David Levi vows to conquer the Canadian LSF landscape. GrowthWorks is the only labour-sponsored fund manager to cross provincial boundaries and, once it’s completed a series of mergers, will have four major labour-sponsored funds as well as three private funds for a total of $850 million under management.
Investment insiders call him the leading consolidator of the country’s controversial labour-sponsored-fund industry. Not surprisingly, David Levi is bullish about the funds that woo investors with a 30-per-cent tax credit. The subsidy exists to encourage people to invest in early-stage tech and life sciences companies. Investors love the tax break, but few rave about the returns. (B.C.’s Working Opportunity Fund has lost an average of 8.2 per cent over the last five years, while 10-year gains are 3.9 per cent.) Critics have cautioned investors to steer clear of the funds for their risky nature, while competing venture-capitalists decry their reliance on government subsidies. Even so, Levi vows to conquer the Canadian LSF landscape. GrowthWorks is the only labour-sponsored fund manager to cross provincial boundaries and, once it’s completed a series of mergers, will have four major labour-sponsored funds as well as three private funds for a total of $850 million under management. Sound impressive? Here’s the snag. The industry is on tenterhooks these days after the Ontario government recently said it would phase out its 15-per-cent tax credit to labour sponsored funds. B.C. must also be taking a second look and if the feds follow suit, the industry could be sunk. Even so, the ripple hasn’t made Levi rethink his strategy of buying up funds in other provinces to become the industry leader. Ontario decided to yank your tax credit – and you’ve just expanded into that province. Worried? Well first, I wouldn’t say ‘yanked.’ They’ve said they’re going to wind down the program over six years – that’s at least two lifetimes in politics – time for us to have another discussion. We’re not that concerned. Still, not a good signal. No, it’s not. And part of the reason we want to go national is to ensure we don’t have all our eggs in one basket. Did Ontario’s change of heart come out of the blue? No question. Six months ago we were meeting with them to talk about growing the program. Nowhere in those discussions in 18 months did anyone say they were considering winding the program down. In fact, I left for Africa to climb Kilimanjaro the day before this announcement because I was told repeatedly they planned to improve the program. I got a call the day after I got there and had to arrange to get back immediately. So you didn’t make it up the mountain. We saw the top of it, that’s all. It must be tough when your industry is so dependent on the whims of governments. Almost every industry gets some kind of incentive from government. You’ve been dubbed the LSF industry’s leading consolidator. Does that fit? We made a decision that we wanted to be the best. We reached our max in B.C. and wanted to apply those skills across the country. How will that look? We now operate in B.C., Saskatchewan, Ontario and the Maritime provinces. Our goal is to be the leader not just in Ontario, but also across the country because size has advantages: For one, the larger we get, the lower the management fees. Two, when you’re larger, you become the first stopping place for companies looking for funds. It’s better to do deals, you can pick your partners and you end up getting the best deals. Investors are drawn to the funds for the tax credit, which is split between the federal and provincial governments. Do you feel the feds’ support is solid? I was in Ottawa last week and we got a very clear view that the national program is not under review. Ontario opened it up to everybody and has about 40 funds – from sports funds to film funds – and they are underutilized, plus a lot of these guys have no experience with venture capital. Now, the shake-out is happening in Ontario. We have about $360 million under management in Ontario, about 13 per cent of the market. In the long term we think there will be two or three large players there and we will be one of them. Your strategy? Internal growth and, at the same time, we want to acquire other funds and we are in discussions on that as we speak. Even if the 15 per cent from the province goes, we still have the commercialization funds – a very early-stage fund that pays an additional 25 per cent dividend to the investor. David Baines has been taking the boots to you in recent months. How do you respond to criticism that the asset class is a lousy performer and GrowthWorks’ bonuses have been out of whack? He writes essentially the same column on us about every two years, so I’m used to it. And for some reason he’s turned it into a personal issue, which diminishes him in writing about the fund. In my opinion, David’s credibility has dropped significantly within the investment community, so I just write it off. But what about the points he makes? It’s easy for him to compare us to the TSX but we’re mainly focused on tech. If you took the banks and resource companies out of the TSX, it would be very different. What have been WOF’s biggest wins? HotHaus Technologies and Angiotech Pharmaceuticals. Biggest dogs? One was F-Sona, which had great technology – point-to-point high-speed laser technology – but it didn’t take off. The other would be Sonigistix, they did a flat speaker called Monsoon that was going to go into cars. It was a great idea, but the market didn’t pick up on it.