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REPORT ON
THE IMPORTANCE OF
LABOUR-SPONSORED FUNDS
FOR THE ECONOMY OF
METROPOLITAN MONTREAL
A report of the Board of Trade of Metropolitan Montreal.
BOARD OF TRADE OF
METROPOLITAN MONTREAL
380 Saint-Antoine St. West, suite 6000
Montreal, Quebec H2Y 3X7
Telephone: 514 871-4000
Fax:
514 871-1255
www.artofbusiness.ca
[email protected]
May 2013
Table of contents
LIST OF TABLES AND GRAPHS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii
A word from the President and CEO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Contribution of the labour-sponsored funds to the economy of metropolitan Montreal and Quebec . . . . . . . . . . . . 5
The three tax-advantaged funds in Quebec and their mission. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
The tax-advantaged funds in Quebec and investment capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Activities complementary to those of private funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Impressive leverage for governments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
A significant coattail effect for the investment capital market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
A major impact on metropolitan Montreal’s industrial fabric . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
A metropolis that benefits substantially from these investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Key sectors that are developing due to these funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Economic icons that might not be here ­otherwise. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
A positive effect on their shareholders’ savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
More regular contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
A starting point for contributions to other sources of savings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
An interesting rate of return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
A major renewal to come. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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REPORT ON THE IMPORTANCE OF LABOUR-SPONSORED FUNDS
FOR THE ECONOMY OF METROPOLITAN MONTREAL
LIST OF TABLES AND GRAPHS
Table 1: Gradual elimination of the federal tax credit for contributions to labour-sponsored funds
Table 2: Highlights on tax-advantaged funds in Quebec
Table 3: Direct investments in the Montreal metropolitan region, by sector
Table 4: Examples of Quebec economic icons that obtained support from the Quebec labour-sponsored funds
Table 5: Annual compounded returns (including the tax credit)
Table 6: Age structure of shareholders of labour-sponsored funds (as at May 31, 2012)
Graph 1: Fields of activity of the tax-advantaged funds in Quebec
Graph 2: Comparison of investment levels of tax-advantaged and private funds depending on the economic
context
Graph 3: Disbursements of tax-advantaged funds in Canada, 2005-2012
Graph 4: The multiplier effect of tax-advantaged funds on co-investors in Canadian private technology venture
capital funds
Graph 5: Quebec venture capital market: breakdown by investor type (2008-2012 average)
Graph 6: Proportion of pension fund holders who contributed two years in a row
ii
A word from the President and CEO
industry moved to Toronto. It would take courageous and
innovative decision-making to make up for these losses.
Today, two pillars of our financial ecosystem, the laboursponsored funds, are under serious threat as a result of
a hasty decision made by the federal government. It is
important that this decision be rectified.
As investors, the labour-sponsored funds help provide the
economy with a dynamic venture and development capital
environment that can meet the needs of the Montreal market and its entrepreneurs. These investments, both direct
and through specialized funds, are made throughout the
life cycle of companies: from the seed stage to maturity.
They directly support the creation and development of
innovative businesses and tens of thousands of well-paid
jobs every year.
Michel LebLanc
The Montreal metropolitan area represents 10% of the
Canadian economy and over half the economy of Quebec.
It is comprised of a substantial number of young, dynamic companies, recognized for their creativity and innovation. And yet, the growth of these companies depends
on a competitive business environment, and in particular,
on access to investment capital at different stages of their
life cycle.
In fact, access to a diversified, well-structured supply of
capital is one of the key success factors for a modern economy. This diversified supply renders it possible to respond
to the needs of entrepreneurs very early on in the start-up
process. This initial capital is followed by a supply of patient
capital, which can support businesses in the initial stages of
their development. Gradually, as companies become sustainable, other sources of both local and foreign capital can
be added to support the needs of these growing companies. All institutions and funds that finance businesses form
what can be called a financial ecosystem.
The labour-sponsored funds offer an excellent benefitcost ratio for governments that grant a tax credit to taxpayers, while freeing up major public funds that can then
be invested in infrastructure projects, which Montreal
­urgently needs.
Because the business community believes it is essential
to understand the weight of these organizations in our
economy, the Board of Trade of Metropolitan Montreal
wanted to publish this report establishing the facts as a
basis for discussion.
The report that follows presents the labour-sponsored funds
and the positive that their investment activities have on the
economic fabric of metropolitan Montreal. It also addresses
the important effect of current tax incentives on the savings
habits of shareholders of these funds, in a context where
too few Quebecers save enough for their retirement.
We hope this report offers the support needed for funds
that make a major contribution to the development and
expansion of our economy.
