90 days into its new Federal mandate, Northleaf goes off script

News report: Canada’s new “Venture Catalyst Fund” invests in $46M Wattpad deal

I’m so utterly confused.

For years, Canadian entrepreneurs and VCs begged Ottawa to get involved in arresting the multi-year decline in our innovation ecosystem. When I did my five year stint as a Director of the Canada’s Venture Capital Association (CVCA), responsible for GR along with then-Exec Director Richard Remillard, it was one of our two key talking points with government.

We met with officials at Industry Canada, then-Bank of Canada Governor Mark Carney, then-Finance Minister Jim Flaherty, EDC, MPs and Committee Chairs, Senators. Even the Prime Minister. We wrote letters (see prior post “CVCA letters to Messers Flaherty, Clement and Ignatief” Dec. 26-08), and gave presentations. News releases were issued, even during an election campaign (see prior post “CVCA injects some fresh ideas into the federal election campaign” Oct. 6-08).

The byproduct of all of that work by dozens of people from across the land was an appreciation in Ottawa that all was not well in our ecosystem.

That led to Mr. Flaherty’s decision to personally weigh in — over the heads of the management team at the Business Development Bank of Canada — who he had come to realize were very much part of the problem (see prior post “Venture Capital advances drop 33% at BDC in fiscal 2010 part 2” Sept. 27-10). This ultimately became the Venture Capital Action Plan, which was announced by the PM in Montreal in January 2013.

It was designed with lots of industry input (see prior post “Feds on right path with Innovation ecosystem consultations” July 2-12), and the allocation of the $400 million made sense to most folks — me included. At the time, the simultaneous phasing-out of the Federal labour sponsored tax credit caused some to wonder if there were any net new Federal dollars going into the space. That fair observation never got traction, but lawyer Stephen Hurwitz recently took up the call to arms on that front (see “Trouble ahead for Canada’s VC action plan?“) — meaning the issue isn’t dead yet. Certainly not in Quebec, which had become the primary beneficiary of the Federal tax deduction when Ontario foolishly backed out of the LSIF business some years’ earlier (see prior post “Labour Fund Renaissance” Jan. 11-07).

After all that time and effort, and the attention of the highest office in the country, it seems incredible that Northleaf Capital Partners would use even one dollar of Canada’s new Venture Catalyst Fund to back an individual company. Using Federal funds from a program where the mandate was solely designed as:

“…a newly created fund of funds that will invest in high-potential venture capital fund managers across Canada.”

At least that’s what the January 2014 press release said when the federal government announced the choice of Northleaf as fund manager. The release went on to say something which is already untrue, less than 90 days post-launch:

Northleaf will execute on the Fund’s strategy by constructing a focused portfolio of high-potential fund managers with sufficient scale and resources to deliver world-class returns, and by promoting the ongoing adoption of global best practices across the Canadian venture capital industry.

Nowhere, in any of the public documents that I’ve read, was there anything about the Federal government wanting Northleaf to use the Venture Catalyst Fund to invest directly in companies; particularly companies such as Wattpad, that didn’t need Northleaf’s $2-$4 million rounder of an investment in any event. Wattpad’s $46 million round is about as large as you’ll find in Canada for a Series C deal, and with OMERS Ventures, August Capital, Raine Ventures, Union Square Ventures, Khosla Ventures, AME Cloud Ventures, Golden Venture Partners, and Version One Ventures already at the table…there are plenty of investable dollars at hand without drawing down scarce government tax dollars that have a higher and better use elsewhere. No matter how great a company it is, or how certain the financial return might be. Whether Northleaf chipped in or not, that round would have closed just the same. What was the point?

If it’s a guaranteed investment home run for the Crown, give it to BDC or EDC. Both have the mandate for direct corporate investments. Each is looking for great entrepreneurs to back and would always benefit from adding to the entity’s existing pool of U.S. VC relationships.

For those with a memory for such tactics, you’ll recall that Northleaf did the same thing with the original OVCF vehicle via its $1.8 million into I Love Rewards and $2 million stake in BlueCat Networks; at least in that case the 2007-era Ontario government mandate seemed to provide for co-investing (see prior post “UAE’s Sheikh Khalifa Fund vs. Ontario’s OVCF” Jan. 10-10), despite the fact that OVCF wasn’t already in the GP leading the company’s financing round. In those two direct investment cases, Northleaf’s OVCF could argue that they were getting to know potential OVCF GP partners via these syndicated deals; even if it just looked as though they were papering the Northleaf website with a couple of easy tombstones to make up for their slow-as-molasses fund investing. (Not long after, then-MRI Minister Glen Murray referred to the firm as “struggling” {see prior post “No sacred cows for Murray” Oct. 26-10}.)

