Investment and Economic Performance of the LSFs


Labour-Sponsored Funds:
Examining the Evidence

Prepared by the CAW Research Department
February 1999

4. Investment and Economic Performance of the LSFs

Subsidized T-Bills

One aspect of the LSF industry that is generally not appreciated is exactly how little of the total LSF portfolio is actually invested in small and medium-sized businesses in Canada. Federal law requires only that 60 percent of an established LSF (one that has been in existence for 5 years or more) be invested in actual venture stakes in real businesses. Most LSFs do not meet this target, either because they have not yet operated for five years, or because they are simply in outright violation of the rule. For example, the Working Ventures fund currently has just one-third of its total capital invested in actual businesses, even though it has been in existence since 1986. The "true" LSFs had attained venture investing shares ranging between 35 percent and 55 percent by the end of 1997.

Established funds which consistently break the 60 percent rule can be fined; however, these fines are refundable if the LSF subsequently meets the target, and the degree of federal enforcement of the 60 percent rule has so far been quite questionable. Even the nature of the subsequent punishment can be quite bizarre. For example, to avoid being fined for its low venture investment activity, in 1996 the Working Ventures fund committed $15 million to an Ontario government fund (the Community Small Business Fund) which provides risk capital to small businesses. By so doing, the fund avoided a $30 million fine it was supposed to have paid because of its extremely poor record of venture investing. Now the whole justification for the private-sector approach to investment embodied in the LSF industry was that private financiers are somehow supposed to be more efficient than government in allocating capital and supervising investment projects. Yet when one of the largest LSFs fails to meet the lax 60 percent investment target, it avoids major fines by paying into an alternative provincial government investment agency! Millions of dollars of taxpayers’ money would be saved if the huge subsidies were simply given directly to a public investment bank (like the one in Ontario), dispensing altogether with the hungry middlemen who run the LSF industry.

On a weighted average basis, it is safe to assume that no more than 50 percent of total LSF assets are invested in actual businesses. The other half is invested in conventional low-risk financial instruments (such as government bonds, Treasury bills, and other assets), which have nothing to do with the job-creation mandate of the LSF industry.

With only one-half of its portfolio invested in actual business ventures, this means that the effective subsidy paid to this type of investment is actually twice what is stated. Suppose that an investor puts $100 into an LSF. They receive a credit for $30 (half from the federal government, and half from the provincial government). But only $50 of the initial investment ends up with a real business. The rest is invested in a conventional bond-type mutual fund, for which no subsidy should be paid. [Hundreds of billions of dollars of unsubsidized money flows into unsubsidized bond funds every year; the inherent appeal of this type of investment is clear.] The actual stake in the business venture is actually subsidized at a 60 percent rate ($30 out of $50). Even if the LSF industry "cleans up its act" and eventually meets the 60 percent target, the effective subsidy from the LSF credit alone to the venture capital portion of the total LSF portfolio would still be 50 percent, rather than the stated 30 percent.

It is important to recall why the LSF industry was given the right to invest subsidized capital in low-risk conventional money-market instruments. It was felt that private capital funds could not be fully invested in actual business ventures without creating unacceptable difficulties of risk and illiquidity for the private individuals who supplied the initial capital to the fund. A fund with all its money invested in real businesses might face temporary cash-flow difficulties, or be too vulnerable to poor performance in a few of its supported business ventures. Therefore the government allowed these funds to keep a large share of its subsidized capital in low-risk non-business assets, as a necessary condition of making these funds (despite the high subsidy rate) acceptable to private investors.

The bizarre fact that the federal and provincial governments are subsidizing over $2 billion in low-risk bond investments is a direct cost, therefore, of the choice of private, competitive financial firms as the delivery vehicle for this subsidized venture capital. If instead of establishing an elaborate network of individual private capital funds, supported through private investors, and staffed by private money managers, government had established a genuine public investment bank (of the sort called for by the CLC), there would be no need to keep a huge supply of subsidized T-bills on hand. The government is well able to absorb the illiquidity and risk of managing a portfolio of venture investments without requiring a huge on-hand store of subsidized bonds as a "cushion." The expensive use of public monies to subsidize the large low-risk bond holdings of the LSF industry definitely qualifies as the most wasteful and scandalous aspect of this whole concept. And the "true" LSFs are as guilty in this regard as the "rent-a-union" funds.