Metropolitan Montreal’s financial ecosystem supplies not
only local businesses, but also companies throughout
Quebec. And yet, this ecosystem was severely weakened
50 years ago when large swaths of the financial services
1
EXECUTIVE SUMMARY
The purpose of this report by the Board of Trade of
Metropolitan Montreal is to establish the facts as a basis of
discussion, in order to assess the important contribution
of labour-sponsored funds to the Montreal metropolitan
area. The report was made possible dues to the collabo­
ration of Deloitte, which allowed access to non-public
data as part of a study that the firm is currently conducting
on Quebec’s three tax-advantaged funds.
indirect and real estate investments, the labour-sponsored
funds have contributed to the creation and maintenance
of over 35,000 jobs.
In addition to offering a benefit-cost ratio and an investment recovery period advantageous to the governments
that offer a tax credit to their shareholders, the laboursponsored funds generate a coattail effect by often being
the first to commit to private investment funds. They also
When it tabled its 2013 budget, the federal government contribute to the capitalization of specialized funds and
announced that by 2017, it would gradually cancel the tax the dynamism of the Quebec and Canadian venture and
credit it grants to shareholders of labour-sponsored funds, development capital markets. For the 2004-2012 period,
and instead would inject an additional $400 million into according to the most recent study by Gilles Duruflé,
with commitments of $758 million, the tax-advantaged
private venture capital funds.
funds drew in co-investors for $1,783 million in these
The tax-advantaged funds, which include the labour-­ same Canadian private technology venture capital funds.
sponsored funds (Fonds de solidarité FTQ and Fondaction In Quebec, the tax-advantaged funds, including the laCSN) and Capital Régional et Coopératif Desjardins, are bour-sponsored funds, contributed over $625 million, an
active investors throughout the life cycle of companies, in average of 29%, to the total investment in the Quebec
both the traditional and high-tech sectors. Through invest- venture capital market over the past five years.
ment activities that are complementary to those of private
funds, businesses in metropolitan Montreal and Quebec Finally, access to the tax credit for labour-sponsored fund
have the opportunity to develop and grow.
shareholders has a positive effect on their retirement savings level. Over the past ten years, these shareholders inThese tax-advantaged funds make an essential contribu- creased their RRSP contributions beyond those held in the
tion to the economic fabric of metropolitan Montreal over labour-sponsored funds. The importance of individual sathe long term investment horizon, by maintaining a high vings remains a challenge, as a result of the extraordinary
level of investment during slow economic times, for small demographic tightening Quebec is currently experienand medium enterprises in sectors less well-served by pri- cing. This phenomena is occurring as the baby boomers
vate funds. With direct investments of close to $2.3 billion near retirement.
in the economy of metropolitan Montreal, in addition to
2
3
REPORT ON THE IMPORTANCE OF LABOUR-SPONSORED FUNDS
FOR THE ECONOMY OF METROPOLITAN MONTREAL
Introduction
The 2013 federal budget decision
Within the context of its 2013-2014 budget, Jim Flaherty,
Canada’s Minister of Finance, announced the federal
govern­ment’s intention to cancel its share of the tax ­credits
for contributions to labour-sponsored funds (see Table 1).
TABLE 1
Gradual elimination of the federal tax credit for contributions to labour-sponsored funds
Period
VALUE OF
THE TAX CREDIT
No change until March 1, 2015
15%
March 2015 to February 2016
10%
March 2016 to March 2017
Effective March 2017
5%
0%
Source: www.lesaffaires.com
The federal government bases its decision, in particular, on a survey by the Organization for Economic
Cooperation and Development (OECD)1, in which arguments are presented in favour of elimination of the tax
credit for contributions to the labour-sponsored funds, as
was done in Ontario (gradual elimination of the pro­vincial
credit was completed in 2012). The survey addresses the
notion of the effect of eviction of private funds by the
labour-­sponsored funds for certain investment projects,
the negative impact on the return on these investments,
and therefore the lower return of the labour-sponsored
funds compared with private funds. Indeed, according to
the OECD, the private funds offer a better risk allocation
and thus a better overall return.
1OECD, OECD Economic Surveys, Canada (Policy Briefs), June 2012.
4
In addition to the gradual elimination of the tax credit,
the OECD also recommends in this survey that the public
­sector contribute by means of co-investment funds in which
the investment decisions are made by the private partners.
In line with this recommendation, the federal government
undertook to invest an additional $400 million in private
venture capital funds over the next seven to ten years.
THE TENOR OF OUR STUDY
Although the OECD survey is recent, it is based nonetheless on analyses dating from the early 2000s. Therefore,
this report is based on other, more recent data specific to
the Quebec context.
This report will show, in the first place, that the contribution of the labour-sponsored funds to the metropolitan
Montreal economy is substantial and essential to the economic expansion of our metropolis. The principal characteristics of these funds and their complementarity with
strictly “private” funds will be illustrated.
