Many investment opportunities in Saskatchewan lie in rural areas.
But the companies and ideas in the countryside are starved by a lack of start-up and expansion money, say managers of a new Saskatchewan labor-sponsored venture capital fund.
The situation creates great opportunities for investors, says Prairie Ventures Fund Inc. president Randy Beattie.
“Because there is a shortage of capital, we will have a lot of requests. This fund can be selective,” said Beattie, whose fund has just been set up.
Labor-sponsored venture capital funds are given tax breaks but have special restrictions placed on them.
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All the money they raise must be invested in Canada if they are federally registered, or in their home province if they are provincially registered.
All the money they raise must also come from their home jurisdiction. In addition, they can invest only in small- and medium-sized businesses.
Investments in the fund are eligible for registered retirement savings plans. Also, the federal government provides a 15 percent tax credit.
In Saskatchewan, Manitoba and British Columbia, investors get an additional 20 percent tax break. That means investors who include the investment in their RRSP can get up to 85 percent of their investment back.
For people in the highest tax bracket, a $5,000 investment in these funds will bring about $4,250 in tax savings and credits.
Alberta does not allow provincial labor-sponsored venture capital funds. Investors there can put their money only in national labor-sponsored funds.
Tax incentives serve as catalyst
Governments provide these huge incentives to encourage investment in their economies.
These funds must be sponsored by a trade union. Prairie Ventures is sponsored by the Saskatchewan local of the Communications, Energy and Paperworkers’ Union of Canada.
The unions’ interest, Beattie said, is to stimulate job creation. He said the union backing his fund is not concerned whether the jobs created are union or non-union.
Beattie thinks there are great opportunities in Saskatchewan because there are few pools of investment money in the province. National risk capital funds don’t spend much time looking at the Saskatchewan market because it is so small, he said. And there is only one other provincial labor fund.
And unlike Alberta, which has large cities with large populations of wealthy investors, Saskatchewan has smaller cities with fewer wealthy investors. But the province has many entrepreneurs in rural areas who can build and manage companies with a minimum of capital.
“People are very good managers,” said Beattie. “They’re used to managing on very little capital.”
To claim the full tax break, investors in the labor-sponsored funds must leave their money in for eight years. Beattie said this is important for the fund because it needs to know how large its pool of capital is before it starts buying into businesses.
Investment commentator Gordon Pape in the past urged investors to be cautious with labor-sponsored venture capital funds. But recently he has begun recommending them as good investments.
He has suggested focusing on funds near the upswing of the J-curve. The J-curve is the term used to describe the lengthy lag between the time an investment is made in a new or expanding business and the time it begins to pay returns.
The lag is due to the problem start-up companies face when they have to make heavy investments in research, facilities and machinery, but are unable to produce their products for months or years. This lag is why these companies need equity investments and cannot rely on bank loans, Beattie said.
Beattie said the fund’s investments will be diversified.
Twenty-five percent will be put into investment grade securities, such as the shares of publicly traded companies. This should bring in dividends and capital growth in the short term.
Thirty percent will be invested in loans to companies. This will bring in interest payments. The remaining 45 percent will be directly invested in the equity of small and medium-sized companies, he said.
Any Saskatchewan resident can invest in Prairie Ventures or the Golden Opportunities Fund Inc., the other provincial labor-sponsored fund. Manitobans can invest in the Crocus Fund.
Dale Halldorson, the chair of the Saskatchewan Chamber of Commerce’s finance committee, said his organization generally supports funds such as these, because they help fill part of a financing gap new businesses face.
“There are a number of established lenders out there with criteria that include having a proven track record of several years (before they will lend money,” said Halldorson. “A startup company obviously doesn’t have that.”
But the Canadian Taxpayers Federation, a privately funded lobby group, doesn’t support the funds. The organization’s Saskatchewan director says it isn’t fair to give special treatment to funds sponsored by labor unions, or those funds that invest only in one province.
“We’d prefer a more equal approach, where governments aren’t creating policies to give special tax treatment to one and not to the other,” said Richard Truscott.
“It may produce the desired result of getting more people to invest in small business and industries and be a benefit to the labor organizations that sponsor these things, but it’s not the best way to achieve that ultimate goal.”
The taxpayers federation wants governments to cut their taxes on investment, so people will put more money into investing overall.
