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MUTUAL
FUNDS
Labour-sponsored
Investment Funds
What
is a Labour-Sponsored Investment Fund ?
A "labour-sponsored investment fund"
(also referred to as a Labour Sponsored Venture
Capital Corporation or LSVCC) are investments
funds sponsored by organized labour to provide
venture capital to small and medium-sized businesses,
particularly start-up businesses. LSVCCs are created
to encourage job creation and protection as well
as greater participation in share ownership and
business development.
LSVCCs must invest in a certain
% of their raised equity capital within a certain
time frame as prescribed by law. They must invest
in either shares of a company or debt issued by
a company. Due to the nature of their investment,
LSVCCs are associated with greater risk potential.
Tax credits offered are supposed to offset existence
of any additional risk.
Investors who purchase LSVCC
shares may be entitled to tax credits from a province
and/or the federal government. Not all LSVCCs
will be eligible for the tax credits in each province
or territory. The maximum federal tax credit is
15% and the provincial rate for applicable provinces
is 15-20%. These tax credits are in addition to
tax reductions experienced when/if making the
LSVCC investment part of an RRSP contribution.
The following Labour-Sponsored
Funds are eligible for the federal tax credit
and are available for sale in all provinces:
Canadian
Medical Discoveries Fund (also
qualifies for Sask. provincial tax credit)
The following fund is available
for both the 15% federal and 15% provincial tax
credits ONLY in the province of Manitoba:
Ensis
Growth Fund
The Benefits of Venture Capital Investing
A shareholders' survey by ENSIS indicated that
the primary purchase motivators are receiving
a tax credit, the recommendation of a financial
advisor, and the knowledge that a portion of
each individual's invested capital is supporting
the growth of Manitoba based companies.
It is not uncommon for venture capital fund
to respond to the inquiry of why the Federal
and Provincial governments provide you, the
investor, with a 30% tax credit. There are many
reasons for the tax credit, the most significant
of which is to attract patient investment capital
to the private equity investment market. The
Federal and provincial governments recognize
that a robust supply of venture capital in a
province creates sustainable jobs by supporting
the growth of small and medium size businesses.
Beyond these obvious benefits to investing in
a venture capital fund are the more compelling
reasons for the tax credits, and more importantly,
for the legislation that governs Labour Sponsored
Investment Funds (LSIF's) within Manitoba.
When businesses have a supply of growth capital
they are able to expand more rapidly creating
new and better jobs and more stable and significant
profit levels. Industry studies have shown that
the incremental revenue to governments in the
form of increased personal and corporate taxes
very quickly pays for the cost of the tax credits.
This is because when smaller firms that receive
venture capital do succeed, they typically experience
growth rates that are exponentially higher than
that of established companies.
To maximize on this phenomenon, effective LSIFs
must follow a disciplined approach to investing
in and managing their portfolios. They must
actively source and make deals, mentor and grow
their portfolio companies, and ultimately exit
them.
In order to ensure that funds perform in accordance
with this venture capital framework, the Provincial
government recently introduced investment pacing
requirements for LSIFS. In a nutshell, the pacing
requirements are as follows:
LSIFS must be 60% invested in eligible Manitoba
businesses by the end of the year after the
year that the funds were raised; over and above
this, new monies coming in must be 60% invested
in new companies (this means that funds cannot
continue to only invest in companies that are
already in their portfolios) by the end of the
second year after the year that the funds were
raised. Over the long term, this new pacing
legislation is designed to prevent the funding
of redemptions with new money - redemptions
need to be funded from exits. For example, if
a fund has $20 million in sales and $20 million
in redemptions, it cannot just fund redemptions
from monies raised by selling new shares. Redemptions
must be funded by selling an investment from
the portfolio, and new monies coming in must
be invested in new companies. When these pacing
requirements are met, the LSIF model truly benefits
the local economy and shareholders, and the
two levels or government maximize their tax
revenues.
As part of the new Provincial pacing requirements,
the province has now implemented a tax for LSIFs
that do not comply with the new regulations.
This charge would come directly out of the net
asset value (NAV) of the fund, so it would have
a direct effect on shareholders in that their
shares would lose value.
E-mail: invest@barkermoney.com
Quadrus Investment Services Ltd.
and design, Quadrus Group of Funds, invest@Quadrus
and Fusion are trademarks of Quadrus Investment
Services Ltd.
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