which are referred to as SOLIDE sociétés locales d'investissement et de développement de l'emploi. This network of regional and local funds will eventually include 96 SOLIDE covering all municipalities in Quebec. Twenty-five have already been formed and we should have 50 by the spring of 1996. We will use these regional and local financial vehicles to make investments ranging from $5,000 to $500,000.

Thanks to these regional and local funds, all segments of the Quebec population, and all regions, from the smallest locality to the largest metropolitan area, will be part of this network.

I should point out that it has taken many years ``nearly 12, in fact'' for the Fonds de solidarité to perfect this model and get it up and running. More recent funds, including those of my colleagues, are still at the initial stage in their efforts to increase the number of small investment projects.

Many knowledge-based and high-tech companies have very few employees. And many of them encounter major difficulties in convincing the traditional sources of financing, such as the banks, that they have a commercially viable product that is worth investing in. Yet the so-called ``new economy'' is based on technology, knowledge and information. We should be promoting, supporting and developing the high tech sector more aggressively.

Venture capital by its very nature is in the business of taking risks. It is what might be called smart capital, with highly skilled and even visionary people at the helm who analyse the overall situation of the firm rigorously but in accordance with relatively sympathetic criteria. Take the Federal Business Development Bank, for example. This federal financial institution reports that more than half of all venture capital investments go to commercial projects of a technological nature.

As Members of Parliament, you are well aware that Canadian companies in general have a sorry record in research and development expenditures. Well, you should know that firms that receive venture financing devote substantially more of their activities to research and development, spending an average of 9% of equity on R and D. Research and development spending in firms backed by venture capital increased by 46% between 1987 and 1992.

.1130

As major players in the venture capital market, the labour-sponsored investment funds play a vital role in supporting research and development and the high technology sector.

Such support is often a crucial dimension in the funds' mandates. Working Opportunity, for instance, focuses on small and medium sized firms in non-traditional sectors and industries that will help diversify the economy of British Columbia and substantially boost its value-added component. The Fonds de solidarité, for its part, has created a network of nine specialized funds that focus on innovative firms in biotechnology, aerospace, the production of environmental goods and services, and other high tech industries. We also have a new $2 million technology transfer fund that aims to adapt international innovation to Quebec production. The Crocus Fund in Manitoba is mandated specifically to support technological innovation in production, and is encouraged to assist small businesses featuring labour intensive, high value-added production.

Another attractive advantage of venture capital investments by the labour movement is the strong export capability of many of the firms that are financed. In a global economy this helps to strengthen Canada's long-term competition position. For example, in British Columbia most of the companies supported by the Working Opportunity Fund derive more than 80% of their income from foreign markets. In provinces where exports are critical to commercial and financial development, such as British Columbia, Ontario and Quebec, the labour-sponsored venture capital corporations play an increasingly important role. And of course Canada's high tech sector ``one of the sectors that benefits most from union investment funds'' is extremely competitive internationally.

One of the underlying rationales for government support of these funds is that the funds are supposed to create, preserve and protect jobs. Given the nature of our institutions, we take this aspect of our mandate very seriously. For example, 167 investments made by the Fonds de solidarité were responsible for creating or protecting 15,400 jobs and generating close to $1 billion in value added in Quebec, according to a study by the Institut national de recherche scientifique.

Before I conclude these introductory remarks, I would like to refer briefly to two considerations that should inform any discussion of labour-sponsored investment funds.

First, the four funds represented here share a common commitment to bringing labour and management closer together. We favour the establishment of new mechanisms for constructive dialogue that can often result in joint decision-making. Improving the climate of labour-management relations is a fundamental objective of the labour-sponsored investment funds and their sponsoring organizations. These funds are major promoters of innovation in the workplace and the adoption of high-performance techniques which, as recent studies show, help to improve productivity and efficiency in the firms receiving financial assistance.

This commitment to a participatory approach to the management of the firm, an approach that pools the skills and knowledge, the aspirations and expectations of labour, management, and the community as a whole, is a defining characteristic of these investment funds.

The second point I wish to make is that, although we share many essential characteristics and some principles, each fund is unique. Each fund is the product of its own economic, political and social environment. Each fund has its own statutory framework and its own rules of accountability. Within the framework I described at the outset of my remarks, we have mandates, mechanisms, controls and goals that are peculiar to each.

.1135

That being said, I would now like to ask David Levi, followed by Sherman Kreiner and Ken Dalaney, to briefly describe their own funds, as you urged, Mr. Chairman.

My colleague Raymond Bachand will speak for a few minutes about the Fonds de solidarité, following which we will, I believe, have plenty of time for discussion and exchange.

Thank you very much, Mr. Chairman.

The Chairman: Thank you, Mr. Daoust. Personally, as a beginner on this committee, I found your presentation extremely interesting and no doubt my colleagues think the same thing.

[English]

Mr. Levi, would you like to give us the highlights?

Mr. David Levi (President and Chief Executive Officer, Working Opportunity Fund (EVCC), British Columbia): Yes. I'll be quite brief because my slide presentation is not working. We went with a high-tech model, and we need lights to come up from the bottom of the sea on the overhead projector. You have the new high-tech model where the lights come from the top of the projector.

The Chairman: Son of a gun.

Mr. Levi: You're saved.

I'll give you a brief outline of how we approach this in British Columbia and how it's a little different. Since we are all provincial funds, we have a little different focus in each area.

Let me start by saying that for us a critical aspect of these funds is the participation of union members in the purchasing of these funds. In British Columbia about 40% of the people who invest in our fund come from the union movement.

Now, we have a group of underwriters who are from the brokerage community. They tell us that if they were normally selling a product through the brokerage system, they would probably be selling to union members at the rate of less than 10%.

So because of the direct access we have to the labour movement and the commitment of the labour movement in these funds, we have clearly demonstrated that we're raising money from a new source. It's a new source of capital, people who would not normally be investing in the marketplace at all, or certainly would not be investing in equity that's going into small and mid-sized businesses.

So we spend a lot of time on the courses we provide for union members and materials for the union movement. I have to tell you it's access that has not often existed in the past. It would be fair to say that in the past there has been resistance by the labour movement to provide that type of access on business issues. I think the labour movement has gone a long way in bridging that gap, in allowing us to produce materials.

In your packages you'll find two of the booklets we have produced, one on the economy of British Columbia and how it operates and one on personal financial planning for individuals. We're also working on a third one on the venture capital markets, on how small and mid-sized businesses succeed in that marketplace.

The Chairman: Colleagues maybe are wondering about the package. I think I see one of the packages, but they will be available. Colleagues who are not normally with us should let us know whether they would like them as well. We may have to increase the dosage for our regular members who are not here. That's the package being referred to.

Mr. Levi: In our particular case in British Columbia, the critical issue for venture capital or for equity capital for small and mid-sized businesses is in the diversification of the province. And so our concentration in B.C. has been to look at what we call ``the emerging economy'' or ``the emerging companies'' in the new economy that we all face.

In British Columbia we have had about ten years of seeding biotech, telecommunications and electronics companies. Only in the last three or four years have these companies become significant enough in size to have an impact in the aggregate on the economy of B.C.

Today there's about $1 billion worth of activity in British Columbia that falls into the high-tech sector. Most of that $1 billion is spent in the export of their products, whether software or hardware. Usually a knowledge-based component is driving that marketplace.

We add another key factor into all our contractual arrangements when we make an investment in a company: the company will provide for employee-share ownership in all instances. As we have said in the fundamental principles, we want to change the nature of how employment operates within these companies. We want to make sure these employees have a feeling and belief that the company is theirs, and that the company will do better because the employees have a stake in the company as well.

