Rumours swirl on $165 million MRI Fund

Reporting in from the Canadian Venture Capital and Private Equity Association annual conference….

The buzz is all around regarding the much touted $165 million Ontario Government-led MRI Fund (see prior post “$165MM MRI Fund: blessing or curse?” December 3-07). As you may recall, this fund was announced by the Ontario Government last Fall as a means to deal with the continued drop in Ontario VC deals. Institutional partners included RBC, OMERS, Manulife and the scoflaw Business Development Bank of Canada (see prior post “BDC Fact #1” December 3-07). The Fund would invest $20MM to $30MM lead orders in various Canadian VC Funds, and this critical mass would both stimulate the VC business in the near term and encourage new Canadian limited partners to try the asset class for the first time.

If the rumours swirling around the conference are true, the MRI Fund may accomplish little for the VC industry, and the entrepreneurs they help to self actualize.

Here’s the buzz (not all of which can be validated until the Fund is announced):

– TD Capital Private Equity Partners has been chosen to manage the fund; as TD already manages a $150MM Canadian Venture Fund of Fund program for CPP Investment Board (disclosure: they inherited a portion of our Fund II from Edgestone Capital Partners), this means that what may well be Canada’s largest pool of VC limited partner capital will be under the control of one group/person: if they like you, you’re golden; if not, you might be out of business if they pass on your next fund;
– the next close will be $200 million (the December close saw $165 million committed to the concept), of which the Ontario Government represents the lion’s share at $90 million;
– for the first $90 million of GP deals, the Ontario government will use 100% of their funds; unlike a traditional limited partnership where all investors contribute capital equally from the start; if there are losses, all would share, but no one needs to put up any capital until the taxpayer has first funded their portion;
– as a result, the fund is essentially levered from the perspective of the corporate and institutional LPs that have signed on; as the Provinicial Government will put up the first $90 million of cash, the rest of the LPs will earn their pro rata share of the annual profits, even though they’ve yet to deploy any cash. A sweet way to goose private sector returns.
– of the entire capital pool, only 30% will be allocated to “venture capital”, which means the majority of the fund will go to, you guessed it, Private Equity firms. The story is that the institutional LPs forced this upon the Ontario Government. Why, one asks, would the Ontario Government agree to this? On a $200 million fund, for example, only $60 million would go towards VC firms. Which is odd, given that the MRI Fund has been billed as a soultion to 1) the 2005 cancellation by the McGinty Government of the LSIF Tax Credit and 2) the dramatic drop in Ontario VC deals over the past few years.
– that means that despite dedicating $90 million to the MRI Fund, only $60 million in Government capital will go to VC Funds; Would the Ontario Government have been better off in putting their entire $90 million directly into VC Funds, rather than wasting all of the time and expense on the MRI Fund to then only generate $60 million in new VC capital commitment opportunities? Good question. It’s not like RBC, OMERS and BDC couldn’t find their way around the VC industry with a Provincial government tour guide.
– the strangest twist of all is that there are no specific allocations for Ontario-based VCs, or even Canadian-based VCs for that matter; the Ontario MRI Fund may well deploy capital with KKR, Madison Dearborn, Silver Lake Partners and other household names — not exactly the profile of firms that will help arrest the 5 year decline in VC deals in Ontario, nor the dearth of commercialization successes coming out of Ontario Universities…despite multi-billions of R&D investment dollars each year by the federal and provincial governments.

None of these rumours can be true, of course. It all sounds too crazy.

I’m looking forward to hearing the details of the new fund before too much longer. If 30% of the $200 million ultimately goes into VC funds, and those dollars are deployed over a normal five year horizon, what impact will that have on the entrepreneurial marketplace? You know the answer: Squat.

In an industry that saw more than $1 billion of Canadian transaction in 2007, $12 million of new capital each year for the next five years will accomplish little. Our own firm comitted more than that sum to local technology companies in the month of May 2008 alone.

In the rush to co-opt the private sector to validate the MRI Fund vehicle, it appears that the Province has sold its soul. Let’s hope its not true.

MRM