That storyline won’t hold water here, unless the Federal government had intended Northleaf to use the Venture Catalyst Fund to invest in the $60 billion OMERS or US-based August Capital as part of the essential Fed effort to rebuild Canada’s VC industry. In the absence of that rationale, it would appear that Canada’s VC lifesaver is already off script.

(disclosure: this post, like all blogs, is an Opinion Piece and reflects a personal view and in no way reflects the views of the TPA nor the Federal government)

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Kevin O’Leary closes failed mortgage startup

Published on April 14, 2014 by in General

As retail investors continue to suffer via some of his lagging mutual funds, Kevin O’Leary’s brand took another hit last month when he agreed to “surrender” his mortgage licence to provincial regulators.

This came as a surprise, frankly, even to me.

It has been only 18 months since KO put his omnipresent profile behind this new business venture via YouTube. As you may recall, it took several years before investors began to flee his mutual funds in the wake of poor returns in several key asset classes (see prior post “O’Leary Funds appear to shed another 20% of assets in 2012” Jan. 27-13). Since the LCBO was able to market O’Leary-branded wine, it came as no shock that Team Kevin figured that Canadians would also buy a mortgage from KO. Apparently, they didn’t do their market research. As with the mutual fund caper, Canadians expect some value add.

But how did O’Leary’s mortgage entity fall flat on its face so quickly? First reported in Wealth Professional Magazine, there was no word whether the Ontario regulator shut the business down, or if KO merely got tired of losing money on the venture. Surely the Financial Services Commission of Ontario didn’t turn the lights out for him.

Whatever happened, my guess is that when regaling CNBC viewers about his alleged entrepreneurial genius and business savvy, he’ll leave out the parts about his shrinking money management firm and recently shuttered mortgage business. Perhaps these ventures will serve to make him a better mentor — of course, first he’ll have to admit to having failed at several of the businesses he’s been involved with over the past 15 years.

(disclosure: this post, like all blogs, is an Opinion Piece)

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National Volunteer Week


If you are a baby of one of the 4,000 families who will deliver this year at the Sunnybrook Hospital Women & Babies Program, you may well be overnighting in “our” room. The birthing suite above was recently unveiled in the hospital’s new “M” wing. In recognition of our effort to raise and donate funds for the program, we had the pleasure of naming it in honour of all of nurses, technicians and doctors who make the Neonatal Intensive Care Unit sing.

Since this is the end of National Volunteer Week, it made sense to recap the charities, groups and causes that we financially supported over the last year.

Art Gallery of Ontario (Toronto)
Canadian Art Foundation (Canada)
Kasting 4 Kids (Holland Bloorview Kids Rehabilitation Hospital)
National Arts Centre (Canada)
Ronald McDonald House (Toronto)
Technology Underwriting Greater Good (Boston)
Western University Endowed Scholarship (London)
Wounded Warriors (Canada)


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Fairfax has been swamped by E-L Financial’s quiet, steady, winning gains

There’s nothing like a good headline to draw your attention.

Apparently, technology stocks such as Twitter (TWTR:Q) and Facebook (FB:Q) are highly valued, while Blackberry (BB:TSX) is “a good value investment and the firm’s performance will improve over time.”

This analysis is offered by Fairfax CEO Prem Watsa, who is long Blackberry and bought hedges last year on the stock market in anticipation of a major correction. The hedges haven’t paid off yet, wiping out gains the company made on stocks in 2013; I’m sure they might be coming in handy now, however. And Blackberry’s ongoing negative cash flow raises solvency concerns.

I must admit to not having spent any time following Fairfax prior to the firm taking positions in Torstar (see prior post “And then the bottom fell out on Torstar shares part 2” July 14-08) and Blackberry (see prior representative post “BlackBerry deal tests limits on M&A creativity” Sept. 24-13). There was always something else to chatter about. The Blackberry deal brought Fairfax a bit into focus, but again, that was about BBRY, not Fairfax.

But now that Mr. Watsa is comparing a profitable Facebook to the “dot com bubble” of 1999, when business plans were financed on the public markets, it seems timely to compare the 5, 10 and 20 year performance of Fairfax (FFH:TSX) to E-L Financial (ELF:TSX). The two entities are incredibly comparable, even if most of you have never heard of the latter:

- Both market caps are between $5-$10 billion
- Both are grounded in the insurance industry
- Both are run by very able executives, with tightly-knit Boards
- Both invest the firm’s surplus in stocks, bonds and other financial instruments
- Both are based in Toronto, Canada

There’s just one difference. One gets media attention, while the other avoids the limelight; and each is very good at their chosen path. But that’s not all, and it’s certainly not the most important distinction.