.1140

As was said earlier, we do investments. Our lowest investment to date is $250,000. Our largest is about $2.5 million. We do investments down to the $100,000 level.

I'm pleased to tell you today that I hope within about two weeks we'll be announcing our first regional fund in British Columbia, working with some of the community capital pools through Community Futures.

We have drawn a relationship with one community, and if it works, we will start to do it with other communities as well. So we will be able to provide capital in micro-enterprises regionally through the province. I am speaking of somewhere in the neighbourhood of $15,000, $20,000 or $30,000 for these individual investments.

Let me provide just a quick update. We've now invested in 17 companies, one of which we've sold. I'll tell you about that briefly, because it really represents what can go right if you do this properly.

We're up to about $18 million now. Since this was put together, some other investments have been made.

As Fernand was saying earlier, our companies do a lot of R and D. I would say that on average they do between three and ten times the national average for the amount of R and D. We have companies that spend 30% of their gross revenues on research and development.

So this money you're providing through the tax credits is going into research and development. And, of course, the export orientation of these companies means that we're bringing new dollars to Canada, not just recirculating old dollars here.

I want to briefly tell you about the structure we have so you can understand how we've brought business, labour and government together in this process. We have a board of directors made up of eight union directors. There are three people from the business community, and the shareholders themselves elect two investors to the board of directors every year.

We also have an advisory board of ten leading business people in the province, who sit with the board on all investment decisions. So they are actively participating in the decisions we make at the fund. It really is a partnership between those two.

Of course, we work primarily with the provincial government because it is a provincially regulated fund. They are involved as well in terms of the regulatory requirements and ensuring that we're actually making the investments that were intended.

Without prolonging my time too much, I thought that for a moment I might tell you a bit about a company with which we have actually gone through the full cycle. We invested in a company called Photon. Some of you may have heard of it in the last couple of weeks because they won the innovations award, the high-tech exporter of the year award presented here in Ottawa.

When we invested in it, this company was doing about $1 million in sales and had 8 employees. It has a small black box, which I won't describe to you, but it has to do with the new 500- and 1,000-channel universe cable companies are moving to in the next couple of years. They produce a product that is integral to that process.

Most of their sales - I'd say 95% - are outside Canada. They're into the United States. The Asian market and Central and South America also have a fairly big role in this company.

This was an unusual circumstance because we intended to invest for much longer, but in the year and a half we had invested in this company it grew to about 16 employees and $2.5 million in sales, again all of it export-oriented. At the end of that period, one of their partners asked if they could purchase the company. We agreed to sell our shares.

The next result was that our investors tripled the investment they got. We had $500,000 in this company and we received just over $1.5 million for our investment. The employees, who had an employee share ownership plan, did very well as well and will continue to be shareholders in the new company. The company is quadrupling its workforce to about 70 over the next year.

So this is a situation in which the increase in employment is going to be 50 to 60 people versus the 8 we started with. This is a fairly small company, a company expecting to do about $20 million in export sales next year. So it really is a win for everybody, including our shareholders. That, of course, is important for our shareholders.

.1145

That case is similar to most of the cases of companies we're involved in. Some of them will not work out, as everybody knows, because that's the nature of this business, but the companies we deal with have this potential for growth if they can attract risk capital. As you know, there is a shortage of risk capital, particularly in British Columbia, and we've experienced that for many years.

Let me offer a simple last statistic for you. In the United States venture capital pools exceed $500 billion; in Canada they are at $30 billion. So in terms of percentages, we still have a long way to go to be able to compete with the American venture capital pools.

Thank you.

The Chairman: Who's on third?

Mr. Sherman Kreiner (President and Chief Executive Officer, Crocus Fund, Manitoba): This is a little lower-tech presentation, so I hope the slides will work here.

The Crocus Fund was created by the Manitoba Federation of Labour in response to capital flight from Manitoba. Its primary objective is to retain Manitoba capital in the province and use it to create jobs in small and medium-sized businesses.

In its 1993 Framework for Economic Growth, the Government of Manitoba noted that access to affordable capital is a problem because of location, specifically identified problems faced by information and technology industries in accessing local capital. The report concluded that without a solution Manitoba would be constrained from building an idea-based economy.

During our first three sales seasons our fund has raised close to $24 million from individual investors, an extremely large amount given the population of Manitoba. About half of our investors are affiliated with the labour movement.

We think that part of the success has been the result of the fund's performance. Our shares have increased in value from $10 to $11.14 over the past 18 months.

We also believe that the bulk of the success is due to the fact that we've developed a dual-track marketing system. A portion of our sales was made by investment brokers, which is the same as with other funds in English-speaking Canada.

The second track, which we learned from the Solidarity Fund in Quebec, utilizes specially trained volunteer members of MFL-affiliated unions. These people are trained, they're licensed by the Manitoba Securities Commission, and they sell shares of our fund.

Creation of this second sales force produces a growing presence within the labour movement of individuals with a sophisticated knowledge of financial issues. It assures that a large representation in the Crocus investor pool will come from the labour movement.

Also, because we come from a small province, we have sought institutional investment in our fund. We've received that from the Credit Union Central of Manitoba, from a union and from some pension funds.

Mr. Bélanger (Ottawa - Vanier): How much?

Mr. Kreiner: Several hundred thousand dollars.

The bulk of our assets are invested in small and medium-sized businesses. We do not see our target investments as conventional venture capital investments. As a general proposition, we do not seek early-stage companies at the top of the deal pyramid, with the concomitant high-risk and high-return potential. The truth of the matter is that we believe few such opportunities exist in Manitoba. Rather, we seek existing companies that require capital to grow, whose balance sheets require additional equity to lever bank debt necessary to finance expansion. We provide that equity capital.

We also seek opportunities in companies that will become employee-owned and are disposed to employee participation in corporate governance and management.

Employee ownership maintains local ownership. It assures that major decisions affecting Manitoba business are made locally. It creates a mechanism for intergenerational transfer. When it's combined with employee participation, it increases competitiveness.

We are specifically designed and our legislation mandates us to seek to assist ownership transitions for successful companies that face a crisis because the owner is aging with no succession planned.

With regard to investment, we have dramatically exceeded our legislative requirements, with more than 70% of our assets invested in small and medium-sized businesses in three years. Our initial investment was in Infocorp Computer Solutions, a Winnipeg-based software developer that creates and markets point-of-sale software for retailers worldwide. In total, we have invested more than $8.6 million.

.1150

Two-thirds of our investee companies are in manufacturing, one-sixth are knowledge-based, and the remainder are in the service sector. Two-thirds are expansions, one-sixth are start-ups, and one-sixth involve internal acquisition by employees. Our investments support more than 1,100 existing jobs and will create 200 new jobs in the next year. Further, we have provided more than 500 employees with an immediate ownership stake in their companies, and we will provide that stake to the balance of the employees in our companies as part of our exit strategy.

We have pioneered in Canada an instrument modelled after the U.S. Employee Stock Ownership Plan, to transfer equity to employees by borrowing against the assets of the corporation. This was implemented for the first time in a transaction we just completed with Buhler industries, a 500-worker agricultural implements manufacturer in Winnipeg and Morden, Manitoba.

Our $1.2 million investment immediately transferred 5% of the company to a trust created for the benefit of all 500 employees. Mr. Buhler commented in the newspaper as follows:

This is a breakthrough for Canada. My goal has always been to turn the company over to the workers, and this process allows it to happen without any pain for anyone involved.

