Export Development Canada has played an increasingly active role in providing loans and investments to small and medium-sized businesses in recent years. Over the past decade, EDC has nearly tripled these investments, making $320-million in direct investments and $265-million in fund investments in 2023.Justin Tang/The Globe and Mail
Ottawa is directing Crown corporations that finance small and medium-sized businesses to increase their risk appetite to get more dollars flowing to Canadian companies.
The new direction, mentioned in last month’s federal budget, is being worked out between the Department of Finance and three Crown corporations: the Business Development Bank of Canada (BDC), Export Development Canada (EDC) and Farm Credit Canada.
The budget includes an amended capital and dividend policy framework that directs the Crown corporations to target their solvency rating at a lower level than before (to A from AA), and not to benchmark their finances against those of private banks. The goal is to free up funds that could then be used to support more and potentially riskier businesses.
It is part of the federal government’s plan to use what policy tools it has at its disposal to attract more investment into the economy, along with such measures as the highly publicized efforts to encourage the country’s major pension funds to invest in more Canadian projects.
BDC and EDC have played increasingly active roles in recent years in providing loans and investments to small and medium-sized businesses. According to data provided by EDC, it made $18-million in direct investments and $198-million in fund investments in 2013. That total amount had nearly tripled a decade later, with EDC making $320-million in direct investments and $265-million in fund investments in 2023.
“They are very important players,” said Kim Furlong, chief executive officer of the Canadian Venture Capital and Private Equity Association.
Those investments have already paid rewards to the Crown corporations. BDC’s venture-capital division, for example, generated $902-million in net income in the 2021 fiscal year and $988-million in 2022, according to financial statements. “During the pandemic, valuations were through the roof,” BDC CEO Isabelle Hudon said in an interview.
But there’s also risk. As BDC’s VC arm rode the tech-investment wave on the way up, it fell with it on the way down, generating losses of $638-million for the year ended March 31, 2023, and a further $165-million loss for the following nine months.
EDC and BDC are both structured as self-financing corporations wholly owned by the government, and they pay back a portion of their profits to it. For example, BDC sent the government a dividend payment of $337-million last year.
EDC makes pandemic investment program permanent for small- and medium-sized businesses
Mairead Lavery, CEO of EDC, said that while the details of the policy are still being worked out, she understands that the federal government will expect lower dividend payments from the Crown corporations in the future, and they will direct more funds instead back to Canadian businesses.
The budget contains additional direction to EDC, including that it should prioritize programs that get Canadian businesses to find clients in countries with which Canada has free-trade agreements.
“Government has played its role in constructing and establishing free trade agreements,” Ms. Lavery said in an interview. “It’s then about getting Canadian exporters to use the free-trade agreements.”
John Ruffolo, managing partner of Maverix Private Equity, said EDC has helped companies scale, which has been a perennial problem for Canada’s small and medium-sized businesses.
“They [EDC] make very significant co-investments in a thoughtful and timely manner that is very conducive to the future growth of innovation in this country,” he said.
Ms. Furlong said some parts of the budget were working at cross-purposes to the government’s aim of encouraging entrepreneurs.
The budget pledged $200-million through the Venture Capital Catalyst Initiative to entrepreneurs in underrepresented groups, which Ms. Furlong said could have been distributed more broadly. “$200-million is actually too much, at this point in time, to deploy in those groups,” she said.
And tech industry leaders have criticized the increase in the capital-gains tax in the budget because it discourages entrepreneurs from building companies in Canada.
But, Ms. Furlong said, she welcomed more talk from the government and Crown corporations about taking chances on new companies.
“This entire asset class is about risk taking and Canada’s future economy is about these transformative companies,” she said. “When you think about what will generate jobs and wealth for future Canadians, this is it.”
With reports from Irene Galea and Sean Silcoff
Chris Hannay