Negative Return on Venture Investments

LSFs have typically demonstrated a lower rate of return than most other types of financial investments. The average annual return on LSFs during the 1990s, for example, has been 3.65 percent per year—or just one-third the annual average return on other mutual funds during this same period. In itself, the low return of LSFs is not surprising: it is their expected lower profitability that (in theory, anyway) justifies their large public subsidies.

But when we consider that one-half of all LSF assets have been invested in low-risk bonds during this same period, then the true profitability record of the industry is far worse. Bond-based mutual funds have generated annual rates of return of slightly over 10 percent per year during the 1990s. There is no particular reason why the LSFs should not have enjoyed roughly equivalent returns on the portion of their assets invested in these types of instruments. When the total LSF returns are adjusted to reflect this "safe" profit on their large bond holdings, the implied true profit on their venture investments actually turns out to be negative.

As shown in the following table, on the assumption that LSFs had an average of one-half their total assets invested in actual business ventures through the 1990s (and for many funds this is an optimistic assumption), then the pure return on the intended venture capital stake of the industry averaged about minus 3 percent per year. Even if the LSFs had met the 60% venture content rule of the federal government, average pure returns on the venture stake would have equaled negative 0.7 percent per year. This suggests the inherent efficiency and profitability of the small and medium businesses supported by the LSFs to be highly questionable.

Labour Fund Returns: Reported and Actual

Average Total LSF Return

Average Return, Canadian Bond Funds

Implied "Pure" LSF Venture Return
(@ 50% venture)

Implied "Pure" LSF Venture Return
(@ 60% venture)

1990

3.81%

6.37%

1.25%

2.10%

1991

6.52%

19.05%

-6.01%

-1.83%

1992

2.01%

8.69%

-4.67%

-2.44%

1993

5.33%

15.89%

-5.23%

-1.71%

1994

0.01%

-6.18%

6.20%

4.14%

1995

5.71%

19.25%

-7.83%

-3.32%

1996

3.49%

10.07%

-3.09%

-0.90%

1997

2.35%

8.40%

-3.70%

-1.68%

1990s Avg.

3.65%

10.19%

-2.89%

-0.71%

Source for average fund returns: Equion Group, as reported in Globe and Mail.

This strange result is actually a selling feature of the LSFs. Their large holdings of risk-free but subsidized bonds in essence insulate them from the risk of losses in concrete venture investments. Brokers and analysts argue that even if LSF venture investments bomb completely, investors will receive a quite competitive return based purely on the tax credit and the profits generated on the non-venture holdings of the LSFs.

Now in principle there is nothing wrong with a public investment program which generates a zero or even slightly negative return on its assets, as long as those investments are socially mandated and meeting clearly specified and measured social goals. But the whole LSF industry is premised on the notion that private investors, private money managers, and private companies know best (on the basis of their respective profit motives) how to allocate and manage finance. This is why the public subsidies are delivered through these complex and expensive private organizations. Yet if those private decisions actually generate negative returns, the whole vaunted efficiency of private-based finance and investment structures has to be called into question. If Canadian taxpayers are going to subsidize an investment program with zero or negative returns, it would be far better to support public or social projects with explicit social goals—low-cost housing, non-profit community development projects, public infrastructure —rather than paying for an elaborate and costly network of private financiers, and accepting the notion that private companies are the best agents to organize economic growth and job-creation.

Huge Management Expenses

Just how costly it is to maintain the LSFs’ elaborate network of private managers and financial professionals is clear from the financial statements of the funds. The Solidarity Fund spends about $40 million per year on administration. B.C.’s Working Opportunities Fund spends $5 million per year on administration. The CFL’s Working Ventures fund costs $14 million to administer—even though less than one-third of its $825 million in assets are invested in real businesses. The First Ontario Fund spent $1 million on administration in 1997—even though it had invested just $8 million in real companies by year-end, in just 6 different investments. The LSF industry as a whole spends at least $75 million per year on deadweight administrative costs.

"There are incentive fee arrangements built in to a lot of these funds, and there aren’t any standards yet. And generally the fees have tended to be high."

- Edward Waitzer, then-chairman of the Ontario Securities Commission, Globe and Mail, January 12, 1995.