The fund also encourages participation through our 18-member CEO round table, which includes the CEOs of our investee companies and other selected Manitoba companies, and provides education, disseminates information, explores models of employee ownership and participative management, encourages the discussion of risks and benefits, and provides examples of best practices.

I want to close by recounting an event that occurred last week and I think clearly demonstrates the multidimensional value of labour-sponsored funds.

On Tuesday we received a call from the president of a Manitoba manufacturing company that employs 200 people in two facilities. The president said that the parent company had entered into an agreement to sell to a U.S.-based company, which he believed would completely close one facility - the one that wasn't unionized - and dramatically scale back the second one. He further indicated that as the leader of the management group he had been given the opportunity to match the offer, but that the parent company planned to accept the U.S. offer within 24 hours, and asked if there was anything we could do to help.

Based on our knowledge of the company, we concluded that an investment could be viable, and utilizing our corporate finance experience and our relations in the local community, we assessed the financing requirements for the deal, figured out what we ourselves could invest, and obtained expressions of interests from potential equity partners, institutions providing debt and government lending programs.

The next concern was the union. Labour relations were poor and the union was without a contract. The president felt that he could not make an offer without an agreement. The only positive to this transaction for the mistrusting union was the fact that we were involved. We were able to meet with the union, give our assessment of the situation, provide advice about how to structure a new agreement, and provide a framework for discussion of profit sharing and employee ownership alternatives that would permit union members to share in the company's success.

This framework permitted an agreement in principle to be reached before noon the next day. By 2 p.m., just prior to the board meeting that would have ratified the sale to the U.S. company, the management team, armed with a new collective agreement and our letter of intent to participate in and syndicate the financing, matched the U.S. offer.

The immediate response on the shop floor was profound. The vice-president of the company came onto the floor for the first time that anybody could remember, and went up to the union president and congratulated him for saving the company. The marketing VP took the time to introduce a significant new customer to the union leadership, and the president extended a 30-minute meeting of the workforce to three hours.

.1155

The end result of all this is that in Manitoba last week, at least 100 and maybe 200 jobs were saved because of a labour-sponsored fund. The jobs mandate of the fund prompted us to attempt a response. Our capital pool and our corporate finance expertise permitted a viable transaction to be structured. The special relationship with the labour movement, coupled with expertise in employee ownership and profit sharing, permitted a collective agreement to be reached.

Each of these pieces was essential. No other institution could have accomplished all of them. The end result will be not only the maintenance of a manufacturing operation employing 200 people, but a restructured company with a new level of employee involvement in ownership and corporate governance and a new tenor of labour relations.

The Chairman: What a great story. I don't know how you're going to top that, Ken, but I invite you to.

Mr. Ken Delaney (President and Chief Executive Officer, First Ontario Fund): In order to save time, I'll try to keep it short. I'll just talk to you, if that's all right. In the kits that you'll eventually get are copies of the slides that I was going to use - in both English and French - so you can catch up later.

What I want to talk about more than our record is our plans. We are currently in the capitalization phase. We began raising capital in February 1995. We got our sales people licensed and out selling in the middle of February, which gave us two weeks of the RRSP season last year but no time to promote. Nonetheless, we did raise a couple of million dollars, so we're gearing up for our first real marketing campaign this year.

First Ontario was created by a group of trade unions and people from the cooperative sector. It was created because the unions and the co-ops saw the need in Ontario for an alternative source of capital. Ontario, as you know, has gone through some intense industrial restructuring during two recessions over the last 15 years. That has forced unions and those interested in establishing alternatively structured entities to become much more sophisticated.

My experience with the steelworkers union around the buyout of Algoma Steel, and the paperworkers union with the buyouts of St. Marys Paper in Sault Ste. Marie and Provincial Papers in Thunder Bay, tells me and others that the labour movement and co-op sector has tried to rise to the challenge presented to them by the intense restructuring that we've seen. Despite this increase in sophistication, however, there are still a lot of barriers to using worker ownership and expanding the roles that labour and co-ops have in helping the economy respond to international pressures.

We were able to save Algoma Steel primarily because the creditors collectively stood to lose $800 million if the thing failed, as well as thousands of jobs. Basically, the entire community of Sault Ste. Marie would have been threatened.

With small and medium-sized enterprises, that's not the case. When Algoma Steel is threatened, all of the chartered banks with a stake have to stand up and take notice, as do both levels of government. Small and medium-sized enterprises, which is where most of our job creation is, do not have the same resonance and do not get the same response.

.1200

The same kinds of opportunities exist, however. Algoma has been a tremendous success. Those of us who were involved are all very proud of what has happened there. But I have seen many opportunities like Algoma, on a smaller scale, missed because there was no source of capital able to step in. I think the co-op sector and the trade unions that are involved in First Ontario decided to establish it based on experiences like these.

There are three defining characteristics of First Ontario. First, we're going to market heavily to the members of the sponsoring unions and co-op members, through credit unions, in the province of Ontario. In our first year, 75% of the capital we raised came from trade union and co-op members.

The second defining characteristic for us will be our unique investment mandate. We're going to specialize in worker ownership, establishing cooperatives and restructuring. This is an area where Ontario is lacking. There are many other venture capital funds in Ontario. Many of them specialize in start-ups and some specialize in medical products and various high-tech things. But capital for restructuring is much harder to come by, so there's an important niche we intend to fill.

The third defining characteristic is that we have tried to build on the experience and success of the other funds represented here with me at the table. We've relied extensively on the Fonds de solidarité des travailleurs du Québec. It has been very helpful in giving us advice on the investment side and helping us learn how to market to our members. From the Crocus Fund in Manitoba we learned about licensing the union people and getting them out to sell. David helped us strike a deal with the credit union system. So we have relied on them extensively, and therefore, in many ways we will ultimately look similar to how they look now.

First Ontario will generate a new source of investment capital. The unions sponsoring First Ontario represent 185,000 union members in Ontario. In addition to that we will be marketing through credit unions.

This will be a brand-new source of venture capital, and for many people, if the experience of the FTQ holds true in Ontario, investing in First Ontario will be the first RRSP investment they make. We will try to reach these people in a unique way, by training local union people and giving them a special licence to go out and sell. It will be particularly helpful in isolated areas and in workplaces that are situated where people would otherwise not be able to make these kinds of investments because the traditional channels of brokers and financial planners are too far away.

I've touched on our investment mandate briefly, but I just want to give you one example of a missed opportunity. There was a small furniture manufacturing company we tried to save about four years ago in the wake of the free trade agreement being signed and the rapid rise in the relative value of our dollar versus the U.S. dollar.

The furniture industry in Ontario was protected by a 17% tariff, and furniture was on the accelerated tariff reduction schedule. So the combination of the reduction in tariffs and the swing in the value of the dollar meant Canadian furniture manufacturers saw a relative cost swing of 30% versus their American competitors. It meant there was going to be a restructuring and a shake-out in the furniture industry.

We represented the workers of the company we were trying to save. It was a very prudently run family-owned business at one time and had a pretty attractive balance sheet. Its competitors were more inefficient with higher-cost structures, problems with distribution channels, etc., but they were highly leveraged, and therefore their creditors had a lot at stake in trying to keep them alive. They were able to push the furniture company we were trying to save into liquidation. The company managed to get 85¢ on the dollar, which is pretty generous in a liquidation situation.

Unfortunately, that was a case where capital markets didn't produce the right result and the more efficient facility went down. We had a very good restructuring plan and it was a matter of days trying to keep this place open. We had a plan to develop a new market. Unfortunately it went by the way. I believe that if a fund had been available this more efficient enterprise would certainly have been able to succeed.

