Canada's largest financial institutions have pooled more than $500-million in capital to help grow Canadian businesses, and hope to double their investment in a decade – if the returns are adequate.
The Canadian Business Growth Fund is a private-sector experiment urged on by the federal government, which will serve as a source of bridge funding between early-stage venture capital firms and the public markets. The name of the game is patience, with many investments carrying five- to 10-year time horizons.
The scheme is also tinged with patriotism, aiming to keep small and medium-sized companies owned by Canadians. Typical investments will range from $3-million to $20-million, in return for minority stakes, providing business owners with an alternative to selling early to U.S. private equity firms.
But at its core, the fund's investments still have to make business sense.
"Look, we are investors, and we are running this as a private enterprise," Victor Dodig, chief executive officer of Canadian Imperial Bank of Commerce, said in an interview. "What we need to do is make sure we're making the right investment decisions, with the right team in place. And if we can get the returns that we believe are there, I believe we'll attract more investors to the fund."
Companies that are hungry for capital will also need to be patient. A 10-member board has been named, including two independent directors, but the fund has yet to start searching for a chair or a CEO. The partners hope to make their first investments within a year.
The fund could grow to as much as $1-billion over the next decade, and sources say pension funds may also be looking to join. But any extra investment depends on performance and demand. The group thinks Canada has some 50,000 small and medium-sized businesses that could fit the bill.
"We do have a challenge raising capital for growth in our economy," Dave McKay, the CEO of Royal Bank of Canada, said at a Thursday press conference.
There are 13 participating institutions collectively pledging more than $500-million to start. They are Canada's six largest banks; leading insurers Manulife Financial Corp., Sun Life Financial Inc. and Great-West Lifeco Inc.; mid-sized banks such as HSBC Bank Canada, Laurentian Bank of Canada and Canadian Western Bank, as well as Alberta-based ATB Financial.
Initial contributions vary: Smaller institutions chipped in $25-million, while some of the largest banks put up $75-million each.
This rare show of unity from Canada's dominant financial firms came together over months of talks, spurred on by government officials and the Bank of Canada. Some of the largest institutions initially hesitated – CIBC, RBC and TD had all scaled back or exited venture capital businesses over the last decade, retreating from poor returns.
But the pivotal meeting came just before Christmas, when CEOs from the country's largest banks and insurers gathered in a room with Finance Minister Bill Morneau and agreed in principle on the fund's outline.
The group had "a very interesting and important discussion over a period of time," Mr. Morneau said Thursday, and the result is a pool of "patient capital that will make a long-term difference for our country."
Mr. McKay singled out Mr. Dodig as "an early champion and a very persistent champion of this initiative."
"We really started to get traction when everybody realized that, you know what, this is a good way to diversify our risk, put capital to work that's longer-term in the small and medium-size business sector," Mr. Dodig said. "And we're better off doing it together than as one institution doing it on its own."
It is not a novel idea. Last year, the Bank of Canada began pushing the country's banks to craft something modelled after a growth fund for businesses in Britain, which launched in 2011 with £2.5-billion ($4.1-billion) in capital from five of the U.K.'s largest banks.
The Canadian group will also build an advisory network comprised partly of retired executives and academics to mentor companies on international expansion, research and development, marketing and technology.
"They don't just want equity – they want smart equity," Mr. McKay said.