LSFs typically have higher management fees (measured as a proportion of their assets) than other types of mutual funds. Whereas bond-based mutual funds report typical expense ratios of about 1 percent of assets per year, and equity-based funds about 2 percent of assets per year, many LSFs report management expenses equal to 5 percent of assets per year, or even more. On an unweighted basis, the average management expenses of the 19 LSFs surveyed by mutual fund expert Gordon Pape equaled 4.25 percent of assets in 1997. Larger funds tend to report lower expense ratios, thanks to the efficiencies that come with running a larger operation. Again, it was expected that LSFs would have higher administration costs than other investment funds, in theory because of the inherent costs involved in brokering and supervising investments with numerous small companies.

Nevertheless, it is worth noting that over the 8 years for which an investor is required to hold their LSF shares in order to keep the 30% credit, even just a 3.3 percent annual management fee compounds to a full 30 percent of the initial investment. The average 4.25 percent management fee compounds to a full 40 percent of the initial investment. In other words, the high overhead cost of running a typical LSF eats up the full value of the 30 percent LSF credit. When the LSFs were founded with a "job-creation" mandate, the creation of well-paid jobs in financial administration is not exactly what the policy-makers had in mind! Yet to a large extent it must be admitted that the public subsidy of LSFs is in reality subsidizing a high overhead cost that would not be tolerated by investors in an unsubsidized investment vehicles.

Labour Fund Management Expenses: Reported and Actual

Solidy. Fund

Working Ventures

Working Opprty.

Total Assets,
End-1997

$2.18 b.

$828 m.

$167 m.

Venture Assets,
End-1997

$1.18 b.

$268 m.

$81.7 m.

Venture Share

54%

32%

49%

Management
Expenses, 1997

$39.0 m

$14.4 m

$4.9 m.

Apparent MER1

2.0%

1.7%

3.3%

"Pure" Venture MER1

3.5%

5.6%

6.9%

Assets stated as of fiscal year-end 1997. Data taken from financial reports of respective LSFs. Management expenses for 1997 expressed as a share of average 1997 assets (that is, the average of year-end 1996 and year-end 1997 assets). Management expenses include all overhead and amortized start-up costs except depreciation and capital taxes. Data for the N.B. Workers Investment Fund are not meaningful due to its recent start-up.

1. Management Expense Ratio.

2. The First Ontario fund had only $1 million in venture assets as of year-end 1996. If we calculate its MER using year-end 1997 assets only, then the "pure" venture MER is 13.4 percent.


Labour Fund Management Expenses: Reported and Actual

Crocus Fund

First Ontario

CVO Fund

Total Assets,
End-1997

$66.5 m

$22.9 m.

$16.7 m

Venture Assets,
End-1997

$33.2 m.

$8.3 m.

$13.3 m

Venture Share

50%

36%

83%

Management
Expenses, 1997

$2.7 m

$1.1 m.

$1.8 m

Apparent MER1

4.7%

6.2%

12.5%

"Pure" Venture MER1

10.1%

24.0%2

23.0%

Assets stated as of fiscal year-end 1997. Data taken from financial reports of respective LSFs. Management expenses for 1997 expressed as a share of average 1997 assets (that is, the average of year-end 1996 and year-end 1997 assets). Management expenses include all overhead and amortized start-up costs except depreciation and capital taxes. Data for the N.B. Workers Investment Fund are not meaningful due to its recent start-up.

1. Management Expense Ratio.

2. The First Ontario fund had only $1 million in venture assets as of year-end 1996. If we calculate its MER using year-end 1997 assets only, then the "pure" venture MER is 13.4 percent.



In fact, the true cost of administering the LSFs is actually much greater than the stated management expense ratios, again because of the fact that these funds maintain one-half of their assets in low-risk Treasury-bills and other bonds. It is not expensive to manage a simple portfolio of bonds. In fact, two of the "true" LSFs–the First Ontario Fund and the Workers Investment Fund–have outsourced management of their non-venture assets to private investment agencies, in both cases for an annual fee equal to 0.2 percent of those assets. So if we deduct a share of total LSF management costs equal to 0.2 percent of their bond holdings, the remaining management expenses can be considered a fair estimate of the "pure" overhead cost of running the actual venture capital business. The results are startling, as highlighted in the preceding table.