.1205

With respect to worker ownership and co-ops, there are other barriers that really shouldn't be there. Even when we did the Algoma deal, I remember as part of the structure we created special voting shares that we held in a cooperative. All workers at Algoma were members of the cooperative, and that's how they voted those shares. When we presented this structure to the other players around the table, someone said to me, ``Ken, haven't you been reading the papers? The Berlin Wall has collapsed.'' What we thought was an innovative structure turned out to be a matter of ideology with some of the players.

Although there is plenty of evidence to suggest that worker-owned companies and companies where employees do have a piece of the equity perform much better and have high levels of productivity, there are barriers to those trying to establish those kinds of enterprises.

I think there's an important investment niche that we can move into. It's certainly a similar problem with co-ops. When we were doing the Algoma deal it was impossible to find anybody around the table who had ever dealt with a co-op before and knew how to structure one.

When we do our investments, like the other funds here, we not only look at management skills, the rate of return, the business plan, etc. We also look at the firm's commitment to training, working cooperatively with its employees, and health and safety practices, which is another thing that distinguishes us from other funds operating in Ontario.

The sponsor support and belief in the project is quite high. The sponsors advertise the product for us through their own trade unions and co-op publications at no charge. They work with us to help us market the product to their members, and significantly they will also be an important source of deal flow.

Ultimately, if we can work with the unions and co-ops to improve the nature of the relationship between them and their employers, we will learn about investment opportunities as those respective employers plan an expansion or get into financial trouble, etc.

We hope to be able to build an effective communication channel to exploit this, which will enhance the economic viability of all the enterprises that employ the members of the sponsors, and from our perspective give us privileged access to some good investment opportunities.

Our sponsors are, just for your information, the United Steelworkers of America; the Communications, Energy and Paperworkers Union; the Service Employees' International Union; the Ontario Workers Cooperative Federation, and the Power Workers Union.

That's the First Ontario Fund, and now I'll pass on to the next speaker.

[Translation]

Mr. Raymond Bachand (First Vice-President, Fonds de solidarité des travailleurs du Québec (FTQ)): Good morning.

The President of the board of the Fonds, in his general introduction, dealt with a number of aspects of the Fonds de solidarité in French.

[English]

So I'll move on to just a few highlights in addressing your question about where the fund stands now after 10 years of existence.

[Translation]

The Chairman: It's 12 years now.

[English]

Mr. Bachand: I am a member of the business community. I have spent most of my time in business for the past 15 years. I have friends in the labour movement because I spent two years as chief of staff in the ministry of labour in the Quebec government about 20 years ago, and was chairman of the National Productivity Institute in the early 1980s. I've been a member of the board of directors of the fund since its inception. They lured me into being the executive VP about 10 months ago.

Where's the fund today? It has about $1.2 billion in assets and 250,000 shareholders. Who are those shareholders? It is not in your package, but I have some 1993 statistics that show 25% of our shareholders have annual revenues of less than $30,000 and only 15% have revenues above $60,000. The rest, or 60%, have revenues between $30,000 and $60,000, split fairly evenly by 10% splits with every $5,000 of revenue. These are Department of Revenue statistics for 1993.

.1210

We gather our money through a network of 1,200 local organizers to whom we pay no commissions. It is to be noted that two-thirds of our shareholders are unionized, and for about - I'm going from memory from a study that was done a few years ago - 40% of our shareholders it was the first time they had invested in an RRSP. Instead of taking only part of the pie, we've kind of enlarged the market for saving by workers.

Maybe it's slightly different with some of our colleagues, but we're not really favourable to worker ownership in their own companies, except maybe for a 5% or 10% ownership. The fund was set up by the FTQ 12 years ago because workers have their jobs with their companies and their pension funds with their companies. Their savings and RRSPs and things like that should be invested in their companies, but through a collective mechanism like the Fonds de solidarité. That's how we have tried to work. So every time we make an investment we have a clause in the agreement with the business owner saying he'll favour investment by the employees in the Fonds de solidarité. In that way the workers have less personal risk because all of the workers aren't in one basket.

We now have about $650 million invested in Quebec corporations, both directly and through 27 funds, reaching about 350 companies. Of the slightly more than 100 companies in which we're directly involved - and I don't have the statistics for the funds - 43% have assets of less than $10 million, and another 26% have assets between $10 million and $25 million.

I know one of the concerns of the committee is whether these funds go to small companies, so I guess that is the case.

What is our strategy today? I guess in the next two years it will be a three-fold strategy. We will continue, of course, our basic direct approach in the investment community. Our philosophy is to not take control, but be partners with the business community and its companies. We don't want control and we don't seek control. In a few cases we have gained control of a company by accident.

One of our success stories is Tripap, a Trois-Rivières pulp and paper company. It was formerly a Canadian Pacific Forest Products company that was closed down. Most of the workers had been there for 20 to 25 years and were 45 to 55 years old. We reopened the company completely by ourselves. There are now 400 people working there on four paper machines.

We reopened a few years ago when the paper cycle was not at its peak, as it is today. We lost money in the first few years. Today we've put the company, in a sense, on the block. We had a kind of auction for all the paper companies in Quebec. We announced last Tuesday that Uniforêt, which is a public company, will take control of the company. It will drive that company into the future, I think. That is the kind of thing we like to do. We will take control accidentally.

We're implementing local funds with an initial capital of $500,000. We put up $250,000 and the regional municipalities have to find $250,000 in the communities for seed capital of $5,000 to $50,000. Those are very small investments by the local communities. There are 25 local funds called Solide in existence today, and our objective is to have 50 of them before next spring. We will fund these local funds afterward and won't require matching grants from the community.

We're also implementing, as Fernand mentioned, 16 regional funds with initial capital of $6 million each for investments of $50,000 to $500,000. So we hope to cover small needs on a grassroots basis, $50,000 to $500,000 in the fund. It comes in at anywhere from $150,000 to many millions of dollars.

.1215

Now, these regional funds will be autonomous limited partnerships. Even though 100% of the cash comes from us at the onset, the majority of the directors of these funds will come from the region, and they'll be on their own for the investment decision. We believe that regional business and community leaders are just as intelligent as we in Montreal are and can make those investment decisions.

The Fonds de solidarité is taking a new sectorial approach. We've put up a team of top executives who are analysing our economy sector by sector. I guess with free trade our Canadian economy is completely changing and will change in the next years. They will try to find the key players, regroup and reorganize the companies as needed so they can compete with the global markets.

One of the needs we have identified in the last few months is for export financing. A lot of these companies have to fight in the world markets and in the American market. There are a lot of things that exist in export financing, such as la Societé d'expansion d'exportation and organizations like that. For every project, at the end you always need that 10% - $1 million, $2 million, $3 million, depending on the product - of real equity or real guarantee, which is not guaranteed by our company. Most of our small companies are still undercapitalized, so they don't have the means to get these contracts in the external markets, and they need that capital. That's what we will try to focus on.

One of your concerns we have heard is that we're too big and you should put a cap on these funds. I guess we have two answers to that. One is that in the Quebec economy the real unemployment is between 20% and 22%. If you add unemployment plus all the people on social security who are able to work, not the disabled, it would come to 20% or 22%. So there is still a lot of work to do in our economy to create jobs.

I think we have a cap in our law, and our colleagues have similar caps. We had to invest 60% of our net assets on the previous year's average to be eligible for tax credits, and there are penalties if we don't act. Our goal is to stay at 65%, and as long as we're reaching that goal, I think it's a fiscal cap. When the need doesn't exist we won't be able to invest. The natural cap is already in our law.