It is then essential to analyze the potential impact of the
gradual cancellation of the federal tax credit on the industrial fabric of metropolitan Montreal and the different
economic sectors that would be affected by an eventual
shortfall of investments from the labour-sponsored funds.
Finally, we will discuss the positive impact of the provincial
and federal tax credits currently in place on the savings
level of the shareholders of the labour-sponsored funds.
Contribution of the labour-sponsored funds
to the economy of Metropolitan Montreal
and Quebec
Since the establishment of the Fonds de solidarité de la
Fédération des travailleurs et travailleuses du Québec
(FSFTQ), in 1983, and then of Fondaction CSN of the
Confédération des syndicats nationaux (CSN) in 1996,
the labour-sponsored funds have made sustained investments in the companies and the economy of metropolitan
Montreal and Quebec as a whole.
The three tax-advantaged funds in Quebec
and their mission
In Quebec, the government combines three funds under
the heading of tax-advantaged funds: the two laboursponsored funds, Fonds FTQ and Fondaction CSN, and
Capital Régional et Coopératif Desjardins (CRCD).
The tax-advantaged funds share the core values of their
mission: support for businesses located in every region of
Quebec, which contributes directly to the creation of quality jobs. The CRCD fund also seeks to support the expansion of resource-based regions and cooperatives. The three
funds are subject to the government requirement to invest
(at least 60% of their average net assets for the previous
year) in businesses with economic impacts in Quebec.
Moreover, Deloitte’s more recent analyses of the taxadvantaged funds reveal important facts about these
investments.
However, the contributions of the shareholders of tax-advantaged funds benefit from different tax treatment than
other investments. A 15% tax credit is granted by each of
the provincial and federal governments for the shareholders of the FSFTQ and Fondaction CSN (an additional
10% from the Quebec government from June 1, 2009 until
Fondaction CSN has achieved a capitalization of $1.25 billion). The CRCD shareholders obtain a 50% credit from the
Quebec government, because they do not benefit from the
RRSP deduction and the investments in the fund are subject to additional constraints (minimum of 35% in resourcebased regions and in cooperatives). Only the FSFTQ and
Fondaction CSN are affected by the federal government’s
decision announced in the 2013-2014 budget.
It is important to mention the rationale of these tax credits.
They were established to generate capital contributions
by individuals wishing to save for their retirement, while
supporting the expansion and growth of Quebec companies when the venture and development capital market was still underdeveloped in Quebec. The credits also
enabled the funds to achieve capitalization levels rapidly
that allow them the necessary leeway to meet the needs
of businesses in many sectors. Since the tax-advantaged
funds offer patient capital through their investment, strict
redemption rules apply to the shareholders who have invested in these funds. In exchange, the tax credit contributes to an interesting return for the shareholders.
Table 2 :
Highlights on tax-advantaged funds in Quebec
• 69% of the transactions occur in the regions
• 70% of the transactions are for less than $1 million
• 52.4% of the transactions in the start-up phase in Quebec are made by the tax-advantaged funds
• 87.3% of the venture capital transactions in the traditional sectors are made by the tax-advantaged funds
Source: Data from FSFTQ,
Fondaction CSN and CRCD, Deloitte analysis
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REPORT ON THE IMPORTANCE OF LABOUR-SPONSORED FUNDS
FOR THE ECONOMY OF METROPOLITAN MONTREAL
The tax-advantaged funds in Quebec
and investment capital
There is no doubt that the tax-advantaged funds play an
important role as investors in the businesses of Greater
Montreal and other regions of Quebec.
Access to venture capital is crucial for businesses in the
seed and start-up phases, both in the technology and traditional sectors. The venture capital market is dynamic in
Quebec, reaching 0.083% of the GDP in 2009, compared
to 0.019% for Ontario and 0.033% For Canada2. When its
venture capital market is compared as a percentage of
GDP with that of other OECD member countries, Quebec
ranks third, behind Israel and the United States.
Moreover, development capital is just as important to
support the early growth, expansion and maturity phases
of businesses.
The tax-advantaged funds are active throughout the investment chain, from the seed stage to maturity, in the traditional and technology sectors (see Graph 1). Contrary to
the assertions of some observers, Deloitte’s analyses show
that the tax-advantaged funds play a role complementary
to the strictly private investment funds active in Quebec.
Activities complementary to those
of private funds
Businesses seeking investment capital in Quebec have recourse to several sources of financing: government assistance programs, tax-advantaged funds and private funds.
The government and the tax-advantaged funds invest
both directly in projects and businesses, and indirectly in
specialized private funds. In both cases, the tax-advantaged funds respond to certain deficiencies of the investment capital market.