After controlling for the fact that LSFs maintain one-half their capital in low-risk, relatively low-cost bonds and Treasury-bills, the true management expense ratio for the pure small business portion of their assets soars by anywhere between 75 percent and 400 percent from the apparent expense ratios calculated on the basis of total LSF assets. Even some of the "true" LSFs (such as Manitoba’s Crocus Fund and the First Ontario fund) are collecting expenses on their actual venture investments in excess of 10 percent or more per year of the total value of those small business investments. No wonder it is so difficult for these venture investments to show any positive return whatsoever, when the whole process is dragged down by such an expensive administrative superstructure. Salaries paid to LSF administrators are far from being the highest in the financial industry–but LSF managers don’t exactly come cheap, either. Compensation for top LSF executives ranges from $75,000 for the president of New Brunswick’s WIF (about the same as an average union representative would earn) to a total of $310,000 (including a variety of bonuses) for the president of B.C.’s WOF in 1996. [More recent data is not yet available.]

Once again we must compare this administrative expense to the costs of running a genuine, publicly-managed social investment bank. To be sure, any lending or investment institution will encounter administrative costs associated with accounting, monitoring, and supervising investments made in real enterprises. But the administrative costs of running a single, unified public investment system would be a small fraction of the deadweight overhead costs of the LSF industry—just as the administrative costs of running a public pension plan (the CPP) are a small fraction of the administrative waste of private pensions and the heavily-subsidized RRSP industry. Many of the functions performed by LSF employees—filing prospectuses, meeting securities regulations, preparing and distributing advertizing, preparing and distributing detailed reports to tens of thousands of individual shareholders, taking financial journalists to lunch, and so on—play no useful economic function and would simply be unnecessary in a genuine social investment scheme. And even the administrative functions that are economically necessary (such as evaluating business plans and monitoring the real business activity of financed companies) could clearly be done more efficiently and with less duplication through a centralized, not-for-profit organization.

"Bay Street hasn’t been much involved."

- Don Beach, chartered accountant, letter to the editor, Globe and Mail, November 11, 1998, regarding the claim that LSFs have benefited the private financial industry.

Beach was a senior partner at accounting and brokerage powerhouse Coopers and Lybrand, and is currently a member of the Board of Directors of the Royal Life Insurance Company and a member of the Board of Directors of the First Ontario Fund. These affiliations were not noted in his letter.

Job-Creation for Financial Professionals

One especially ironic outcome of the growth of the LSF industry is the number of new jobs that have been created for private financial professionals and companies hired to oversee the management of "labour’s capital." The success of several financial executives in creating lucrative new ventures for themselves through Ontario’s rent-a-union LSF industry was described above. But even the so-called "true" LSFs have done their bit to enhance the business opportunities of Canada’s already booming private financiers. For example, several of the "true" LSFs have handed over important financial management tasks associated with their projects to outside financial agencies. These links between LSFs and the private financial industry are highlighted in the following table. In addition, all of the "true" LSFs outside of Quebec are marketed through the existing network of private brokerages and investment dealerships. To be sure, this has enhanced the profile of the LSFs within the investing community, but it doesn’t come cheap. Large commissions–between 5 and 6 percent of investments sold–are paid by these "true" funds to the private brokerages who carry their product. In other words, as much as one-fifth of the total 30 percent public subsidy to LSF investments is creamed off the top of these new sales by private financial salespersons long before the money even reaches the LSF itself (let alone invested in a real company). Once again, the use of the expensive and complex industry of private financial dealers as the public face of this so-called "social" investment model must be energetically questioned.

"True" LSFs and the Private Financial Industry

LSF

Outside Manager

Nature of Tasks Outsourced

First Ontario Fund

Crosbie Capital Management
Co-operators Investment Counselling Ltd.

Source, analyze, and manage venture investments
Manages non-venture investments

Canadian Venture Opportunities Fund

Wood Gundy Mutual Funds
Goodman & Co.
(Subsidiary of Dundee Bancorp)

General administration and housing of the fund
Management of investment assets

Workers Investment Fund

National Bank of Canada

Manages non-venture investments
Source: Prospectus documents of the funds.

Venture Investment Criteria

Another important issue is raised by the process through which the venture portion of LSF assets are invested in the private companies which are supposed to be the ultimate beneficiaries of this strange investment system. Even though the LSF industry is often held up as a form of "social" investment, there is actually no social, ethical, or labour criteria on which the funds are to be allocated to recipient companies. The only restriction is that these be companies with less than 500 employees and less than $50 million in total assets. (Keep in mind, as well, that only about one-half of LSF assets are invested in companies at all; the rest are in low-risk bonds.) Beyond that, the LSFs are legally free to invest in any company that they wish. Since most funds (including the "true" funds in English Canada) are committed explicitly and legally to maximizing the value of shareholder assets, this means selecting companies on the basis of high expected profitability and low expected risk. This in and of itself is rather strange for a subsidized investment system ostensibly designed to serve social goals.

Some of the results of this virtually unconstrained approach to venture investment are quite bizarre. For example, some LSFs invest in small businesses by purchasing a portion of new shares that these companies that these companies issue through an IPO or other conventional equity offering. This constitutes an incredible abuse of the stated purpose of the LSF industry. The huge subsidies to this industry are justified on grounds that unconventional sources of finance are required by small businesses which simply cannot access conventional stock markets. So why are the funds permitted to place subsidized capital in vehicles (such as IPOs) which are readily snapped up by non-subsidized investors? This practice is just a step removed from using subsidized LSF assets to purchase low-risk T-bills—except that investments in the conventional stock market help these LSFs to meet the already-lax 60 percent venture target stipulated as part of their enabling legislation. The "true" LSFs have not been the worst offenders in this regard, but neither are they innocent. For example, both the Working Opportunities Fund and the First Ontario Fund have previously invested in companies which also issue shares on the stock market. More importantly, the "true" funds have failed to call publicly for this corrupt practice to be prohibited.

"It is absolutely essential to provide [small and mid-sized] companies with an alternative source of investment capital."

- First Ontario Fund brochure

December 3, 1997: Fireworks Entertainment raises $11.5 million unsubsidized capital on the Toronto Stock Exchange

December 4, 1998: Fireworks Entertainment raises $1.8 million subsidized capital from the First Ontario Fund.

Again somewhat in contrast to their mandate to create jobs, many LSFs (including "true" funds) steer away from actual start-up ventures—preferring instead to invest in proven companies which are already operating on a profitable and stable basis. While this strategy may enhance the profitability and stability of the LSFs, it is not at all clear that it results in any new job creation. For example, according to its own promotional literature, the First Ontario Fund "focuses its investment activities primarily on established businesses, so its portfolio has a lower risk profile."

Other issues are raised by the types of companies that benefit from LSF placements. One would think that a "labour-sponsored" industry would be sensitive to the labour relations practices of the companies in which it invests. Yet whether a company is unionized, and the nature of its workplace practices or labour relations, are not normally relevant to the investment decisions of LSFs. The vast majority of LSF-supported companies (including those supported by the "true" LSFs) are non-union firms. Indeed, many of the companies which have benefitted from the subsidized capital offered by the LSF industry are some of the worst violators of the principles which the labour movement otherwise promotes. For example, the largest single equity placement made by the Working Ventures during the first quarter of 1998 was a $1.5 million placement with RailLink Inc., an Alberta-based "short-line" railway. The short-line railways, of course, take advantage of a deliberate labour loophole in most provinces, under which union representation is annulled when ownership is transferred from a unionized national railway (governed by federal jurisdiction) to a provincially-chartered short-line. The sole economic reason for being of these companies is that this loophole allows them to sidestep the union and thus pay dramatically lower wages. The growth of short-line railways represents a direct attack on the jobs and working conditions of union members in the railway industry. Yet a major LSF, in the name of "labour," is actually financing this attack.

Indeed, support for private, largely non-union transportation companies–often competing for the jobs of union members who work in larger, sometimes publicly-owned transportation providers–seems to be a favourite investment focus of several LSFs. Again the question must be raised: are these LSF investments really helping to create new jobs in Canada’s economy, or are they merely assisting in the transfer of jobs from larger unionized companies toward smaller non-union ones? For example, Working Ventures recently invested in WestJet, a non-union start-up airline which is also offering shares for sale on conventional stock markets and which is undercutting the job prospects of union members at Canada’s larger airlines. B.C.’s Working Opportunities Fund has a major placement with a private railway (Great Canadian Rail Tours) which operates private passenger rail service in competition with publicly-owned, unionized VIA Rail. Great Canadian received a major political boost in 1997 when then-Transport Minister David Anderson (another true friend of labour, who oversaw the unilateral reopening of labour contracts during the 1996-97 financial crisis at Canadian Airlines) actually intervened to prevent VIA Rail from expanding its trans-mountain service during the high-demand summer months so as not to undercut the business of Great Canadian.

