Discussion guide: Funds-of-funds stream

1. Provincial/territorial government participation

Similar to previous program funds-of-funds streams, it is proposed that Canadian provincial or territorial governments participating in selected funds will be expected to invest on the same terms as the federal government.

2. Private investment leverage ratio

The Growth VCCI will seek to maximize the leverage ratio of government investment. As such, it is proposed that selected fund managers will be expected to raise $3 from private-sector investors for every $1 of public-sector capital (including investments from other levels of government or agencies wholly government owned), a ratio consistent with previous VCCI 2021 funds-of-funds stream.

3. Target fund size

To ensure Canadian funds have capital to scale their investments and Canadian companies have access to capital to achieve their growth objectives, it is proposed selected fund managers must be raising a fund-of-funds of at least $150 million. It is proposed that no maximum fund size is set. However, it is intended that this funding will be allocated to multiple fund managers.

4. Timing of first close

Following confirmation of funding, selected fund managers would be expected to complete a close with government capital matched by private sector investment of the lesser of $150 million or at least 50% of target fund size, within 18 months from confirmation of federal investment.

5. Capital call contribution schedule and waterfall structure

Consistent with previous programs, a waterfall structure is being contemplated which would include the following considerations:

• adjusting government/private sector capital call contribution schedule to permit greater risk sharing between government and private sector; and
• adjusting preferred rate of return to align with markets for the private sector with a lesser preferred rate of return for the government capital.

Below are proposed options. Views are welcomed by fund managers and investors.

6. Management fees

Management fees should be competitive and based on comparable terms in the Canadian VC market.

With the dual-purpose of fostering a competitive investment landscape and ensuring fund managers are sufficiently resourced to be agile and diligent in operations, fund managers would have the flexibility to offer fee discounts, such as:

• Discount proportional to investment size—fee discounts provided for large-scale investments from private sector investors.
• Graduated fee structure—relative to investment size, fee structure changes between the investment period and the harvesting period.
• Early bird discount—option to provide a reduced fee for private investors that participate in the first close.

Public sector investors would not be eligible for fee discounts.

Fund managers and investors are invited to share their views on models and potential fee ranges based on factors such as cheque size, as well as propose alternative models for consideration.

7. Proposed eligibility criteria

The following eligibility criteria are proposed in the selection of a fund manager, to ensure a minimum threshold of investment expertise, Canadian industry presence, and general partner (GP) risk alignment:

• Applicant must be a private sector fund manager.
• Applicant firm must already be a registered investment entity in Canada, as applicable and capable of raising capital if selected.
• All successful applicants must agree, at a minimum, to having a principal office located in Canada that is an active investment office and that houses senior investment professionals who are residents of Canada and of whom at least one is a member of the investment committee (or similar decision-making body) responsible for making investment decisions for the proposed fund.
• Demonstration of support from institutional investors through at least one of the following:
  • A letter of intent from at least one institutional investor, indicating support for the identified manager to create a fund-of-funds focused on Canada and an appetite to invest in said fund (viable in-principle commitment); or
  • experience in raising a fund-of-funds of at least $100 million in size that has had pension fund or other institutional investor (e.g., financial institutions, insurance company) limited partner (LP) commitments; or
  • at least one GP has managed a private capital fund of at least $100 million.
• GPs of selected funds-of-funds managers must demonstrate a market-based GP commitment relative to fund size.

8. Investment restrictions

Aligned with BDC's investment policies, fund-of-funds managers will be restricted from making direct investments in companies primarily engaged in certain activities, such as holding or managing real estate, extracting resources, or selling, marketing or providing gambling, pornography, alcohol, tobacco or illegal goods.

Funds will be permitted to invest in entities whose activities in the defence and national security sectors relate to supply chains and direct sales destined for Canadian defence and security entities and those of allied nations (such as NATO, G7, and Five Eyes countries). In considering any such investment opportunities, general partners will be asked to conduct enhanced due diligence appropriate to the sector and ensure that (i) investee entities and their operations comply with all applicable laws and regulations, and; (ii) the fund's activities remain aligned with Canada's strategic national security objectives, international human rights commitments, and the United Nations Guiding Principles on Business and Human Rights.

9. Allocations

Within this program, a main objective of the Funds-of-funds stream is to drive capital formation in the venture capital ecosystem, with the end goal that Canadian companies across Canada have strong domestic partners who will be able to follow a company along its growth journey. Building on the parameters of the previous program, it is proposed that a maximum of 30% of total fund size (aggregate limited partner [LP] commitments, does not include recycled capital) are allocated to direct investments, defined as investments into companies alongside other investors.

Successful applicants must pledge a commitment to make fund investments in accordance with the following parameters:

• a minimum 60% of fund investments into Qualified Canadian Venture Capital (VC) Funds;
• a maximum of 30% of fund investments into Qualified VC Funds; and
• a maximum of 40% of fund investments into Qualified Canadian Funds.

Of the direct investment activity:

• at least 90% must be allocated to Canadian-based companies.

Secondary transactions will be permissible, up to a maximum of 20% of aggregate LP commitments, calculated as the sum of:

• commitments to funds that investment primarily through secondary transactions; and capital into direct investments and commitments to fund investments via secondary transactions.

A pan-Canadian approach to investment is encouraged.

For the purpose of this program, it is proposed:

Substantial Canadian presence: The manager's headquarters are located in Canada or a principal office of the manager of such fund that is an active investment office is located in Canada and, in each case, such office is staffed with senior investment professionals who are residents of a province or territory of Canada and who comprise at least one half of the fund's investment committee—or similar decision making body—that will be responsible for making investment decisions. Funds that do not meet this definition would be considered non-Canadian.

