As labour funds rely almost exclusively on the last two weeks of February to fill out their funds, some analysts predicted
doom and gloom for the industry in light of the economic slowdown. Judging by results that are slowly trickling in, however,
this year's RRSP season was not as bad as anticipated.
"The numbers are looking pretty strong. It looks as though the capital supply from labour funds will remain stable or even go
up from last year," says Macdonald & Associates' senior research analyst Kirk Falconer.
Macdonald & Associates is the consulting firm used by the Canadian Venture Capital Association. It will release its official
results next week.
Locally, labour-sponsored Capital Alliance Ventures Inc. (CAVI) is reporting a positive year.
"We were happy with our RRSP season. Many of the labour-sponsored funds could have been negative this year, but
that wasn't the case," says Denzil Doyle of CAVI.
Labour-sponsored VC firms have dominated the market since the early 1990s. Supported by generous tax incentives,
labour-sponsored funds are now responsible for 54 per cent of the capital supply in Canada, according to figures provided
by consulting firm Macdonald & Associated Ltd.
Like many labour funds, CAVI is at the mercy of the RRSP market. A poor RRSP season could mean a limited amount of
investments new or follow-on.
Fortunately, CAVI is reporting new sales of $18 million with redemptions totalling around $17 million a positive year in a
tough market. Of the $18 million in new sales, $13.5 million was raised in the first 60 days of 2001.
Doyle admits he was worried about a futile RRSP season.
"The way the high-tech industry has been going, we were concerned how that would affect us," he says.
However, generous tax breaks and upside potential associated with labour funds seem to have balanced out shaky
investor confidence surrounding a number of funds' unproductive technology portfolios.
Many labour funds are counting on the government's help to insulate themselves against a tough capital-raising market.
They are quick to educate potential investors about the federal and provincial tax credit changes that were implemented
recently the federal, New Brunswick and Ontario governments increased the maximum annual investment eligible for the
15 per cent tax credit, from $3,500 to $5,000.
In addition, the foreign content limitations placed on investors' portfolios have been raised. Traditionally, RRSP rules have
limited foreign content to a maximum of 20 per cent of one's portfolio. However, to encourage Canadians to invest in small
business, tax legislation allows the foreign content to be increased to up to 40 per cent, if one holds securities in qualifying
small businesses.
Bryan Allsopp of KPMG's technology industry group says the impact of the RRSP season on labour funds cannot be
overestimated.
"One of the things labour-sponsored funds tend to do come January is stick their heads in the sand and concentrate on
raising money until March. It's a bunker mentality," says Allsopp. "They won't plan anything until March. March becomes a
let's-take-stock-and-plan time."
That is even truer for smaller cap funds, which, without the aid of brokers, do all of their marketing during January and
February. That means almost 100 per cent of their capital is secured during the first 60 days of the year.
Small cap funds with ties to Ottawa include CAVI and the Canadian Science and Technology Growth Fund (CSTGF). Both
funds reported positive years, meaning they secured more new investments than redemptions for the year.
With his balance sheet complete, Doyle says CAVI will make follow-on financings its top priority. CAVI portfolio
companies likely to be seeking follow-on financing include Sige Semiconductor, Webhancer Corp. and Coast Software Inc.
"We won't have a problem with our existing companies, but we probably won't be looking at new investments as
aggressively as in years past," says Doyle.
As for the CSTGF, it raised $18.5 million in new investments, with only $500,000 in redemptions. Glen Smeltzer,
managing director of Technology Investments Management Corp. (which manages the CSTGF), was satisfied with his
RRSP season. About $12 million of the fund's new sales were generated during January and February.
"We're up from last year, and we're happy about that," says Smeltzer.
A poor end to the RRSP season tempers his satisfaction, however.
"The last few days of the RRSP season were disappointing. We didn't see the hockey stick effect we anticipated," says
Smeltzer.
Like CAVI, the CSTGF will focus on follow-on financings more than new investments in 2001. Some of its local portfolio
companies include Youtopia.com, Semiconductor Insights and Sigem Inc.
The king of the RRSP season hill so far appears to be Toronto-based labour-sponsored fund VenGrowth. It had one of its
best years, reporting new capital investments worth $240 million, with $40 million in redemptions.
VenGrowth has a number of local investments, including Bridgewater Systems Corp., Zucotto Wireless Inc. and Zenastra
Photonics Inc.
Managing partner David Ferguson says he was pleased with VenGrowth's RRSP success.
"From an industry perspective, we're very pleased with $240 million," he says. "That kind of money is a significant portion
of the Ontario market."
By netting $200 million, Ferguson says VenGrowth can continue its traditional 50:50 ratio of new to follow-on financing a
luxury not afforded the smaller cap funds mentioned above.
Many more labour funds are expected to announce their numbers this week. These are numbers that could shape Ottawa's
investment climate for the whole year.
According to Macdonald & Associates' senior research analyst Kirk Falconer, one thing to watch for is whether a drop in
capital raising in the U.S. will affect Canadian labour funds at large.
"That's the million-dollar question," says Falconer. "We are sensitive to American trends. The last figures available show a
34 per cent decrease in capital raising from the third quarter to the fourth quarter. It will be interesting how that will affect
RRSP contributions in Canada."