Graph 1
Fields of activity of the tax-advantaged funds in Quebec
Development capital
Venture capital
Technology
sectors
Traditional
sectors
Seed
Start-up
Definition of venture capital (source: Réseau Capital)
“Capital invested in a business during the first stages.
This investment is generally high or very high risk.”
Early Growth
Expansion
Maturity
Definition of development capital (source: Réseau
Capital)
“Capital invested in a business which generally has a
viable product, a developed market, significant
customers, and sustained revenue growth, which has
reached its breakeven point and is generating not only
profits but positive cash flows. The financing is often
intended to increase production capacity and the sales
force, develop new products, new services or new
markets, finance acquisitions and/or increase the
working capital.”
1
Source: Deloitte
2 According to OECD, cited in the Deloitte survey on tax-advantaged funds.
6
A major difference between strictly private funds and taxadvantaged funds is the investment horizon. The life cycle
of private funds is close to ten years and their investment
horizon is around five years, but tax-advantaged funds
make long-term investments in partner businesses. The
perspective of a long-term partner is certainly desirable
for entrepreneurs, for whom years can elapse between
the seed money and obtaining returns on investment that
meet the investors’ expectations.
Furthermore, while many specialized funds target specific
sectors (for example, information technology, clean techs,
biopharmaceuticals), tax-advantaged funds invest both in
the technology sectors and in the traditional sectors, such
as manufacturing and retail. For example, the FSFTQ has
made a $75-million commitment to Fonds Valorisation Bois,
in partnership with the Quebec government, which is contributing $95 million, in order to acquire minority positions in
forest sector companies that show strong potential3.
Here is another fundamental difference between private
funds and tax-advantaged funds. Since tax-advantaged
funds have a long-term investment outlook, collect funds
from their shareholders annually and must invest 60% of
these funds in Quebec, they ensure the availability of investment capital even during an economic slowdown (see
Graph 2). Their countercyclical investments can be made
alone or in partnership. In fact, the tax –advantaged funds
increased their investments and supported successful companies at risk due to credit tightening during the last economic crisis. In one known example, the FSFTQ allied with the
Quebec government under the RENFORT program.
In addition, the investment activities of tax-advantaged
funds in Quebec are completely complementary with
those of private funds. Tax-advantaged funds were created not to compete with private funds, but to meet companies’ distinct and fundamental needs.
The scale of the companies and the transactions is another
factor that we must consider. The costs of a $1-milion investment transaction are essentially the same as those of a
$10-million agreement. By their presence outside the major centres (such as Montreal), the tax-advantaged funds
Outre la couverture des carences de marché, les fonds fiscalisés assurent un flux contracyclique de capitaux dans l’économie québécoise
meet the demand for financing of smaller-scale projects.
We should remember that 70% of the transactions of taxadvantaged funds are for less than $1 million.
En effet, alors que les investissements en capital de risque et capital développement diminuent lorsque la conjoncture économique
présente 2
des perspectives négatives, les fonds fiscalisés, du fait de leurs collectes de fonds annuelles, ne sont affectés que dans une
Graph
moindre
mesure
par les turbulences
Comparison
of investment
levelsduofmarché.
tax-advantaged and private funds depending on the economic context
Funds invested in investment capital and by tax-advantaged funds (Quebec) and
issuance of loans by chartered banks (Canada)
Amounts invested in funds
Millions of $
$250
Depression period
$5,000
$4,000
$3,000
Banks
$2,000
TCAC 2007-2009 :
-38%
$150
TCAC 20072009 : -46%
$100
$50
Fonds fiscalisés
$1,000
$-
$200
Investment
capital
TCAC 20072009 : +48
2007
Investment capital
2008
2009
Tax-advantaged funds
Loans issued by the banks
Billions of $
(in millions and billions of $, 2007-2011)
$6,000
2010
2011
$-
Loans issued by the banks
Sources: Thomson Reuters; Réseau Capital; Annual reports and financial statements of FSTQ, CRCD and Fondaction; Deloitte; BDC & TD analysis – Debt Market Observations and M&A
Trends, September 2012.
Source: Deloitte
tax-advantaged
funds
Les fonds fiscalisés, de par leur mission de développement économique et leur particularité
de survey
fondson
patients,
permettent
aux entreprises de bénéficier d’un appui constant. De plus, ils viennent parfois à pallier au manque de disponibilité des
instruments
de financement
traditionnels,
lorsque
les joueurs
sederetirent
temporairement
marché.
3 Sources: Ministère
des Finances,
Budget 2012-2013,
Gouvernement
du Québec;
Fonds
solidarité
FTQ, Rapport de du
gestion
intermédiaire au
30 novembre 2012.
En période d’expansion, les banques deviennent plus agressives et cherchent à augmenter leur part de marché; à l’inverse, elles tendent à se retirer en
période de ralentissement. Les fonds de capital investissement tendent à réagir de manière similaire. Dans ce contexte, la capacité des fonds fiscalisés
7
à lever des fonds assure une stabilité d’investissement, année après année.
