The first few news articles and columns about the rumoured pending departure of PMO Chief of Staff Guy Giorno were to be ignored. When you leave Parliament Hill, even of your own volition, the media tends to kick you in the pants on the way out the door. Today’s DTM column on the subject continues the theme, and it seems high time to put it to rest.

Mr. Giorno has been there for the requisite two years. The PMO CoS role is as tough a staff job as they come. Two years is all anyone can/should handle, so the fact that Mr. Giorno may be returning to his law practice and young family reflects his sanity in my mind, and nothing to do with the daily ups and downs of national polls.

Former PM Brian Mulroney had five Chiefs during his nine years in office. In my day, we even referred to the tenures by numbers: CoS Hugh Segal led “PMO 5″, that odd choice of Norman Spector was “PMO 4″, and so on. I’ll make the math easy: 5 Chiefs in less than 10 years is an average tenure of just under two years. Did Derek Burney or Stanley Hartt leave Mr. Mulroney’s direct employ due to weak or strong polls? Not a chance; they had other things to do. Their two years were up.

When I joined Mr. Mulroney’s staff in 1991, two of the four prior Mulroney-era CoS EAs had died of tragic heart attacks either in the PMO job, or a short time thereafter. These were people in their prime. That should give you some idea of the stress of the place, and that was 20 years ago, before the BlackBerry and Justice Gomery added even more stress to the place.

In Mr. Giorno’s case, I’d be surprised if he wasn’t laying the groundwork for his departure six or twelve months ago; he is, after all, an excellent tactician according to the media. When Minister Flaherty’s Chief, Derek Vanstone, joined a few months ago as Deputy Chief of Staff to the PM, many took it as another signal that Mr. Giorno was building the team for a near term transition away from the job.

It is true, however, that these media reports may serve the PM well. Any mistakes are the fault of bad staffing, that’s just part of the job. No elected official writes a bad speech or dreams up a kooky policy. That’s what staff do. When things go well, all credit flows to the boss; that goes with the territory. In the Secret Service parlance: staff must take the bullet. And the inverse is also true.

Does it help Michael Ignatieff if the media report at length that his change in momentum all started with the arrival of his new Chief of Staff, Peter Donolo? That the 50 year tradition of a stumping bus tour was Mr. Donolo’s idea? Mr. Donolo isn’t on the ballot, of course, which is why his boss must get all the credit for being the new person that he is coming across lately in the media — even though it near impossible for middle-aged men to be anything other than who they are, deep down.

Which brings us back to Mr. Giorno. Whether or not any of us, or his ultimate successor, would have given the same advice or made the same decisions over the past two years isn’t the point. If you’re not there, in the foxhole, you have no idea what you’d have done differently, or if you’d have served Prime Minister Harper any better than the incumbent. Or if the Boss would have taken your advice to do something different, or the same. What you can be sure of is it would have taxed you like few other white-collar jobs in the world.

If you want any more proof about the specific shelf life of the CoS role, just look to Washington.

I see that White House Chief of Staff Rahm Emanuel may also be taking his leave after two “short” years. His boss couldn’t be in more political hotwater (save the intern), and yet Mr. Emanuel appears to be floating a trial baloon about running for Mayor of Chicago: “something I’ve always wanted to do if the job became available”. Some might say he’s putting himself ahead of the President, being disloyal even, and hurting Mr. Obama at the very moment he needs to break-out of the challenges of the past year.

Whatever the coming months will bring, whether he stays or goes, no one can say that about Guy.

MRM
(this blog, like all posts, is a personal view and in no way represents the views of the TPA, its Board/Staff, or the Federal Government)

According to Mass High Tech, Wellington Financial Fund III portfolio co. Boston-based Ember is going to ship 10 million chips this year, having just announced earlier in 2010 that it had produced its 10 millionth chip (see prior post “Ember sells 10 millionth chip” May 4-10) in aggregate since the company’s founding in 2001 — that’s quite the ramp.

Ember produces ZigBee chips, which are used in smart meters, home automation and security systems. These low power devices communicate data wirelessly, perhaps running the network that will make the smart gird work in your house.

You can find ZigBee chips in your power meter, smart thermostat (Toronto’s ecobee) and RF controlled home theater system (Control 4).

Here’s the excerpt from Mass High Tech:

Meanwhile, Boston-based Ember is leading the small but growing ZigBee chip industry. ZigBee is considered the leading technology for the wireless communications behind smart meters and other “smart home” devices. The technologies monitor energy use in buildings with an aim of reducing consumption and cost.

In May, Ember announced that it had shipped 10 million ZigBee chips since its founding in 2001 – the first company to achieve the milestone. Yet the pace is picking up fast; Ember is on track to ship 10 million chips in 2010 alone, said Robert LeFort, the company’s CEO.

Ember’s revenue is on track to grow by more than 300 percent this year from 2009, with the company now seeing revenue of $9 million to $10 million per quarter, LeFort said. Ember achieved profitability in the first quarter of this year, and has grown its staff to 50 from 40 over the last several months, he said.

Ember’s existing VC investors include: DFJ, Grandbanks Capital, New Atlantic Ventures, Polaris Venture Partners, RRE and Vulcan.

Congrats to the Ember team on the fabulous momentum.

MRM

Invitation for Funding Submissions – two days left!

The Canadian Consulate in San Francisco/Silicon Valley, in partnership with the Canadian Venture Capital Association, CVCA, wants to bring an opportunity to your attention. We have been working with Applied Ventures LLC, the venture capital arm of Applied Materials, Inc., which has expressed interest in receiving information from early-stage Canadian companies in the technology sectors described below.

Applied Ventures invests in or partners with early-stage technology companies which promise to deliver high growth and exceptional returns with technologies that can advance or complement Applied Materials’ areas of core expertise. Its objective is to help to develop technologies and markets which stimulate the growth of applications for semiconductors, displays, solar PV, and related products and services. Applied Materials is the global leader in nanomanufacturing technology solutions for the electronics industry with a broad portfolio of innovative equipment, service, and software products.

Applied Ventures is accepting submissions from Canadian VC portfolio companies which would benefit from strategic association with Applied Materials. All submissions should fit the technology sectors described below and should be by way of a 2-page profile document which provides basic company information along with a clearly defined value proposition for the technologies and business models involved. Submissions should not contain any confidential or proprietary information. Upon conclusion of the submission period, September 9, 2010, Applied Ventures will undertake a review process, and companies/VC’s will be advised accordingly.

Applied Ventures would like to receive submissions from companies in the following technology sectors:

1. Solar Technologies – