Labour Sponsored Venture Capital Corporation
Encyclopedia
A labour-sponsored venture capital corporation (LSVCC), known alternately as labour-sponsored investment fund (LSIF) or simply retail venture capital, is a fund managed by investment professionals and invested in small to mid-sized Canadian companies. The Canadian federal government and some provincial governments offer tax credit
s to LSVCC investors to promote the growth of such companies.
in 1982. The province was in the midst of a recession and the lack of capital in small and mid-sized companies had caused numerous bankruptcies.
In response, the Quebec Federation of Labour
proposed a "solidarity fund" at a provincial economic summit conference in 1982 to help the provincial labour movement create a locally-controlled healthy and sustainable economy. The intention was to lure venture capital to smaller Quebec firms.
This new type of fund slowly began to spread across the rest of Canada during the 1980s. But it wasn't until the late 1990s that LSVCCs became truly noteworthy outside Quebec, thanks in equal part to generous tax breaks from federal and provincial governments and attractive returns. So far in the 2000s, returns have been less impressive, due in part to the bursting of the technology bubble
. Unfavorable Government rule changes regarding LSVCCs have also been an important reason for this turn.
Labour-sponsored venture capital corporations, as the name suggests, must be sponsored by a labour unions. This sponsor is able to appoint members to the fund's board of directors.
The money investors put into these firms is a form of venture capital
. These firms are just starting out and generally aren't listed on a stock exchange such as the Toronto Stock Exchange
or the Canadian Venture Exchange. LSVCCs offer an asset class that is normally not accessible through conventional investment vehicles. These companies have potential for substantial growth and high returns down the line if they succeed and are generally chosen precisely for that growth potential.
In an LSVCC, as in any mutual fund
, investors' money is distributed among a number of businesses. However, because the companies invested in by LSVCCs may be new and are likely small, many don't have much of a track record and can be very risky investments by themselves. Ideally, an LSVCC can reduce that risk by diversifying their portfolio of assets.
These small to mid-sized companies are interested in receiving financing from LSVCC fund companies because they are in a high growth cycle and are looking to further support the expansion of their business. These companies are often too small or too young to secure conventional bank financing. The LSVCC fund companies are also able to provide sought-after strategic guidance and operational support.
An additional 5% tax credit is available to Ontario
investors who purchase certain research-oriented LSVCC – a kind of specialty LSVCC dealing mostly in research-oriented small companies.
The Ontario government had announced plans to gradually discontinue its 15% tax credit. It was to remain in place through the 2008 tax year, and would then be phased out over the subsequent three years.
However, the Ontario Government’s recent decision to extend the retail venture capital tax credit program for an additional year is a positive development for LSVCCs in Ontario. This improvement will now allow tax credits for investors in retail venture capital funds to March 1, 2012. In addition, the Ontario provincial government is proposing to increase the maximum investment eligible for an Ontario tax credit from $5,000 to $7,500.
If an investor chooses to buy an LSVCC in their RRSP, they would obtain the LSVCC tax credits as well as the tax deduction they receive each time they contribute to their RRSP.
LSVCC fund companies tend to use their investment in a company to buy an equity
stake. They will also negotiate to have members of their portfolio management team hold positions on the board of directors of companies they invest in. This allows them to have some say in future decisions that that company makes in regards to company strategy and execution.
LSVCC funds have holding periods because of the time it takes for these small companies to meet the criteria necessary for one of the above-mentioned options. Even though the holding period is an extended period of time, the LSVCC fund company doesn't wish to retain any investment indefinitely. The primary objective of LSVCC fund managers is to obtain a superior rate of return through an eventual and timely disposition of each investment.
Tax credit
A tax credit is a sum deducted from the total amount a taxpayer owes to the state. A tax credit may be granted for various types of taxes, such as an income tax, property tax, or VAT. It may be granted in recognition of taxes already paid, as a subsidy, or to encourage investment or other behaviors...
s to LSVCC investors to promote the growth of such companies.
History
The idea behind LSVCCs was first proposed in the Canadian province of QuebecQuebec
Quebec or is a province in east-central Canada. It is the only Canadian province with a predominantly French-speaking population and the only one whose sole official language is French at the provincial level....
in 1982. The province was in the midst of a recession and the lack of capital in small and mid-sized companies had caused numerous bankruptcies.
In response, the Quebec Federation of Labour
Fédération des travailleurs du Québec
The Fédération des travailleurs et travailleuses du Québec , or FTQ, is the largest labour federation in Quebec in terms of its membership. It has over 500,000 members, who account for 44% of the unionised workers in Quebec. This ratio is 60% in the private sector, in which most members work...
proposed a "solidarity fund" at a provincial economic summit conference in 1982 to help the provincial labour movement create a locally-controlled healthy and sustainable economy. The intention was to lure venture capital to smaller Quebec firms.
This new type of fund slowly began to spread across the rest of Canada during the 1980s. But it wasn't until the late 1990s that LSVCCs became truly noteworthy outside Quebec, thanks in equal part to generous tax breaks from federal and provincial governments and attractive returns. So far in the 2000s, returns have been less impressive, due in part to the bursting of the technology bubble
Economic bubble
An economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values"...
. Unfavorable Government rule changes regarding LSVCCs have also been an important reason for this turn.
Labour-sponsored venture capital corporations, as the name suggests, must be sponsored by a labour unions. This sponsor is able to appoint members to the fund's board of directors.
Companies invested in
LSVCC funds invest primarily in small and medium-sized private companies who require funding to sustain and increase growth. The emergence of the LSVCC industry stems from the idea that the growth of these firms will stimulate the Canadian economy and create jobs.The money investors put into these firms is a form of venture capital
Venture capital
Venture capital is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as...
. These firms are just starting out and generally aren't listed on a stock exchange such as the Toronto Stock Exchange
Toronto Stock Exchange
Toronto Stock Exchange is the largest stock exchange in Canada, the third largest in North America and the seventh largest in the world by market capitalisation. Based in Canada's largest city, Toronto, it is owned by and operated as a subsidiary of the TMX Group for the trading of senior equities...
or the Canadian Venture Exchange. LSVCCs offer an asset class that is normally not accessible through conventional investment vehicles. These companies have potential for substantial growth and high returns down the line if they succeed and are generally chosen precisely for that growth potential.
In an LSVCC, as in any mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
, investors' money is distributed among a number of businesses. However, because the companies invested in by LSVCCs may be new and are likely small, many don't have much of a track record and can be very risky investments by themselves. Ideally, an LSVCC can reduce that risk by diversifying their portfolio of assets.
These small to mid-sized companies are interested in receiving financing from LSVCC fund companies because they are in a high growth cycle and are looking to further support the expansion of their business. These companies are often too small or too young to secure conventional bank financing. The LSVCC fund companies are also able to provide sought-after strategic guidance and operational support.
Tax credits
To encourage Canadian retail investors to invest in LSVCCs, the federal government and some provincial governments offer tax credits. Currently, the federal government offers investors in LSVCCs a 15% tax credit on a maximum investment amount of $5,000 per year – worth up to $750. Some provinces offer further 15% tax credit on top of that. Together that can add up to $1,500 in tax breaks. In total, a $5,000 investment would cost $3,500 when you take the tax credit into account.An additional 5% tax credit is available to Ontario
Ontario
Ontario is a province of Canada, located in east-central Canada. It is Canada's most populous province and second largest in total area. It is home to the nation's most populous city, Toronto, and the nation's capital, Ottawa....
investors who purchase certain research-oriented LSVCC – a kind of specialty LSVCC dealing mostly in research-oriented small companies.
The Ontario government had announced plans to gradually discontinue its 15% tax credit. It was to remain in place through the 2008 tax year, and would then be phased out over the subsequent three years.
However, the Ontario Government’s recent decision to extend the retail venture capital tax credit program for an additional year is a positive development for LSVCCs in Ontario. This improvement will now allow tax credits for investors in retail venture capital funds to March 1, 2012. In addition, the Ontario provincial government is proposing to increase the maximum investment eligible for an Ontario tax credit from $5,000 to $7,500.
If an investor chooses to buy an LSVCC in their RRSP, they would obtain the LSVCC tax credits as well as the tax deduction they receive each time they contribute to their RRSP.
Realizing Gains on LSVCC Investments
Gains made in the value of LSVCCs occur in one of three ways:- Exiting from an investment in a company via an initial public offeringInitial public offeringAn initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
.
- Selling the investment in a company to a larger company (often in the same industry) by way of mergers and acquisitionsMergers and acquisitionsMergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
.
