TD Bank tagged to manage Ontario venture capital fund targeting early-stage investments

The Ontario Venture Capital Fund (OVCF) has chosen a fund manager and boosted capitalization to $205 million as it prepares to begin making investments later this year. TD Capital Private Equity Investors has been selected to manage the fund of funds and TD Bank has invested $30 million to the existing pool which now includes the Ontario government and five institutional investors.

The launch of the OCVF marks a distinct turning point in the Ontario government's support of the venture capital (VC) industry with a purely market-based mechanism that effectively supplants the tax-leveraged approach characterized by labour-sponsored VC funds. The OVCF will be selecting fund managers and investing in 15-20 funds which will each invest in approximately 20 companies each, giving it an impact that could stimulate a resurgence in VC investment that has been in steep decline.

Between 80% and 100% of capital will be invested in Ontario-based, Ontario-focused funds, with up to 20% available for direct co-investment primarily in follow-ons in the most promising prospects.

"This approach has the benefit of diversification and therefore a high probability of success," says Rob MacLellan, TD Bank's chief investment officer. "We're hoping this is a good time for investment returns. With less competition out there, you can be more picky and companies have a better chance of getting funding."

Canadian VC has been slow to recover from the collapse of the tech and dotcom markets back in 2000-01 with many players opting to exit the early-stage space in favour of less risky follow-on investments. The red hot oil, gas and mining industries have had a negative impact on high-tech companies, which are viewed as higher-risk and often longer term. The problem has been particularly acute in Ontario, where the VC industry was dominated by tax-advantaged labour-sponsored venture capital funds (LSVCFs), which are now widely considered a failed experiment. That has hit early-stage VC which has declined in Ontario from $1.5 billion in 2000 to just $236 million in 2007.

"The big difference between this and labour-sponsored funds is that there's no tax angle or tax cushion. We're working with 100% dollars," says MacLellan. "We're hoping to have a positive return on our investment and a positive return for government. Hopefully it will lead to a second fund."

Due to the high risk of high-tech investments, large institutional investors typically place only a small portion of their overall portfolios into VC. This is true for the institutional investors behind the OVCF. In addition to TD Bank and the Ontario government, its backers are OMERS Capital Partners, RBC Capital Partners, Manulife Financial and the Business Development Bank of Canada.

Although the OVCF has a hard cap of $270 million, Maclellan says $205 million is sufficient to move forward.

R$