REPORT ON THE IMPORTANCE OF LABOUR-SPONSORED FUNDS
FOR THE ECONOMY OF METROPOLITAN MONTREAL
Impressive leverage for governments
While the provincial and federal tax credits to which
the shareholders of the labour-sponsored funds have
access are 15% each (total of 30% for FSFTQ and 30%
+10 [Quebec government top-up] for Fondaction CSN),
the maximum annual amount of share purchases for the
purposes of the tax credits is $5,000.
The federal government estimates the tax cost of its tax
credit at $160 million (for Canada as a whole)4. The provincial government values the cost of this tax credit at $146
million for 20125.
However, the tax and incidental tax impacts of the tax
credits are largely to the advantage of the governments
that offer them to the shareholders of labour-sponsored
funds. Indeed, in the case of Fondaction CSN, the IREC
assesses the benefit-cost ratio of the tax credit at 2.05 for
the provincial government and 1.26 for the federal government6. In other words, for each $1 cost of the tax incentive represented by the 15% tax credit, the Government of
Canada collects $1.26 in tax and incidental tax revenues.
In the case of Fonds de solidarité FTQ, a SECOR study on
the economic impact of The FSFTQ’s investments7 refers
more to the recovery period of the tax costs for the provincial and federal governments. In 2009, the recovery period, including the incidental tax cost, was 2.2 years for the
Quebec government and 4.7 years for the federal government. It is important to consider the impact of the recession that began in 2008 on the duration of this recovery
period. The analysis then estimates a recovery period for
a “normal” year of corporate earnings at 2.1 and 3.8 years
for the provincial and federal governments, respectively.
In other words, when all the tax benefits granted to FSFTQ
shareholders are considered, the provincial government
will have recovered all the amounts after 2.1 years, and the
federal government will have recovered all its costs after 3.8
years for a year of operation in an economic growth period.
In addition to a benefit-cost ratio and a recovery period
that are clearly to the advantage of the governments that
offer the tax credits for shareholders of labour-sponsored
funds, these funds often play a key role in the capitalization of private and specialized funds.
A significant coattail effect for the investment capital market
The OECD recommends that public funds be invested in
funds for which the decisions are made by private players.
However, the tax-advantaged funds “generate a major
coattail effect when they invest in private funds; they ensure an often initial capital investment in specialized funds
which, by leverage, allow mobilization of additional capital
and thus complete the fundraising”8.
The most recent study by Gilles Duruflé on the venture
capital market shows the key role of the tax-advantaged
funds.
In this study it is presented that for the 2005-2012 period,
the tax-advantaged funds disbursed $1.474 billion on the
Canadian venture capital market.
Graph 3
Disbursements of tax-advantaged funds in Canada,
2005-2012
26.3%
73.7%
Direct
investments
Capitalization of
Canadian private funds
Source: Gilles Duruflé, 2013
4 Department of Finance Canada http://www.budget.gc.ca/2013/doc/plan/anx2-fra.html.
5 Ministère des Finances du Québec, Dépenses fiscales, 2012 edition, p. A-46.
6 Oscar Calderon, Nouvelle méthodologie pour le calcul des retombées de Fondaction, IREC, July 2012.
7SECOR, Analyse de l’impact économique des investissements du Fonds de solidarité des travailleurs du Québec, July 2010.
8 Deloitte analysis, within the context of its Étude sur les fonds fiscalisés, 2013.
8
Moreover, since 2004, the direct and indirect commitments
by the tax-advantaged funds (two out of three of which
are labour-sponsored funds) have played a critical role in
achieving the capitalization of 27 Canadian private-independent funds. These commitments represented 30% of
the total fundraising by the private funds. These 27 funds
alone raised 45% of the private capital of Canadian funds
over the 2004-2012 period9.
In Quebec at present, the tax-advantaged funds, including
the labour-sponsored funds, have contributed a total of
more than $625 million, an average of 29%, to the Quebec
venture capital market over the past five years10.
Graph 5
Quebec venture capital market: breakdown by investor
type (2008-2012 average)
Corporate
For the 2004-2012 period, as shown in Graph 4, the taxadvantaged funds generate an impressive coattail effect
when they commit to private funds. Indeed with $758
million in commitments, the tax-advantaged funds drew
in co-investors for $1,783 million in these same Canadian
private technology venture capital funds.