A few other questionable LSF investments include:

One particular example illustrates vividly the potential ironies of using public funds to subsidize private investments without attaching any binding social or ethical criteria to those investments. Working Ventures has invested several million dollars in Indigo Books, a firm competing with Chapters in the new mega-bookstore market. Indigo is the creation of Heather Riesman, a well-connected Toronto executive, formerly a senior manager at Cott Corp. Ms. Riesman is married to Gerry Schwartz, CEO of Onex Corp., a leveraged buy-out firm with assets of about $6 billion. Schwartz was the second-best paid CEO in Canada in 1997, with total compensation (including exercized stock options) of just under $19 million. Indigo’s flagship store in Toronto was the site last year of a special birthday party for Ms. Riesman. The aisles of books were rearranged to make room for a glamorous party attended by luminaries including Conrad Black and Brian Mulroney. Riesman recently managed to defeat a close union organizing drive launched by UNITE (ironically the co-sponsor of another LSF, Canadian Venture Opportunities). In the wake of employees being fired for having a bad attitude and other forms of arbitrary treatment, enough workers signed cards to approach the OLRB for a certification vote. After the usual management pressure and intimidation leading up to the vote, UNITE lost by six votes. The notion that this well-heeled, well-connected, fiercely anti-union book retailer located in an upscale Toronto neighbourhood should be the recipient of millions of dollars of publicly subsidized capital at all–let alone that this capital should be advanced in the name of "labour"–is surely one of the most outrageous chapters in the strange saga of Canadian LSFs.

These examples and others cast great doubt on the alleged "social mandate" that is being fulfilled by the LSF industry. Since these funds are heavily subsidized by society, shouldn’t society require that they be invested with an explicit and binding social mandate? This difficulty arises fundamentally from the construction of LSFs as private, profit-maximizing institutions, which thus have to justify their decisions to private investors demanding competitive rates of return. A public investment fund, which deliberately sidestepped the structure of private financial markets, would be much better able to structure its investment decisions in line with social priorities.

"The primary effort of this fund is to make money. I am only going to be judged by one thing, and that’s the return from this fund."

- David Levi, President and CEO, Working Opportunities Fund, Vancouver Sun, January 17, 1992.

Ethical and Social Criteria

"None of the labour funds screen prospective companies on social and environmental criteria."

- Eugene Ellmen, The 1997 Canadian Ethical Money Guide (Toronto: Lorimer, 1996), p. 147.

The "true" LSFs, embarrassed by the strange and counterproductive nature of some LSF investments, claim to adhere to a social code in their investment decisions. The statement of principles of the LSIF Alliance supposedly ensures that "socially responsible economic growth" is the end result of investments by the "true" LSFs. But the wording of the principle is deliberately vague, and no binding ethical or social screens are imposed, even by the "true" funds. For example, the "true" funds’ statement calls for "ethical employment practices and cooperative labour relations." Yet the vast majority of companies supported by the "true" LSFs (and almost all LSF-supported companies in English Canada) are non-union. How do the labour unions sponsoring these funds expect that labour relations will be "ethical" and "cooperative" if workers remain unorganized? Indeed, if labour relations in non-union companies can be sufficiently "ethical" and "cooperative" to justify investing the "workers’ money" there, why do we need unions in the first place? B.C.’s Working Opportunity Fund actually stresses in its promotional literature that "whether a company is unionized or not does not enter into consideration when making investment decisions." Similarly, the prospectus document of Manitoba’s Crocus Fund states explicitly that "the fund’s investments are not to be influenced by whether the business is nonunionized or unionized."