- Capital appreciation in currently held investments in a company.
LSVCC fund companies tend to use their investment in a company to buy an equity
Ownership equity
In accounting and finance, equity is the residual claim or interest of the most junior class of investors in assets, after all liabilities are paid. If liability exceeds assets, negative equity exists...
stake. They will also negotiate to have members of their portfolio management team hold positions on the board of directors of companies they invest in. This allows them to have some say in future decisions that that company makes in regards to company strategy and execution.
LSVCC funds have holding periods because of the time it takes for these small companies to meet the criteria necessary for one of the above-mentioned options. Even though the holding period is an extended period of time, the LSVCC fund company doesn't wish to retain any investment indefinitely. The primary objective of LSVCC fund managers is to obtain a superior rate of return through an eventual and timely disposition of each investment.
Common characteristics
- Holding period
- To retain the tax credit an investor has to hold on to the shares for a set time period, often eight years. If shares are sold before this time, the amount received in tax credits must be repaid to the government in what's termed tax credit clawback.
- Liquidity
- Because of the nature of the holding period (often eight years), LSVCC shares usually can't be redeemed without paying penalty charges until the holding period is complete. Because of this decreased liquidity as compared with other investment instruments, LSVCCs are best for investors with longer time horizons who are able to hold their shares for the full holding period.
- Valuation
- LSVCCs don't generally invest in publicly traded firms and that can make it more difficult to assess their value. With a stock that's publicly traded, the price that is quoted when the market closes is influenced by the opinions of investors, analysts and other market participants who have studied the company issuing the stock. Whereas LSVCC funds invest in private companies whose worth tends to be more difficult to assess and to determine.
- Risk
- LSVCC fund companies are able to diversify their portfolio by investing in a relatively large number of firms thus decreasing overall risk. But this only holds to a certain degree. The companies have little track record and most are not publicly traded. Some will fail; others will stagnate. It’s the few that thrive that ideally provide the profit that makes up for the other losses.
Criticism
There funds have come under criticism for their relatively poor performance, as these funds lagged equity indices in both the U.S. and Canada. Additionally, funds such as these have been shown to decrease private investment, hurting the development of new companies in areas where they operate.Major LSVCC fund companies
- BEST Funds
- Canadian Medical Discoveries Fund Inc.
- Covington Group of Funds
- Fonds de Solidarité FTQFonds de solidarité FTQThe largest labour-sponsored fund in Canada, the Fonds de solidarité FTQ is a Québec development capital organization whose overriding mission is to invest in local businesses to further the economic development of all the regions of...
- GrowthWorks
- ROI Fund
- SaskWorks Venture Fund Inc.
- VenGrowth Asset Management Inc.
- VentureLink Funds
Companies that have benefited from LSVCC investment
- Algorithmics
- ALI Technologies
- Aspreva
- Bennett Environmental
- Bfound.com
- Changepoint Corporation
- Chrysalis-ITS Inc.
- Cognicase
- Dees Communications
- Dragonwave Inc.
- Enghouse Systems Ltd.
- Espial Group
- Galleon Energy
- Genesis Microchip
- Helix BioPharma
- Hothaus
- Hydrogenics
- Indigo Books and MusicIndigo Books and MusicIndigo Books & Music Inc. is a Canadian retail bookstore chain. The company was founded in 1996 by CEO Heather Reisman, wife of Gerry Schwartz, majority owner and CEO of Onex Corporation....
- Inex Pharmaceuticals
- Lakeport Brewing CompanyLakeport Brewing CompanyThe Lakeport Brewing Company is a beer brewer located on Burlington Street East and Wellington Street North in Hamilton, Ontario, Canada. It is the largest discount brewer in Canada, and uses the motto "Lakeport, Great beer, Fair prices." The company was incorporated on April 27, 2005...
- Lavalife.com
- Med-Eng Systems
- Novadaq Technologies
- PixStream
- Q9 Networks Inc.
- Ruggedcom
- Sandvine Inc.
- Sierra Wireless
- SignalSoft
- Terago Networks
- Triant
- Triple G Systems Group
- Tundra Semiconductor
- Ventus Energy Inc.
- Whitehill Technologies
External links
- Association of Labour Sponsored Investment Funds
- Canadian Revenue Agency Website – LSIF Tax Reporting Guidelines
- Canadian Retail Venture Capital Association