We do social audits in companies before we invest. They are done by our employees. We have a team of four or five people from the union movement. Having been a VP of corporate development for major businesses for the past 15 years, I can tell you this is the greatest due diligence I've ever seen, because you learn a lot of things directly on the floor about what's wrong and what's right for the company. When you tell the owner and the manager what's going on, they learn things from those social audits.

The last thing is economic training. I think it is a role unique to labour funds, and very different from venture capital funds. It is a real cultural revolution. In each company we invest in we have a two-day seminar every year, where we start with the union executives and the key workers. Basic training includes defining such things as balance sheets, P and L, cashflow and productivity. What do they mean? Who's your competition? Working with the company's balance sheets, a lot of times the CEO comes in at the end of the seminar to answer any questions. A lot of times, of course, the CEO is very adverse at first to this approach because they are his company's numbers and it's a private company. But most of the CEOs today are the greatest proponents of that, and large and small companies ask us for additional classes.

In 1996 we will spend about $1.5 million on what we call training and education. We're also training some union people who sit on these regional boards of directors, regional funds, and government institutions on basic economics and business structure. This cultural revolution is really coming from the business side. It's going on in our economy and in our companies.

We basically create trust between management and the union. Only a labour fund can do that coming in. When we tell workers what's going wrong they believe us and vice versa with management. They wouldn't believe any other consultant.

.1220

I've strayed from what's in the package, because I believe you can read it, to give you a few highlights of where the fund is today. Thank you very much.

The Chairman: I must say I'm glad you all ran over. It's a great story. I know my colleagues would like to talk to you as quickly as possible.

[Translation]

Since there is very little time left and many people are interested in this project, could we limit ourselves to five minutes each for the first round?

Mr. Rocheleau (Trois-Rivières): I would like to begin by thanking each of the witnesses for their contributions, including Mr. Fernand Daoust and particularly Mr. Raymond Bachand.

I would also like to thank the Fonds de solidarité des travailleurs du Québec for its action in terms of economic development in Quebec. One might even speak of the socio-economic development of Quebec and of Quebeckers. Gentlemen, you are entitled to all our thanks.

At an earlier point there was an allusion to my role as member for Trois-Rivières, particularly in regard to the Tripap case, the reactivation of the old Canadian Pacific Forest Products company, which had 1,200 employees and had shut down. Thanks to the masterly intervention of the Fonds de solidarité, which, if my memory serves me, invested $28 million to restart the operations, some 400 jobs were recreated. I am taking advantage of this opportunity to thank you, on behalf of the people of Trois-Rivières, for the extremely beneficial effect of your intervention in our community.

Where, in relation to the big funds, are the initiatives you plan to make regionally and municipally in each of the regions?

Mr. Bachand: I am not sure I correctly grasped your question.

Mr. Rocheleau: Traditionally, the Fonds de solidarité intervenes throughout Quebec and it has just decided to make a more specific intervention, if I understand clearly, in each of the regions. What will be the role of each of the levels and what is its philosophy of intervention?

Mr. Bachand: There are the SOLIDE, which are small funds. But let's take the 16 regional funds, one per region, which are given $6 million in capital and a board of directors. So it is a limited partnership. The tax system is very complicated in Canada, and you cannot do integrated taxation for companies. So you go for a limited partnership.

The boards are composed of nine members. The Fonds, the FTQ and the Quebec government each appoint one board member. The one appointed by the government is often a civil servant, because the government subsidizes the operating costs. The other members are business men and women and other leaders in the region. The board members are completely independent and approve investments that can range from $50,000 to $500,000, or up to 10% of the funds at their disposal.

The Fonds injects $6 million into each regional fund. We have our auditors, of course, who ensure we are proceeding in accordance with accounting rules. In addition, we establish a team of three senior advisors, each of whom is responsible for advising and training five boards.

The remainder of our resources are put at the disposal of these regional funds. Our market analysis department has studied a lot of companies and a lot of industrial sectors over the years. We have conducted market studies that might, for example, be in response to a request from the regional fund in the Mauricie region. However, these regional funds are completely independent in their decision-making in regard to which firms they will invest in, the amounts invested and how they structure their investment. It is venture capital, as it is in our case.

We do not control the board of directors. The board can appoint new members and go on indefinitely. The only control we exercise is to strike some names from a list of directors that the board submits to us, but apart from that they will be independent.

Does that answer your question?

Mr. Rocheleau: Yes.

Mr. Daoust: You should recall that Quebec, administratively, is divided into 16 major administrative regions. So Quebec will have funds in each of these regions. I am talking about the regional funds that were described to you by Raymond Bachand.

.1225

He spoke to you quickly about what we call the SOLIDE, the local investment and job development corporations. There are now 25 of these and the goal is to have 96. Why 96? Because Quebec has a coalition of rural municipalities, small municipalities, in an organization that is called the Union des municipalités régionales de comté, the UMRCQ, which you are well aware of.

In Quebec there are 96 regional county municipalities covering more than 1,500 small municipalities. Some cities do not belong to the UMRCQ, but to the Union des municipalités du Québec instead, but there are only a half a dozen or so of them.

I don't want to overwhelm you with statistics, but our goal is that within about 18 months the whole of Quebec will have, at the municipal level, very very close to the citizens, 96 SOLIDE and, at the regional level, regional solidarity funds.

Mr. Rocheleau: Let's take a look at the Tripap case, with the structure of a regional fund and a SOLIDE. Is the collaboration of the three institutions conceivable, or will you be aiming for three different market niches? Or could it be complementary?

Mr. Bachand: I think it will be complementary. There are a lot of small firms that we are not in contact with because they are really in the regions. That is why we are establishing regional funds that may invest between $50,000 and $500,000.

If we're talking about investments of $40 million and up, they will be made directly by the Fonds de solidarité. However, investments of that size are the exception. It scares us. We'll try to keep it down.

Mr. Rocheleau: In the course of our committee's proceedings, we have observed here, in Ottawa, a belief, no doubt legitimate, that the labour-sponsored funds in Canada cost too much to the public treasury and that the encouragement given to this kind of fund by the government and the taxpayers should be re-examined. This belief has been challenged earlier, but do you have a reply to make to these people?

[English]

The Chairman: We shouldn't lose sight of this very important point, but I'm also anxious to move along.

[Translation]

I don't intend to close the discussion. However, it is a very general point that is of interest to everyone. Perhaps we could come back to it toward the end.

[English]

Mr. Mayfield (Cariboo - Chilcotin): I would like to begin by thanking you for coming and talking about venture capital, because it's a word that's been used and we've heard people say they need a lot more venture capital, and here are some people who are actually involved in that.

I'm relatively new to the committee, and if my questions don't always quite hit squarely, perhaps you'll just readjust them and make sense out of them.

I'm wondering about capitalization and where your money comes from, I guess. The emphasis you have is on the union organizations behind this, principally, but where do you get the rest of your money? Where does it come from?

.1230

Mr. Levi: I can speak to it from British Columbia's perspective. The security commission there required that all sales were put through brokerage firms so that there's third-party advice.

In our particular case, we come from exactly the statistics that were being quoted a moment ago. Most of our investors are individual investors who are trying to decide what to do with the money they're going to put into their RRSPs, and they put an average of $2,500 to $3,000 apiece into the fund, which gives you an idea of the kind of investor we're looking at. People who are making between, I'd say, $25,000 and $50,000, maybe $60,000, would be the vast majority of our investors.

We have a special push within the labour movement, because they're not normal investors in this type of vehicle, and it has resulted in a lot of union members buying and providing equity to businesses, which they would not normally do. This is truly an investment vehicle for working people across the country.