Qualified Venture Capital (VC) Fund: The investment objective is to provide investors with competitive long-term returns through investments in venture capital (VC) opportunities, typically in innovative or technology-focused companies across sectors of the VC marketplace, including companies in information and communication technologies, clean technologies, healthcare, life sciences and companies that are engaged in the development of new products, markets or business models, subject in each case to the availability of such opportunities.

Qualified VC Funds include investments that would reasonably at the time of making such investment (support companies as they develop, grow and transition to reach the later stages of the VC continuum). Such investments are made in operating companies principally through minority equity investments to grow the businesses without taking control, but also through majority equity stakes, typically at initial investment without expecting to retain control at exit, and for the purpose of supporting the companies' development and growth, provided; however, such investment is not effected through traditional private equity buyout strategies, primarily through debt investments (excluding mezzanine and convertible debt and other quasi-equity debt instruments consistent with venture capital investing) or for the purpose of exercising control over the operating company, including at exit.

Qualified Canadian Venture Capital (VC) Fund: A fund that has a substantial Canadian presence and meets the definition of Qualified Venture Capital Fund.

Qualified Canadian Fund: Has a substantial Canadian presence, and has as its primary investment objective the making of primary or secondary investments that support innovative or technology companies and provides growth equity to support later stages for such companies that are reasonably considered to be a part of the venture capital continuum and take minority or majority equity stakes in such companies.

Direct investment: A primary or secondary investment by a Fund-of-funds manager in a company, alongside other investors.

Canadian-based company: A portfolio company that, at the time of the original investment by a Qualified Canadian VC Fund, Qualified Canadian Fund, Qualified VC Fund or direct investment has the following characteristics:

1. either:
   • its headquarters are located in Canada; or
   • a majority of its senior executive officers are residents; and
2. either:
   • a majority of its operations are located in Canada;
   • or a majority of its full-time employees are located in Canada.

10. Overall Canadian content (Portfolio look through)

Building on the historic parameters, it is proposed that selected fund managers should make all commercially reasonable efforts to ensure the majority of total invested capital is invested in Canadian-based companies.

The intention of this program is to continue to advance promising innovative Canadian companies. This increase is intended to maximize the impact of program investment in Canada, while providing flexibility to fund managers to have some international exposure.

11. Code of conduct

Consistent with past practice, fund managers selected under the program will be expected to demonstrate high degree of integrity and transparency in their firm operations as well as interactions with portfolio funds and companies.

General partners must adopt the BDC's Code of Conduct or one that is substantially the same form and substance for the term of the partnership. The main provisions cover harassment, discrimination, and workplace violence. Selected fund managers will be expected to demonstrate a high level of integrity and transparency.

12. Proposed reporting obligations

As with previous programs, fund-of-funds managers selected under this program will be expected to report on fund activities and make commercially reasonable efforts to obtain the necessary information from supported funds and portfolio companies. This information will be used to inform ISED and BDC on initiative progress. Requirements are appended in Annex A.

13. Inclusive Growth Framework obligations

As with previous programs, fund-of-funds managers selected under this program will be expected to align with the Inclusive Growth Framework (Annex B) and implement at least one action under each of the following areas (internal, portfolio and ecosystem) and fulfill obligations under data collection.

14. Call for Expressions of Interest and selection process

Similar to previous programs, the Growth VCCI will use a "Call for Expressions of Interest" over a set fixed intake period to seek proposals from private sector fund-of-funds managers. Fund-of-funds managers will be evaluated and selected through a competitive process that will assess capabilities in such areas investment process and strategy, manager capabilities, and fundraising strategy. Assessment criteria will be set out in more detail in the Call for Expressions of Interest.

Applicants would be invited to bring forward proposals outlining their experience and track records (including alignment between past history and current fund size goals [demonstrating progressive growth in assets under management], track records of performance that is aligned with industry benchmarks for comparable vintages/investment thesis); presence/profile in the Canadian market (including endorsements from portfolio companies and limited partners); and, clearly articulated investment thesis, fundraising strategy, and value propositions to Canadian firms and the VC ecosystem.

Once selected, recipients would be required to do their own fundraising to meet predetermined targets within set timeframes. If a selected recipient fails to meet these targets, the Government would reserve the right to reallocate some or all of the capital within or across streams.

Views are welcome on timing of launch of the process, with the aim of contributing to strong fundraising outcomes for selected fund managers alongside timely flow of capital into the ecosystem.

15. Discussion questions

1. Are the proposed parameters aligned to attract new institutional investors to investment? How can the proposed areas be strengthened to support capital attraction while providing competitive returns to both private sector and government investors?
2. The proposed parameters, including investment allocations and definitions (section 9), adopt a more expansive view of the Canadian investment landscape, expanding the categories of investment for selected managers. How can the proposed allocations and definitions be strengthened to foster increased investment in Canadian funds and companies while also aligning with investment strategy and portfolio diversification objectives? Are there specific market gaps or sectors that should be prioritized for investment under this model?
3. A key priority remains bolstering investment directed toward Canadian funds and companies. What are alternative models or incentive structures that could be integrated in a fund-of-funds model to ensure that fund managers meet or exceed the allocation of committed capital to Canadian companies?
4. Are there other parameters or operational efficiencies that should be considered in the context of design?