The prospectus documents of some of the "true" funds list certain ethical and social criteria as among the factors that fund managers may consider in choosing firms for venture investments. Yet all the "true" funds in English Canada still commit to maximizing the long-run return to their investors as their dominant investment objective (see table), and none list social or ethical criteria as among the binding criteria guiding investment decisions. The Working Opportunity Fund has a social audit process to evaluate the overall social impacts of supported companies, but again the real impact of this process on investment decisions is dependent on the non-binding, subjective judgements of the fund’s managers. Indeed, the WOF’s prospectus makes no mention of the words "social" or "ethical"; if these factors were truly important in the course of making the fund’s investment decisions, it would be legally obliged to inform investors of this through its prospectus filing. In short, despite some overtures to the contrary on the part of the "true" funds in English Canada, there is no fundamental difference between the criteria governing LSF investments–namely high profits and low risk–and those governing the decision-making of any other private investment agency. Author and ethical investment specialist Eugene Ellmen, evaluating the operation of LSFs (a concept which he generally supports), concluded that "none of the labour funds screen prospective companies on social and environmental criteria."

Fundamental Investment Objectives of the "True" LSFs

Working Opportunities Fund

The Fund makes venture capital investments in Eligible Businesses with the objective of achieving long-term capital appreciation.

Crocus Fund

The Fund intends to make investments in Manitoba businesses with the objective of achieving long term capital appreciation in the value of its investments.

First Ontario Fund

The Fund makes investments in Eligible Businesses with the objective of achieving long-term capital appreciation of its Venture Portfolio while fostering long-term growth of companies providing sustainable and equitable employment in Ontario.

Canadian Venture Opportunities Fund

The Fund’s fundamental investment objective is to achieve long-term capital appreciation.

Workers Investment Fund

The Fund will make investments in small and medium-sized Canadian businesses with at least 80% of investments to be made in New Brunswick with the objective of achieving long-term capital appreciation.
Source: Prospectus documents of the funds.


Inflated job-Creation Claims

The five "true" funds represented by the Labour Sponsored Investment Funds Alliance recently claimed that their activities had "created or maintained" over 60,000 jobs in Canada. Over 90 percent of this total is allegedly due to Quebec’s Solidarity Fund. The CFL’s Working Ventures fund claims to have supported 18,500 new jobs. Considering the rest of the LSF industry, a total of some 100,000 Canadian jobs (or about 1 percent of all private-sector paid employment in Canada) are claimed to be the result of the LSF industry.

This claim is vastly overstated, and rests on a single and highly implausible assumption. To arrive at this job total, LSF managers simply add up all of the workers on the payroll of all of the companies which have ever received financing from one or more of the LSFs. Underlying this approach is the assumption that every one of those companies would have become completely and permanently bankrupt, with no jobs retained in any successor firm, were it not for the infusion of capital from an LSF. Since virtually all LSF placements take the form of minority holdings in sponsored companies, it is hardly fair for the LSFs to claim credit for all of the employees on the payroll. Moreover, while the LSF industry has probably generated some genuinely new funds for the new business ventures, much of the funding channeled through LSFs would have existed even without the LSF industry (through banks, equity markets, or traditional unsubsidized venture funds). In other words, many of the investments made by LSFs would have occurred through other vehicles in past years. Thanks to generous tax subsidies, however, the LSF vehicle has become a preferred choice for both private investors and the supported companies. A large share of the financing provided by LSFs, therefore, has simply been diverted from other investment sources, and cannot be considered to be creating net new jobs.

Obviously some jobs have been created or maintained as a result of LSF investments, and the workers in those companies are understandably grateful. What is a fairer estimate of the total jobs impact of the LSF industry? It might be assumed that the LSFs’ share of total business job-creation is proportional to their share of total business investment, or of the total business capital stock. In this case, the LSF industry might account for between 0.15 and 0.25 percent of total private sector paid employment in Canada—or between 15,000 and 25,000 jobs in total. This is not large, in the context of total public subsidies exceeding $3 billion that have been received by this industry. Moreover, we can only conclude that LSF investments account for these jobs; we cannot say that the LSF industry caused these jobs—because we do not know what share of the LSF venture portfolio would have existed even without the subsidized LSF process, and what share represents a genuine addition to the real investments of small businesses.

Even if we accept that some LSF investments have created some jobs, this in no way leads one to the conclusion that the LSF structure—with its reliance on private investment decisions, largely by high-income individuals, its requirement for an expensive infrastructure of private money managers, and its focus on private small business as the "engine" of growth—is the best or even an efficient way of delivering that final job creation. If instead of funding this complicated private venture capital industry, governments had simply invested the same dollar value embodied in their large tax subsidies in new projects by worthy private or public firms, they clearly would have generated more "bang for the buck" for Canada’s hard-pressed labour market.

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