E-L Financial’s shareholders have done far, far better than Fairfax’s on a 5 and 20 year horizon. ELF is up more than 850% over a 20 year period, while Fairfax generated a return less than 600%. In fact, between 1999 and 2014, Fairfax shares are down about $100. Even the much-maligned Nasdaq market index has performed better (+75%) between January 1999 and today than Fairfax (down 20%). Remind me again who was talking investor “tears”?

Somehow, despite an irrefutable difference in the stock-picking and shareholder value creation talents of these impressive teams over a two decade span, it is Mr. Watsa who is compared to Warren Buffet. Not the Jackman family.

I’m sure that doesn’t bother them one bit. ELF has won the crown that matters: creating shareholder value.


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The Canadian tech IPO onslaught that never was

The media coverage of the pending TSX tech IPO onslaught has been intensive. And perhaps the recent attention shouldn’t come as a shock, since they missed the first wave of deals and all (see prior post “Two Tech IPOs moving to the launch pad” Feb. 24-13). There’s only one problem. I’m becoming more convinced by the day that there isn’t going to be a raft of IPOs, after all.

Certainly not an onslaught. I’d expect there to be a couple names hitting the TSX market this fall. But that’s the extent of it. The problem is simple: the media coverage has centred on the prospects of five firms that John Ruffolo and I touched on at the Cantech Letter conference in January (see prior post “Vision Critical’s $10.5M secondary clears the deck for potential IPO” Jan. 17-14), and my gut tells me that most of them are looking southward, to the NASDAQ.

For Canadian retail investors and investment banks, this is bad news. When and if firms such as PointClickCare, Desire2Learn, Shopify and Hootsuite do go public, whether it be this summer (PointClickCare with Goldman) or at some point in 2015 (D2L & Shopify?), I expect them to be doing so on the NASDAQ with US-based investment banks in the driver’s seat. Which means one thing: miniscule allocations to Canadian retail investors, and between 5% and 20% of the syndicate IPO fees being available to Bay Street. At the most.

For the average institutional salesperson on a Canadian trading desk, the lack of domestic IPO product has been a royal pain. The NASDAQ is hitting decade highs, and there are few new local names to talk about with your clients. For those of you who have been around this blog for an extended period of time, you know that I blame these very same people, at least in part, for this sorry state of affairs (see representative prior posts “Belair / Ericsson deal a wake-up call for every Institutional Sales Desk” Feb. 22-12). As I wrote more than two years ago:

What can’t be ignored is that BelAir could have been a public company today had someone truly put their shoulder to the wheel. I have no unique knowledge of the thinking of the CEO and VCs on the topic, but BelAir was definitely a candidate to go public during the past 18 months. All it took was the Head of an Institutional Sales desk at a local dealer to decide to make a go of it, just as the late Ross McMaster did so many times during his career, with awe-inspiring success. Of course its been a tough market for IPOs, but it is always thus in tech land.

You just need someone on the Sales Desk to stand up and be counted.

For every public tech co acquisition, such as Dalsa, MKS, Q9 or Miranda, there was not much in the way of public market backfill prior to 2013 beyond the NexJ nightmare (see prior post “What impact will NexJ have on the next crop of Canadian tech IPOs?” Mar. 9-13). And, if you’re in stock sales, there’s [almost] nothing worse than waking up in the morning to articles on Bloomberg or in the Globe & Mail about market excitement surrounding a bunch of tech IPOs and having not a single roadshow underway. Nor any scheduled.

This lack of local tech IPO product has led to more than a few large, growthy treasury offerings, from such names as Avigilon (AVO:TSX), Espial (ESP:TSX), Knight Pharma (GUD:TSXV), Redknee (RKN:TSX) and so forth. Not to mention an untimely secondary from Halogen (HGN:TSX). Even without a use of proceeds, the buyside can’t be blamed for being attracted to any equity offering with a small cap growth flavour to it. Anything. For fear of having nothing in the portfolio at all, beyond CGI, Catamaran, Constellation, Descartes and…. Well, there’s not much else to buy, is there? Other than DIRTT and ViXs, and neither are trading great post-IPO.

Which is where D2L, Hootsuite, Shopify et al were supposed to come in. And satisfy this market demand. It’s time, though, that people started to appreciate that even if they do come out this year, my money is on the NASDAQ path.

(disclosure: I own CSU, ESP and HGN)

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