Government
Institutional
Tax-advantaged
Private-independent
Foreign
Other
Source: Thomson Reuters
2012. 27 fonds privés (2 541 M$) ont bénéficiés d’investissements
Graph 4
The multiplier effect of tax-advantaged funds on co-investors in Canadian private technology venture capital funds
The commitments of the tax-advantaged funds to the private funds have a coattail
effect (commitments by co-investors and investors in companies)
$1,783 million
Amounts committed by
co-investors in these
same funds
$758 million
Amounts committed
by the taxadvantaged funds in
private funds
$1
invested in companies by
private funds in which the
tax-advantaged funds
have committed funds,
generates 2.5$ of
additional investments in
the financed companies
Source: Gilles Duruflé, Deloitte analysis
Source: Deloitte survey on tax-advantaged funds
9 Gilles Duruflé, Investissements directs et indirects en capital de risque par les fonds fiscalisés du Québec, April 2013.
10 Thomson Reuters, Québec’s Venture Capital Market in 2012.
9
REPORT ON THE IMPORTANCE OF LABOUR-SPONSORED FUNDS
FOR THE ECONOMY OF METROPOLITAN MONTREAL
According to the latest Thomson Reuters report on the
venture capital market in Quebec11, 37% of the funds
invested in 2012 went to traditional sectors, while life
sciences and IT respectively accounted for 28% and 30%
of the funds. Of the $409 million invested in Quebec in
2012, 29% went to businesses in the seed and start-up
stages and 60% in the development stages. Thus, due to
their direct investments and their major contribution to
the various venture capital funds, the labour-sponsored
funds and CRCD supported companies throughout their
life cycle, in both the traditional and technology sectors.
Furthermore, this active participation by the labour-sponsored funds in the venture and development capital market
contributes to a dynamic Quebec market and to attracting
foreign investment to the province. While Quebec’s share
of Canada’s GDP is 20%, the province reaped 31.8% of the
foreign investments for the past five years in the venture
capital market, compared to 68.7% for the rest of Canada12.
Thus, with leverage that is clearly to the advantage of the
governments that offer a tax credit to their shareholders,
and a major contribution to the dynamism of the investment capital market in Montreal and Quebec, there is no
doubt that the labour-sponsored funds are an integral part
of the business environment of metropolitan Montreal’s
companies and play a crucial role.
A major impact on Metropolitan Montreal’s
industrial fabric
An eventual withdrawal, even if it is gradual, of the tax
credit for shareholders of labour-sponsored funds would
result in negative consequences for access to financing by
metropolitan Montreal businesses. Some sectors would
be more affected than others, and the argument that private funds would replace this shortfall is certainly not founded for all sectors.
A metropolis that benefits substantially from these investments
As prescribed in their constituting act, the labour-sponsored funds must invest at least 60% of their average
net assets for the previous year in eligible enterprises in
Quebec, without requiring any guarantee. As at May 31,
2012, this proportion was largely respected both by the
FSFTQ and by Fondaction CSN13.
A substantial part of these investments is realized in the
Montreal metropolitan area. The labour-sponsored funds
have directly invested nearly $2.3 billion in the Montreal
metropolitan economy. When indirect and real estate investments are taken into account, the investment activities
of FSFTQ and Fondaction have contributed to the creation or maintenance of more than $35,000 jobs14.
11 Thomson Reuters, Québec’s Venture Capital Market in 2012.
12 Ibid.
13FSFTQ, Financial statements as at November 30, 2012; Fondaction data.
14 FSFTQ and Fondaction internal data, as at May 31, 2012.
10
Key sectors that are developing due to these funds
The Quebec government offers a good number of
business assistance programs, particularly through
Investissement Quebec, which manages a portfolio of $3.4
billion, in addition to the Economic Development Fund
valued at $4.2 billion15. All sectors are eligible for the loans
and loan guarantees of these financial products, on condition that the majority of their revenues are derived from
sales of goods and services to businesses16.
The technology sectors (life sciences, information and
communications technologies, clean technologies, etc.)
are better served than in the past by specialized venture
and development capital funds, and by the Teralys Capital
Fund, which invests in these sectors. Fonds de solidarité
FTQ contributed $250 million to the initial capitalization
of Teralys Capital. The retail sector is much less well served. Retail businesses are not eligible for the government
assistance programs managed by Investissement Quebec.
The labour-sponsored funds have substantial investments
in all the major economic sectors: services, technology,
manufacturing and commerce.
Table 3
Direct investments in the Montreal metropolitan region,
by sector17
Sector
INVESTMENTS
Manufacturer
$530,631,883
Commerce
$164,249,190
Services
$1,060,950,601
Technology
$348,207,510
Specialized funds
$442,648,517
Other sectors
$157,503,555
Total
$2,261,542,739
Source: Combined FSFTQ and Fondaction CSN data
The labour-sponsored funds
have directly invested
nearly $2.3 billion in the
businesses and economy of
­metropolitan Montreal.
