Northleaf's Venture Catalyst Fund gets to work

Depending on your point of view, things are either going quickly or they’re not when it comes to the execution of the Federal government’s Venture Capital Action Plan. Announced formally in January 2013, the Federal goal was to put another $400 million to work in the innovation ecosystem.

The tools chosen by Ottawa were appropriate, given their public policy choices:

– $250 million to establish new, large private sector-led national funds of funds (a funds of funds portfolio consists of investments in several venture capital funds) in partnership with institutional and corporate strategic investors, as well as interested provinces;
– Up to $100 million to recapitalize existing large private sector-led funds of funds, in partnership with willing provinces;
– and An aggregate investment of up to $50 million in three to five existing high-performing venture capital funds in Canada.

In 2013, the government allocated the “Direct” piece. $50 million went to CTI Life Sciences Fund II ($15M), Summerhill Ventures II ($15M), Real Ventures Fund III ($10M) and Lumira Capital II ($10M). These were fabulous choices, and the four funds in question gave the Feds exposure to two different firms in both the life sciences and information & communication technologies sectors. That they are all based in central Canada speaks to the consolidation that has occurred in the Canadian VC space over the past decade. Vancouver no longer has standard bearer Ventures West, for example, but one can hope that the $100 million Alberta Enterprise program has done the trick in that part of the country.

Given the relative dollars, whether or not each individual VCAP LP commitment will have a defining difference to the GP in question could be argued, but none of the VCs in question, nor their eventual entrepreneurial partners, will turn down the opportunity to have a slightly larger fund. And there’s the very positive brand impact of being designated by the government as having “demonstrated strong investment performance” in your earlier fund(s). Everyone appreciates third-party affirmation (see prior post “Wellington Financial named to Preqin’s list of ‘Consistent Performing Fund Managers’” Feb. 24-14), after all.

Next up in the execution of the VCAP appears to have been the so-called “recapitalization” of some of Canada’s existing fund-of-funds, with last month’s announcement of the $217.5 million first close of the Northleaf Venture Catalyst Fund. With $36.3 million lead orders by each of Ottawa and Queen’s Park (via BDC and OGCC), the “private sector” joined in with $145 million. I put quotes around the private sector moniker, since almost all of it came from the six large Federally-regulated banking entities or the taxpayer-funded CPP Investment Board, which would have been conspicuous by its absence (see prior post “Has anyone seen CPPIB’s venture bucks? part 2” Nov. 12-12). The only pure corporate name was Open Text, which has unusually strong ties to the topic: OTEX Chairman Tom Jenkins Chaired the Review of Federal Support to Research & Development in 2011, and let’s not dismiss the perspective of OTEX Director Debbie Weinstein, who is as passionate as anyone about the importance of the innovation sector in Canada’s future economy.

There is great hope within the venture ecosystem that the NVCF will eventually reach its $300 million hard cap, and you can be sure that Finance Minister Jim Flaherty and BDC Chair Sam Duboc are focussed on getting the fund over the finish line (see prior representative post “Feds on right path with Innovation ecosystem consultations“). Where that additional capital will come from remains unclear, and in the absence of support from Canada’s largest energy, resource or utility firms, I nominate that some of Boeing’s C-17 industrial offsets be sent into this piggybank. A few firms have taken the leap for their own corporate reasons: Thomson Reuters is in the Blackberry Partners Fund, thanks to Geoff Beattie, and Rogers Communications has their own tactical venture arm. But the list of very large firms who benefit from Canada’s R&D spend, but do little to help convert that massive government R&D spend into pure innovation themselves is long.

As much as the local press hailed the new $217.5 million NVCF fund as being “a massive increase in venture capital funds for the area“, this vehicle appears to merely replace the “troubled” $205 million Ontario Venture Capital Fund. Some will be concerned that the Ontario government’s commitment to the total fund has shrunk 44%, from $90 million to $50 million. Compounding the pain of the $250 million cut to the Ontario Emerging Technologies Fund (see prior post “Ontario government puts $250M Emerging Technology Fund on ice” June 21-12).

The 2008-vintage Ontario Venture Capital Fund, which was also managed by Northleaf Capital Partners, enjoyed commitments from many of the same institutions: Ontario ($90M), TD Bank ($35M?), OMERS Strategic Investments ($20M?), RBC ($15M?), the Business Development Bank of Canada ($20M?), and Manulife Financial ($15M?). As we know, OMERS CEO Michael Nobrega subsequently started his own venture initiative, leaving Manulife as the only OVCF limited partner not to participate in the first close of NVCF. Back in 2007, Manulife liked the space:

“We are supporting this VC Fund because we think it’s the right initiative at a time when the supply of venture capital in Ontario is less than optimal and investment returns have been rising,” said William Eeuwes, vice-president and head of Manulife’s merchant banking arm.

And yet, if I’m on Manulife’s Board of Directors, I might be looking at Great-West Life, Sunlife and Industrial Alliance’s absence in either vehicle and ask what venture has to do with the insurance business. In the case of the big six banks, they owe Ottawa for every dollar of their current shareholder’s equity (see prior post “Canadian bank bailout total touches $186 billion” Dec. 2-10). Their participation in this initial launch, and perhaps other VCAP funds, was never in doubt. The respective CEOs would have been better off to set themselves on fire than not participate in this first close.

Now that it is up-and-running, I was glad to see Northleaf quickly pull the trigger with two $30 million commitments for both Georgian Partners II and XPV Water Fund II. The fact that both funds had previously raised capital from the Northleaf-managed OVCF would have eased the workload, without a doubt.

The ecosystem will be delighted that the tap has been turned on. A year ago, I observed that OVCF had been run like the Greek Post Office (see prior post “Here’s hoping OVCF 2.0 fixes the bugs in version 1.0” March 20-13). All eyes will be now be watching to see how long it takes Northleaf to back some incremental teams that weren’t already in their wheelhouse, such as a reincarnation of Edgestone Ventures III (and even that name had been previously soft-circled by OVCF), and truly add to the number of VC doors that Canadian entrepreneurs have to knock on.

Let’s not forget! That’s a key point of this entire exercise (see representative prior post “CVCA injects some fresh ideas into the federal election campaign” Oct. 6-08).

MRM