Tech fund poor substitute for LSIF credit

The venture capital industry has applauded the Ontario government’s new fund for innovative high-tech companies, but some experts also say that if the province really wants to get money into the hands of businesses, it should bring back tax credits on certain retail vehicles.

“It’s very hard to imagine any solution that doesn’t encompass the retail funds,” says Richard Rémillard, executive director of Canada’s Venture Capital and Private Equity Association (CVCA) in Ottawa.

On March 18, Ontario’s Ministry of Research and Innovation unveiled the Emerging Technologies Fund for companies in green technology, high-tech and life sciences. With $250 million to invest over five years, the fund is a response to the challenges that emerging technology companies face when trying to raise venture capital, the Ministry says in a press statement. The government plans to begin investing the money in July, with qualified venture capital funds and private sector investors. The fund is designed to match small- to medium-sized private-sector investments, and take a stake in the companies it supports.

“Ontarians are looking to us to support investment in new technology, especially in this challenging global credit environment,” said Minister of Research and Innovation John Wilkinson in the press statement.

Industry observers say the government is on the right track with the Emerging Technologies Fund.

“It’s good to see more money flowing into Ontario technology companies,” R´millard says, explaining that venture capital investment in Ontario had slipped to $99 million in the fourth quarter of 2008, down from $217 million in the fourth quarter of 2007. “The prospect of our companies being able to access more funding is positive.”

But some also say it’s time for the government to reconsider its decision to cancel the tax credits on Labour-Sponsored Investment Funds (LSIFs) — a move the province made in 2005. Back then, the government said LSIFs had performed poorly, so it planned to phase out the tax credits by 2010.

But the tax credits proved to be the main selling point of LSIFs, and these vehicles provided approximately 35% of Ontario’s venture capital pool. Over the last three years, LSIFs have fallen out of favour — and Ontario’s venture capital pot has shrunk — thanks in part to the LSIF situation and the economy overall, which has put a damper on the funds’ main exit strategies: IPOs and mergers and acquisitions.

“The Ontario LSIFs probably only raised a total of $60 million this year,” says Mike Cohen, managing general partner of VenGrowth Asset Management Inc.

David Levi, CEO of GrowthWorks Capital Ltd., says reinstating the LSIF tax credits would have a strong impact. “It would be a statement of commitment by the government that the retail credit is here to stay.” He adds that while Ontario phases out its tax credits, provinces such as New Brunswick and Saskatchewan are raising tax credit limits, and VC money goes where the credits are the most favourable. “We see strong support from everywhere…except Ontario.”

Earlier this month the CVCA wrote to Ontario Premier Dalton McGuinty, outlining the hurdles the province’s venture capital industry faces. The letter points out that the economic downturn exacerbates “an already difficult fund-raising and investment environment,” and calls on the government to create “an incentive for large Ontario corporations to invest in domestic VC funds, where an investment…would receive the same tax treatment that is currently available for in-house research and development.”

Research and Innovation Minister Wilkinson wasn’t available for comment before press time.

As for the new Emerging Technologies Fund, VenGrowth’s Cohen says it’s a step in the right direction — but success depends on execution.

“I think that [the government is] perhaps trying to find the quickest way of getting funds into the hands of companies that desperately need capital. If monies could actually be invested by July that would be great, but at a rate of $50 million per year this is only a fraction of what these firms will require.”

Those in the industry say it’s too early to tell what role the government expects private sector investors to play. While the Ministry of Research and Innovation has outlined an investment-matching mechanism for private sector investments, more information is expected.

“We certainly want to see that,” says Rémillard. “There’s that old saw about the devil being in the details.”

(03/23/09)