15 Investissement Quebec
16 Agriculture, personal services and retail excluded.
17 The Montreal metropolitan area includes Montreal, Laval, Laurentides, Lanaudière, Montérégie.
11
REPORT ON THE IMPORTANCE OF LABOUR-SPONSORED FUNDS
FOR THE ECONOMY OF METROPOLITAN MONTREAL
Economic icons that might not be here ­otherwise
The labour-sponsored funds have supported companies recognized in Quebec for their major contribution to the province’s economy. Here are a few examples.
Table 4
Examples of Quebec economic icons that obtained support from the Quebec labour-sponsored funds
Renaud-Bray
(bookstore chain)
The initial investment by Fonds de solidarité FTQ in 1996 allowed RenaudBray to emerge from a delicate financial position (initial investment of
$4.7 million). The company today is the biggest French-language bookstore
chain in North America. Renaud-Bray has 721 employees.
Robert Transport
(road transportation)
The company has benefited from several investments by Fonds de solidarité
FTQ over the past 20 years, particularly for expansion projects in Quebec
and Ontario. Located in Boucherville, the company employs 2,572 people,
including 2,451 in Quebec.
Air Transat
(travel wholesaler)
The company, which has 6,175 employees, including 3,678 in Quebec, has
benefited from several rounds of financing. The investment by Fonds de
solidarité FTQ after the events of September 11, 2001 allowed the company
to emerge from a precarious financial position and continue its operations.
Sonaca
(aerospace)
The investment by Fonds de solidarité FTQ, at the bottom of the economic cycle, saved 283 jobs at Mirabel. Subsequent reinvestments allowed the
plant to expand.
Sail
(retail)
Support from Fonds de solidarité FTQ allowed this sporting goods retailer to
buy out the Beloeil company and then expand in Quebec and Ontario. It now
has 880 employees, including 530 in Quebec and 350 in Ontario.
12
Sports Rousseau
Pro Hockey Life Sporting Goods Inc., better known as Sports Rousseau, is a
sporting goods retailer now present in five provinces. The investment by Fondaction CSN has supported the company’s growth projects, and it has rapidly
become a world reference in the hockey field.
Fresche Solutions
Fresche Solutions today is an internationally recognized IT modernization
company, which includes several of the world’s leading companies among
its partners. Fondaction CSN contributed to returning ownership of the company to Quebec while participating in the establishment of a shareholding
workers’ cooperative (CTA).
AV&R Vision & Robotics
AV&R Vision & Robotics specializes in complex automation projects requiring a
high level of precision. With expertise in artificial vision and parts finishing, the
AV&R team has over 600 achievements to its credit and has won many awards.
The investment by Fondaction CSN allowed the acquisition of the company by
its founding officers.
ENOBIA
An example of success in biotechnology. After Fonds de solidarité FTQ has
sustained Enobia’s growth for several years. This company attracted a major
player in human healthcare, which took it onto the international scene, thus
recognizing the high-tech knowhow of Quebec companies and researchers.
DISTECH CONTROLS
Control of this company, which manufactures energy-efficient controllers and
software, was recently brought back from Singapore to Montreal. It has particularly relied on Fonds de solidarité FTQ and the Montreal-based private
fund W2 for its growth, and from now on will grow from Montreal.
ACQUISIO
Joining Charles Sirois’ Tandem private fund, Fonds de solidarité FTQ participated in the startup of this IT company, which offers a recognized platform
for interactive media.
13
REPORT ON THE IMPORTANCE OF LABOUR-SPONSORED FUNDS
FOR THE ECONOMY OF METROPOLITAN MONTREAL
A positive effect on their shareholders’ savings
In Quebec, as in the rest of the world, we are faced with a
savings challenge. Citizens active on the job market do not
save enough for their retirement and employer plans only
cover half of Quebecers18. A study by Claude Castonguay
reports that more than 60% of workers cannot maintain
their standard of living after retirement19.
A starting point for contributions to other
sources of savings
One of the reasons why employees hesitate to resort to
financial tools for retirement savings is the challenge of
financial literacy. Over the past ten years, shareholders of
the labour-sponsored funds have multiplied the retirement
savings products held in their portfolio, in addition to their
RRSP, in the labour-sponsored funds. One of the explanations is that the shareholders receive a form of financial
education by contributing to the labour-sponsored funds.
This allows them to better understand all the immediate
tax benefits and future economic benefits of saving for
their retirement.
More regular contributions
According to Deloitte’s analyses of the tax-advantaged
funds, the shareholders of labour-sponsored funds contribute more regularly to their retirement funds, particularly
due to the deductions at source to which they have access. Nearly 40% of the shareholders of Fondaction CSN
contribute through deductions at source, while this proportion is 31% for FSFTQ20. The proportion of shareholders of Fonds de solidarité FTQ who contribute two years
in a row to their RRSP is 10% higher on the average than
the proportion of all contributors to a registered pension
plan21 (see Graph 6).