Mr. Mayfield: Would a credit union such as Vancity, which I have some experience with - and I think maybe you do, too, Mr. Levi - take money from people and invest it in...?

Mr. Levi: I believe they will be this year for the first time. The credit unions have purchased or opened a brokerage firm across the country. So for the first time, credit unions will be able to sell the fund.

They're very rigid in British Columbia about the rules. They don't allow for the third-party sales or the different licensed salespeople whom they have in other provinces. It has to be done through the normal brokerage community. So we use a combination of the brokers...we have 800 lines advertising that process. There are a lot of people from the credit union system who have bought the fund, because I know from the credit unions that I've discussed with.... For those of you who don't know, I'm the former chair of Vancity Credit Union. This is why I can speak a bit to the difficulties of banking and the banking community being able to provide this kind of risk capital.

Mr. Mayfield: If I remember correctly, when I was in the credit union I saw some advertisements there about environmental funds or socially audited funds, and it seemed to me there was somewhat less return for money put through a fund such as that. Is this correct?

Mr. Levi: No. I was one of the founders of the Ethical Growth Fund, which is now part of a group of funds of about $400 million in size across the country. These mutual funds are invested in public companies, and statistically the returns on ethically screened funds are actually slightly above the average.

There are poor funds and there are better funds, but if you take the seven or eight funds, not dealing now with labour-sponsored funds but just the application of social screens on investing in public companies in general, as a majority they are above the midway point of other mutual funds. So, in fact, the returns are higher when you socially screen funds.

Mr. Mayfield: Just so you understand where I'm coming from, I think that what you're doing is important, and the focus of my question is how you can get more people to invest in venture capital.

I'm wondering about the social audits, the safety, the health, the environment and other things of this nature that are raised in the literature you sent out. Is this in addition to what, say, provincial regulations might have with regard to environmental concerns?

Coming from the Cariboo, we have a lot to do with the environment up there right now.

Mr. Levi: I guess the answer for British Columbia is there's no requirement in legislation for the social audit, other than that these funds were created to create and preserve jobs in general.

I think the process of having active people from the labour movement is to ensure that the work environment, the product, and so on that's being created has a long-term sustainability, and that's where the social screens become quite important.

A lot of the studies you'll find out of the United States - and there are some here in Canada, but very few in terms of employee-share ownership and, in particular, work of cooperatives - show much higher productivity gains from companies that operate this way.

Sherman might want to respond, because he knows it a little better than I do.

.1235

Mr. Kreiner: I just wanted to speak generally to the idea of what we call this. I think it's actually a misnomer to call this a social audit. It suggests that there's conventional due diligence going on on one side and then there's these social factors that are being evaluated for some unspecified set of reasons. We believe that the things we are looking at directly correlate to outcomes for the investor companies. If there's participation and if there's ownership, that's going to have an impact on the productivity and the competitiveness of that company. If there's a quality job, that's going to have an impact on the quality of product or quality of the service.

Most venture capitalists don't normally look at those things, but we think they are as crucial to the long-term viability of the company as the markets that the company has, the technical competency of management, and the amount of cashflow they have.

Mr. Mayfield: I was listening to you speak about the training. How is your cost recovery in these training projects managed? Is there a fee?

Mr. Levi: No, in our case we provide the training free of charge. It is an extra expense that we have, but we believe the long-term recovery is in the sale of our shares in the company. In other words, it'll make the company stronger, as Sherman was saying, and because of that it is of value. But it's not a value that we can put our finger on specifically.

Mr. Mayfield: It's a better deal than the Federal Development Bank, then, eh?

If I may, I have one more simple, elementary question. We've been talking about the Small Business Loans Act. Does the money that you invest...is that an investment or can this come under the act?

Mr. Levi: I don't know the specifics of the Small Business Loans Act. Our provision here is the provision of risk capital. The key component here - and I'm putting on both of my hats as a banker in terms of dealing with a $4 billion institution like Vancity and a labour-sponsored fund - is that the expertise in management at the two different organizations is completely different. A bank deals in secured lending, and so their relationship is whether you have a house, whether you have something rock hard you can put your hands on.

All of our staff is trained in assessing soft assets. And that will never change. There are micro-enterprises that will benefit from small loans, and that's what we're endeavouring to do with our first regional fund.

In terms of the companies that are going through the kind of growth we're involved in, they need the extra management capacity that we're able to provide. So it's very important that you have this group of people. I think that's a key difference in B.C. We now have a permanent full-time group of people who can spend their time helping these companies access markets and manage companies that are growing from 8 to 60 people.

The Chairman: I think I'm the master of flexible time here.

Mr. Mayfield: My question was short.

The Chairman: Absolutely.

Mr. Mayfield: I appreciate the answer.

The Chairman: The way in which I dominate this committee is that I ask the opening speakers to take 20 minutes. They go for an hour. Then I ask Mr. Rocheleau to speak for five; he goes for eight.

Anyway, Mr. Bélanger, go ahead.

[Translation]

Mr. Bélanger: Gentlemen, and particularly Mr. Daoust, thank you very much for your presentation.

We have received a document that is a statement representing an agreement between five investment funds. Why have the other 12 not adhered to this statement?

According to the documents we received from the Canadian Labour Market and Productivity Centre, in March 1995, there were 17 funds. Does this mean you didn't have time to contact the 12 others, or that they did not show any interest?

Mr. Daoust: I don't want to reread this statement, since you have it in front of you.

.1240

The groups represented here, and the one in New Brunswick, have met many times. We are all members, through our unions or our federations of labour, of the Canadian Labour Congress.

We know how to identify the basics, the very essence of these funds, and we would like all the funds, whoever they are, to adhere to this joint statement, insofar as they agree with the principles it sets out. Everyone can have some input, and where there are weaknesses they could be corrected.

In our view, this is the main thing; there is no ambiguity in my reply and no imperialism of any kind either. It is not a matter of telling anyone to merge with a particular fund. But it seems to us that this great innovative project ``I am taking the liberty of responding to other questions'' which is unique in Canada, incidentally, should be treated by everyone involved, be it governments or groups, with the greatest precaution.

There are some basic principles. We could talk in extenso about direction by a labour body, but, in our view, the union organization must be big enough to have a very positive impact, among other things in terms of economic training and, in addition to certain specific things, in terms of the impact on outlooks, behaviour and attitudes.

It is all very well to subscribe to the objectives, but you also have to have the means to prepare what is called in English a ``social audit'', to monitor and ensure that the development or venture capital fund has a proactive role. This is fundamental, as well. We are not bankers. It is not a gimmick to support just anyone. The fundamental goal is to bring the labour movement and the employers' movement together and to conduct economic training.

Mr. Bélanger: May I interrupt you?

Mr. Daoust: Go ahead.

Mr. Bélanger: I would like to ask you a question about point number III, a commitment to provide an equitable rate of return to shareholders.

I am curious to know what this commitment means for these five funds. How far does it go and where do you derive the necessary resources to secure it?

Mr. Daoust: I am going to ask my colleagues to respond. Raymond.

Mr. Bachand: An equitable return means that we're not looking to maximize the return. Our goals are job creation, economic development and an adequate return. We will never invest in a firm if we think we'll lose money. We are not an agency that makes grants or a welfare agency.

We aim for an adequate return. For us, this is a very informal rule. We say to ourselves that this is acceptable for the shareholders, given the tax credits. If the government gives tax credits, it's to ensure that we do a different job than the others.

