Labour-sponsored investment funds may be described as a financial hybrid with characteristics derived from institutions in both public and private equity capital markets.
For instance, labour-sponsored funds are often compared with mutual funds — money market, fixed income and equity funds — which invest across the risk scale of securities in publicly-traded exchanges. The chief resemblance of the two is in a shared method of capital raising. Both species of funds operate in a public venue for soliciting and subscribing thousands of individuals from all walks of life and all corners of Canada (one quarter of Canadian households have invested in mutual funds). In other words, the asset base of both depends on a large body of small shareholders.
In actuality, many labour-sponsored funds, such as Working Ventures and Working Opportunity, utilize the same public market channels, resources and licensed personnel as mutual funds in the distribution of shares located predominantly in Toronto, Montréal, Vancouver and other Canadian financial centres.
A critical difference between labour-sponsored funds and mutual funds exists, however, in methods for liquidating investments. With the latter, individual investors have the utmost flexibility in selling their shares. Shares acquired in the former, on the other hand, must be held for a much longer spell. Persons wanting to redeem their investment earlier have no market for this purpose and must forfeit tax savings. This difference suggests something of the exigencies faced by labour-sponsored funds in the venture capital market.
Fund officers must take pains to remind potential share buyers of such distinctions. In fact, it is with regard to this issue that provincial securities commissions are most likely to monitor labour-sponsored funds, or have them investigated, out of concern for consumer protection.
Financial institutions are often delineated from one another according to function — or functions — and inherent risks. The top chartered banks, for example, concentrate on low risk consumer and commercial lending. If a lending institution seeks to enter riskier financial territory, such as venture financing, it may establish a separately-capitalized entity governed by rules and procedures inapplicable to credit. With greater risk, of course, comes the possibility of higher returns. Such rewards are what drew some banks and near-banks to join, through subsidiaries, those institutions traditionally involved in private equity markets — venture capital institutions, merchant banks, informal venture capitalists (also known as “angels”), institutional investors making private placements, and so on.
From the beginning, labour-sponsored funds chose the latter route. As Section (v) discusses, this had less to do with profits than it did the perception that conventional financial institutions could not — or would not — aid Canadian companies that promised jobs, but that also promised exceptional risk. The FTQ founders of the Fonds de solidarité believed that venture capital was key to economic development and perhaps was more accurately termed “development” capital.