Graph 6
des
détenteurs
(REER) qui two
ont cotisé
deux
années de suite
Proportion of pensionPart
fund
holders
who contributed
years in
a row
80%
75%
79%
70%
68%
67%
60%
70%
71%
65%
62%
64%
62%
59%
55%
50%
76%
74%
68%
70%
65%
78%
76%
2004
2005
2006
2007
2008
2009
2010
2011
Source: Fonds de Solidarité survey, Deloitte analysis
Fonds de Solidarité shareholders
All contributors
Year after years, the proportion of shareholders of tax –advantaged funds who make another contribution is higher than for all RRSP
contributors
Source : Fonds de solidarité survey and Deloitte analysis,
taken from the Deloitte survey on tax-advantaged funds
18Deloitte, Étude sur les fonds fiscalisés, 2013.
19 Claude Castonguay, Le point sur les pensions, Cirano Report, 2011.
20 FSFTQ and Fondaction data.
21 Deloitte analysis
14
An interesting rate of return
While some criticize the lower rate of return obtained by
the labour-sponsored funds compared to private funds, it
is important to consider the different and complementary
mission pursued by the labour-sponsored funds. With an
objective of creating and maintaining jobs and developing the regional economy, the labour-sponsored funds
respond effectively to a large segment of the demand in
the venture and development capital market, while ensuring risk management that measures up to their shareholders’ expectations.
Moreover, the returns received by the shareholders on the
labour-sponsored funds are completely respectable.
Table 5
Annual compounded returns (including the tax credit)
FSFTQ
Fondaction CSN
5 years
7 years
10 years
n. a.
13.4%
10.0%
17.0%
n. a.
6.4%
Source: FSFTQ and Fondaction CSN management reports, November 30, 2012
A major renewal to come
One of the advantages of the labour-sponsored funds we
have discussed above is the availability of capital in periods of economic slowdown and credit tightening. This is
made possible by the recurring high annual contributions
of their shareholders, who recognize the increased advantage conferred by the tax credits compared to the other
financial products related to retirement savings.
However, the withdrawal of the tax credit by one of the
levels of government could affect this capacity of the labour-sponsored funds to raise capital at the same level
as in previous years. Moreover, when the age distribution
of the shareholders of these funds is considered, we can
anticipate large capital withdrawals in the years ahead.
Of course, the labour-sponsored funds, aware of these
dynamics well before the announcement of withdrawal of
the tax credit, accelerated their recruiting efforts among
younger workers. However, as in the case of all pension
funds, this is still a major challenge as the baby boomers
near retirement.
At Fondaction CSN, 54.6% of the shareholders are age
50 or over, while this proportion is 52.8% at Fonds de solidarité FTQ22.
The importance of individual savings remains a major challenge due to the extraordinary demographic tightening
that Quebec is currently experiencing.
Table 6 Age structure of shareholders of labour-sponsored funds (as at May 31, 2012)
AGE OF SHAREHOLDERS
Under 30 years
FSFTQ
Fondaction CSN
4.4%
5.8%
30-39 years
16%
16%
40-44 years
11%
10%
45-49 years
15.8%
13.6%
50-54 years
20%
18.8%
55-59 years
18.8%
20.6%
14%
15.2%
48.9 years
48.9 years
594,287 shareholders
113,838 shareholders
60 years ans over
Average age
Total
22 Fondaction CSN and FTQ data.
Sources : FSFTQ and Fondaction CSN data
15
REPORT ON THE IMPORTANCE OF LABOUR-SPONSORED FUNDS
FOR THE ECONOMY OF METROPOLITAN MONTREAL
Conclusion
The labour-sponsored funds make an undeniable contribution to the economy of metropolitan Montreal and Quebec as
a whole. Due to their mission and the resulting activities, the funds play a supporting role for companies in sectors and
at stages of development often neglected by private funds.
In addition, the labour-sponsored funds make major investments in several specialized funds and are the first investors
to commit. They often play a key role in the capitalization of these private firms, which have a mission complementary
to theirs.
The facts prove the case: the labour-sponsored funds generate positive leverage for the governments that grant tax
credits to their shareholders. Nearly $2.3 billion is currently invested directly in the Montreal metropolitan area and more
than 35,000 jobs have been created or maintained, when indirect and real estate investments are included.
Due to these tax credits, the labour-sponsored funds allow access to savings for more than 700,000 shareholders of
Fonds de solidarité FTQ and Fondaction CSN. Many of them save more regularly and tend to diversify their sources
of retirement savings. This is good news in view of the demographic challenge currently faced by Quebec as a whole.
The economy of Quebec’s metropolis needs these financial tools to prosper.
16