.1245

What is acceptable for our shareholders is that the results be about 3% points less than bonds or certificates of deposit during the RRSP campaign. At that point the money is still coming in to us. If the disparity increases, it is lower. This year, in the Fonds de solidarité, we will have an exceptional return. You will see the results of our campaign.

In our investment attitude we are not necessarily, in all cases, like the traditional venture capital companies, looking at a 25% return on investment. We get a 15% return....

Mr. Bélanger: If there were a negative return in the course of a year, would the Fonds undertake to dip in some way or other into its reserves to guarantee the return of 3 or 3.5% you are referring to?

Mr. Bachand: This hasn't happened to us. However, with the size of some of our investments, it could happen. The reason is that 35 or 40% of our funds are invested in the money and bond markets, and secure the payment of our fees, which we are trying to reduce year by year ``we are down to 2.7% and we're aiming for 2%'' which guarantees a minimum return to the shareholder.

As to the investment portfolio, the return has already been negative, but not enough to eliminate the return and experience a loss. It can happen, especially insofar as we have some investments that are market valued. So, in the next recession, in the markets....

[English]

Mr. Bélanger: I have two quick technical questions. I could carry on for a long time on this.

How long is the capitalization period for the Ontario fund? When you started your presentation you said you were in the capitalization phase. How long is that phase?

Mr. Delaney: The capitalization phase is defined as the period before we make our first investment. We will begin to actively look for venture investments in March. We plan to have at least two or three by next September, so we'll be active by the summer.

Mr. Bélanger: Finally, in calculating the fund's assets - I have those five sheets, and thank you for the phone numbers; we might be in touch - do you include past return on assets? Is that a cumulative asset base or is it investment only?

Mr. Levi: In all cases I think it is the cumulative. There are slightly different formulas. Our formula in British Columbia, for example, is that 80% has to be invested over three years, so we have slightly longer to invest but a higher target to shoot for. That's unique to British Columbia. I think the others are all at the 60% by the end of the second year, so it varies.

Mr. Bélanger: You misunderstood my question. Your asset base for the working opportunity....

Mr. Levi: Yes, it's $78 million. That includes the profits that we have earned.

Mr. Bélanger: All right.

Mr. Levi: As time moves on, we're now at about $83 million. Most of that difference is now in the profits that we earned over this year.

Mr. Bélanger: I appreciated this presentation. Thank you very much.

Ms Bethel (Edmonton East): Your presentation was terrific. I've long believed that return on investment can be greater than dollars. As a former investment broker and chair of the city of Edmonton's sinking fund trustees.... I think Edmonton was one of the first cities in the country to have an ethical investment policy, so I really appreciate what you're doing.

However, there are a few things. In the economic profile of investments...I'd be interested in hearing about the return on investment and how it compares to traditional venture funds.

Mr. Levi: Our process at the Working Opportunity Fund is a little different than at Solidarity. Each has its regional focus. We are primarily engaged in diversification of companies, and the companies we are looking at are growing rapidly. We're not necessarily dealing with as much investment in existing companies, so we expect to see -

.1250

Ms Bethel: I understand that, but there are other venture funds that invest in the same -

Mr. Levi: I started there because we are in the area of where other venture funds, if they existed in B.C., would be investing. We expect similar returns on our investments and structure our investments in British Columbia that way because the return is available.

We view the tax credits as patience from the people who invest, which is an eight-year minimum for our investors, and for the risk. That's where they receive it. We try to get them a market rate of return on our investments because those investments are in high-growth companies. It's the nature of those investments.

Mr. Kreiner: I think the issue of a market rate of return is one that needs to be unpacked.

One of the difficulties for us in Manitoba is that if you ran a fund like a conventional venture capital fund and looked to get conventional venture capital rates of return for your investments, you wouldn't have any. There aren't any other sources of venture capital in the province, and where there have been public or quasi-public sources of venture capital that have attempted to function like conventional venture capital companies, they haven't put their money up. They are sitting on $20 million or $30 million and haven't put it up because there are no 30% deals there.

Ms Bethel: I understand what you're saying about regions, but if you go beyond regions -

Mr. Levi: I think what we're trying to say is that it varies depending on the situation of the province. In our case, the nature of the companies is similar to a venture capital return. You don't have that in Manitoba. They are looking at generational change, which will result in returns of 8%, 9% or 10% because the company won't experience the same amount of growth. It's a mixture of the two in Quebec, because they have more of a manufacturing base that they fund as well. They really are tailored to the different regions.

Mr. Kreiner: We have to go to the marketplace. If we don't get adequate returns, people won't invest in our funds. What's adequate is what they determine to be adequate, but if we continue to not produce, there are alternative investments for those individuals to make. We have to go -

Ms Bethel: You also said that in general you are dealing with an unsophisticated client.

Mr. Kreiner: I feel that with a labour-sponsored fund, particularly when labour people are involved in selling, the level of responsibility required to make sure people don't lose their money is significantly different from when a broker is involved on a commission basis, making investments and asking people to invest. Just as with Solidarity, our labour reps don't work on a commission basis. There's no financial incentive for them to make a sale.

Ms Bethel: I have two quick questions.

Who was it who commented about the difficulty the banks have in providing these types of funds? Can you quickly outline what those are and how we might deal with some of those difficulties?

Mr. Kreiner: The quick answer is that banks have difficulty making loans to technology- and knowledge-based companies. Many of the investee companies that we have come from those sectors. Once they get past their own money or their angel money, there are few sources for them to go to.

Ms Bethel: Are you taking the heat off the banks?

Mr. Bachand: Sometimes I come from the business community, where they get very aggressive about banks. Banks have difficulty lending on soft assets, but even in the traditional manufacturing sector - I think they haven't yet recovered from the shock of the recession. With a lot of the investments that we're looking at, even on what should be the bank's part, they're asking for a guarantee.

But we do work on different parts of the balance sheet. Our 60% requirement for eligible investments - by law those are non-guaranteed investments, either equity, preferred shares or subordinated debt, but if we had a guarantee.... Sometimes we have guarantees, but it's ineligible investment and doesn't count in the 60%. Banks mostly work on the guaranteed part of the balance sheet with their inventories.

So I think we're complementary rather than competitive. On some investments I've turned down my investment people and told them this is the bank's role, not ours. Unfortunately, banks are not playing their role these days.

.1255

Mr. Levi: Banks have very limited capacity internally in terms of the people they hire and the way they're structured to loan on soft assets. The problem is that they've had such poor results in what used to be their manufacturing base and they are convinced that the world is moving towards soft assets, but they don't do either anymore. I think you're right to keep the heat on the banks, because there is a role for people who understand, and there are some people in the banking community who understand how to lend on these new types of technologies, but they're very small.

Ms Bethel: My last question relates to equity. I'd be interested in some comments on your boards and your clients in terms of gender. Are you equitable and can you show that you are?

Mr. Levi: Speaking for our fund, the Working Opportunity Fund, I think there are seven women and six men, as it happens, on our board. There is a policy of the board to look for a mix of people, and we also have people from visible minorities who are on the board. So that is an overt decision of the board.

Ms Bethel: And your loans? Can you measure -

Mr. Levi: That's a little bit more difficult because we're dealing with companies. In our case, and I think the others do as well, when we're doing the social audit we review the barriers and the opportunities for both women and for visible minorities with the companies that we deal with.

Ms Bethel: In terms of work?

Mr. Levi: Yes, in terms of the work. In terms of the board of directors, they tend to be fairly small if they're private companies. There may only be four or five people upwards on those.

Ms Bethel: Can you comment from Quebec...and maybe Manitoba would be good.

