You have probably heard of the Canada Pension Plan Investment Board, they’re entrusted with making stock market investments to try and boost the returns from the CPP Late last year they announced the commitment of almost half a billion dollars to three US-based private equity firms that manage venture capital on a global basis. This is part of a plan to plunk almost $5 billion into private companies over the next several years. The Investment Board made it pretty clear why they were making these moves, stating that “Private equity is expected to produce higher returns than public equity over the long term and…provides alternatives to volatile stock markets”.
While venture capital carries many risks, it’s absence would mean the demise of many small enterprises with great ideas, knowledge and opportunity, but a lack of adequate start-up funding. Venture capital often steps in where the banks will not by providing a lifeline through the research and development phases for private companies involved in a variety of emerging technologies. British Columbia is home to many of these nascent businesses and the highly-skilled, well-paid employment that they foster. While an increasing number of money managers are developing portfolios that are ‘socially responsible’ by virtue of their design, the provision of venture capital investment in our province seems socially responsible by it’s very nature.
BC Working Opportunity Fund
The Working Opportunity Fund, western Canada’s largest venture capital company, invests equity capital in “ethical, innovative, rapidly growing, entrepreneurial BC companies”. These companies are some of the fastest growing companies in the province’s emerging sectors – life sciences, information technology, advanced manufacturing, and film & entertainment. The goal is to earn a competitive long-term return for WOF shareholders while investing in BC, and providing tax savings through credits that put 30 cents back into your pocket for every dollar invested (subject to certain restrictions). WOF is of course no stranger to BC residents, with over 50,000 shareholders having committed almost $500 million to the fund in the 11 years since it’s inception.
WOF shareholders are no doubt disappointed with the recent performance of their funds, but these results need to be put into the perspective of recent market declines. The bursting of the technology bubble has been particularly unkind to many BC-based businesses that are innovators in their field. In an environment where investors are seeking earnings stability, companies that are long on promise but short on real revenues have been shunned by retail investors. However, the actions of the CPP Investment Board demonstrate that there is still plenty of interest in the provision of venture capital by institutional investors. In an investment environment where the pendulum often swings wildly from one extreme to the other, this could be an opportune time to be considering this kind of investment.
WOF is available in two classes of shares, balanced and growth. The balanced shares have less exposure to public equities and are more appropriate for the conservative investor. A little more than half of the balanced fund is allocated towards fixed income investments such as Government of Canada bonds, a further third of the portfolio directed towards private venture companies, and about 10% is placed in firms that have already gone public. By contrast, the growth fund is 41% invested in private venture, 26% in Canadian equities, 18% in public venture, and 15% in fixed income. Growth shares are more appropriate for investors with a higher tolerance for risk in their portfolios.
If you are interested in having a look at how WOF has deployed their venture funding in BC, I would suggest you log into their website at http://www.wofund.com/ and click on the link to Venture Portfolio and then WOF Investments. An interesting list, although I must admit to being a bit lost when it comes to many of the “Information Technology” components of the fund. I just can’t get my head around a “free space optical networking product” although I’m sure that someone far more tech-savvy than I can get turned on by it. My imagination is more stimulated by the work being done at companies like Future SEA Technologies Inc. of Nanaimo (addressing concerns that hinder aquaculture development in this province), Stressgen Biotechnologies Corp. of Victoria (development of vaccines for the treatment of infectious diseases and cancer), and Service Systems International Inc. of Burnaby (environmentally-friendly treatment of wastewater that eliminates the use of chlorine).
The management at WOF will be the first to admit that not all of their investments will stand the test of time. They expect that while they may ‘strike out’ on perhaps 10-20% of their ventures, a similar proportion of ‘home runs’ will be sufficient to reward all of the stakeholders in what is a vibrant and exciting sector of BC’s 21st century economy.