Big banks unveil $1B growth fund for promising SMEs
Canada’s biggest banks and insurance companies have launched a private-sector fund of up to $1 billion to provide longterm financing to burgeoning high-growth businesses, the firms announced Thursday.
The Canadian Business Growth Fund will look to invest the full amount over 10 years, with an expected initial commitment of more than $500-million.
Royal Bank of Canada’s chief executive officer, Dave McKay, said the financial industry had been in talks for a year to address the “subscale and fragmented” funding landscape for small and medium businesses in Canada.
“We do have a challenge raising capital for growth in our economy,” he said during a press conference on Thursday, where he was joined by the chief executives from Canada’s largest banks on stage.
Initial participants include BMO Financial Group, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Bank of Nova Scotia, Toronto-Dominion Bank, Manulife, Sun Life Financial, Great-West Life, National Bank of Canada, ATB Financial, Laurentian Bank, Canadian Western Bank and HSBC Bank Canada.
“Government has a role,” Minister of Finance Bill Morneau said on Thursday. “But the private sector has a critically important role.”
Morneau said the private sector led initiative will provide “patient capital that will make an important long-term difference for our country.”
The fund will operate as a forprofit independent entity, launching in 12 to 18 months, and will be headquartered in Toronto, said TD executive Barbara Hooper, one of the representatives for the fund.
Future contributions, another tranche of $500 million for a potential total of $1 billion, will depend on both demand for investment and the fund’s performance.
Typical minority equity investments in target companies will likely be in the range of $3 million and $20 million, the ministry said.
The fund, similar to one established in the U.K., will also provide advice, mentorship and access to talent pools.
It will also have its own board of directors, comprised of representatives from investors. The fund will also begin a search for an independent chair and a chief executive officer, with the aim of deploying capital within the next 12 months.
The minority stakes taken by the fund will be between 20 and 40 per cent, said Stephen Forbes, CIBC’s executive vice-president and chief commercial officer and one of the fund’s representatives.
The participating investors did not disclose how much each organization contributed. Each of the five banks contributed a “similar” amount, and each investor made a “substantial” contribution that reflects the size of the institution, said CIBC chief executive Victor Dodig, who has long touted the benefits of such a fund.
Empirical evidence shows that Canada has been a difficult place for many companies to grow, said Craig Alexander, chief economist with the Conference Board of Canada. A private-sector led initiative could help, as the government has had a poor track record of picking winning companies, he added.
“I don’t think access to capital has been the primary barrier, but for certain companies it has been ... An independently established growth fund with a capital base can help identify individual companies and help them to succeed,” he said.
Under current rules, banks must hold significant capital on a riskweighted basis when lending to small and medium businesses, according to Alexander. In turn, it is more profitable for banks to lend where less capital is required.
“The best way to diversify your equity risk is to pool that equity capital together as institutions, rather than doing our own,” he said.
“So that’s why we have come to do it that way. We all have our lending models, but when it comes to long-term capital, we thought it’s best to actually conduct it through a fund like this.”