The importance attached to the health of the institutional venture capital market in Canada has grown with appreciation of the need to replace declining, traditional sources of economic output and jobs with new ones, and particularly as regards knowledge-based production. If new and developing SMEs are to contribute to this end, long-term venture capital supply and investing must be constant and evenly distributed to provincial/regional sub-markets to assist local economic development and diversification. Because this has happened to a greater degree in the 1990s, the market has shown signs of maturation on both its demand and supply sides.
However, due to awkward shifts in supply conditions over the past two decades - including the departure of pension funds and other institutional investors, following the challenges of venture financing in the 1980s - the federal and provincial governments have retained a role in ensuring adequate resourcing. This is not unlike how venture capital markets have evolved elsewhere, such as the United States and Australia (see The Pension Difference Down-under), though eventually, government financial leveraging has yielded somewhat to more durable private supply sources.
While in the two aforementioned countries, pension funds have emerged as top backers of venture investment activity, in Canada they occupy a minor position, at least outside of Quebec. One unfortunate result remains less balanced supply sources in this country. The end of 1997 may well represent a turning point, however, given the influx of capital commitments from large funds - some new to the market, some not - as illustrated above. All seem to be taking cautious, strategic steps. If this indicates some selectivity concerning co-investment partners or pooling vehicles, as pension managers have told the CLMPC, this may turn out well in the long-term.Endnote 54
At the same time, such pension funds are already partners to several innovations, such as seeding projects and support for spin-offs of successful Canadian high technology firms (that are new even in the venture capital market). This signals that pension participation of the 1990s may be more full-spectrum (i.e., seedings, start-ups and early stage developments in addition to expansions and later stage developments) than it has been previously.
Precedents also suggest that the experience such large pension funds are gaining in non-venture equity (i.e., over the $7-10 million mark) and merchant banking (see Pension Funds and Middle Market Investing) can lead to more enhanced exposure to venture equity (i.e., under $7-10 million mark) down the road. Because of their long-term focus, they will increasingly be able to influence trends in the latter to suit pension needs - for instance, in relation to limited partnerships and other syndications that remain the market's chief conduit.
At the same time, it should be acknowledged that the large pension funds providing the impetus behind heightened participation in the Canadian venture capital market in 1997 are few in number, large and almost exclusively from the public sector. Many are also first-time entrants. This suggests something of the serious dissatisfaction that remains with fiduciaries whose private or public sector (of all sizes) completely withdrew from the market following their 1980s experience. This situation is unlikely to change in the immediate future unless certain barriers, such as those raised by the 1998 CLMPC-PIAC survey, are addressed with deliberation. This topic is explored in Pension Barriers to Financing New Economy Investment.