Mr. Bachand: On the composition of the board, it's a mixed composition. Of the outside directors on the non-union side, two of the three are women today. Of the union directors, they're chosen amongst the members of the Bureau de la FTQ, so one or two of them now, I guess, are women. The rest are male because unions in the manufacturing sector still have male leadership for the most part and the FTQ has not any less than the public service -

Ms Bethel: On access to loans and systemic discrimination, you're confident there's none.

Mr. Bachand: I would be very surprised if there is. I must say we don't have a specific program to reach out to particular constituencies at this point in time.

Ms Bethel: Is there any way to measure? Do any of you measure?

Mr. Levi: We measure in the sense that when we do our social audit we are measuring how the companies are involved in this process.

Ms Bethel: But you're talking about employment equity. I'm not talking about employment equity. I'm talking about equity in terms of access to venture capital by women who own or manage.

Mr. Kreiner: From my perspective, the issues overlap. To the extent that what we're doing is creating employee ownership in companies that weren't employee owned before, particularly if we end up focusing on restructuring work in industries that employ low-income women, we're creating an ownership stake for women that wouldn't have otherwise existed.

Ms Bethel: But you can't measure it.

Mr. Kreiner: Sure, we can measure how many workers have become owners.

Ms Bethel: Okay, I understand what you're saying. What about Quebec?

Mr. Bachand: We don't know. We don't measure. As for access, one of our board of directors is Nycol Pageau-Goyette, who was the president of the Quebec Chamber of Commerce and very active in the community. So anybody who would like access and felt they were not being treated correctly would be treated correctly very quickly.

The other thing we're doing right now is we're increasing our number of conseillers financiers, or financial advisers and directors, and I guess 40% of those - and we're now in the hiring process - are women.

Ms Bethel: I understand the employment side of it.

Mr. Bachand: But I can't answer your question.

Mr. Levi: The barrier for access to women tends to be in the size of the investments, because I don't believe in terms of people who are approaching our fund that whether it's a woman-led organization or not would make a significant difference. But the number of women-led organizations that are of sufficient size or look for $500,000 or $1 million or $1.5 million is fairly small.

Where we will actually get to this issue is, for example, by the regional funds. With all of our cases, the access that we're providing to smaller companies will, I would bet, probably run at least 50-50, if not 60-40, in favour of women-led organizations simply because of the size.

.1300

The Chairman: Because of my dreadful management of time, and also being the last questioner, I will try to make it very short and perhaps also try to honour my colleagueMr. Rocheleau. I did not realize he had to get off to a meeting with his caucus.

I don't want to get into a spirited defence of the capping issue of the tax expenditure argument that was alluded to in our own report. This may sound a little unusual, but I suspect your intelligence about what we're going to do as a government is better than ours. In brief terms, what is your understanding of what's coming down the pike from whom and when? What are you expecting from the federal government? Do you have a sense that something is going to happen to you pretty quickly on this?

Mr. Daoust: You will understand that we hope not, by the way. In answer partially toMr. Rocheleau's remarks, I would ask you to read this annual report of the Fonds de solidarité on page 13, where we explain through a study that has been made, and where we comment on the economic and fiscal impact of our fund, and where you're going to see that over the period of roughly four years the fiscal cost is being recuperated by the government.

We would be only too glad to supply you with a copy of the study that has been made - it's a lengthy one, of course - and to supply you with other information we may have. This is not the only reason why we feel there should be any change in the type of fiscal status we have. There are a lot of reasons that have been very rapidement touched on during this meeting.

The Chairman: Let me, then, understand. I would assume that if there were to be changes they might be expected in a budget. Yes? You would, then, anticipating such changes - and you're certainly hearing from someone who has hardly any privileged information at all - be participating in discussions with the finance committee and the Department of Finance addressing this issue. That's where the change might come from.

But let me just make two observations by way of trying to summarize what I think are some of the strongest arguments you can put to the Department of Finance and indeed to this committee. They are perhaps indirect arguments, because I'm extremely impressed, as I think everybody is here, by what you had to say.

Two indirect benefits that I've retained, and I'm sorry Mr. Rocheleau's not here for at least the first one.... The first benefit, it seems to me, is that in an informal way this country, as a nation, has created a series of informal linkages. It was not a devolution of power. Starting with a Quebec example of something that has worked better and better over time, it has created a new kind of financing instrument that, through networking, is learning from itself. That is to say, you hear the sharing that's going on and the common positions that are being taken.

To me - and perhaps we're all a little affected by the events of the week - this is one of the more subtle arguments for having a nation in the first place, which allows for these tripartite discussions. They really involve us as a federal government because it's our tax expenditure money that allows this to happen - and maybe it's quadripartite. It certainly involved discussions with the provinces; it involved discussions with labour, management, and municipalities, just to start with. It's a wonderful example, on an informal basis, of how a country actually works rather than a constitutional discussion. That's an editorial comment.

.1305

The second point that really strikes me is an argument in your favour, in my eyes. In attempting to convert this economy in which we live from its traditional roles, both in terms of what it has done with respect to manufacturing versus knowledge-based industries but also in the traditional roles of management and labour, which are so often both conflictual and have an assumption that management knows best...based on a military model that only 15% of the officer class knows how to read and write or something, whereas the people who work in factories are intelligent human beings.

It's all the added-value, to which you refer in your March report, of getting people not to park their brains at the door, to be more productive, because they understand the wider picture of how the economy works. I think this stuff on the economic education side is absolutely terrific.

Also, there is the sense that when people work together at the community level with management, labour and the political authorities, they'll do better in terms of international competition. And dare I add that this scales up to the country?

I think there are a number of arguments. This is the kind of instrument of change - how am I doing? - because it also allows us to make the transition into a knowledge-based economy in a way that is graceful, appropriate and flexible, that allows for experimentation, but has a positive direction to it.

That isn't a question. That's just my very biased attempt to summarize the positive aspects of what you're doing and why you'll have our support.

I have a final comment from Mr. Bélanger.

Mr. Bélanger: Mr. Chairman, I would hope that we would continue this exercise by perhaps inviting at least another fund, perhaps two -

The Chairman: It's our intention to do so, and they're on the books for -

Mr. Bélanger: - in particular the one from the Canadian Labour Congress one, which is Working Ventures.

The Chairman: It's coming. They're coming, date to be announced.

Mr. Bélanger: Thank you.

The Chairman: We have not ended this conversation; we have merely begun it.

Mr. Mayfield: I hope so, because I didn't get my question.

The Chairman: One quick question from Mr. Mayfield.

Mr. Mayfield: As we've been talking, I've heard you say that the banks had difficulty making the transition from hard assets to.... Yet I've heard you folks say that you're in the process of renewing companies that are not doing so well with worker ownership.

Are you actively involved in that transition, and how much of the soft side are you investing in now?

Mr. Levi: In our particular case, virtually...I'm going to take a guess off the top, but I'd say two-thirds of the companies we invest in are knowledge-based. They are selling either software or some software attached to hardware, but primarily software. So it's a completely soft asset, and the primary reason for that is that it's impossible to get.

Mr. Mayfield: Are you involved in things like the medical industry?

Mr. Levi: Yes, we have two medical instrument companies. We invested in two biotech companies as well. Without our equity position in those companies, they would not be able to get any funding from the banks. I can tell you that because those companies deal with the banks, and we're involved with them.

Mr. Mayfield: Is that a similar situation for the rest of you too?

A witness: Yes.

Mr. Bachand: Yes, that's correct.

Mr. Mayfield: Thank you very much.

The Chairman: I was going to say à bientôt, but that's dangerous. See you soon.

The meeting is adjourned.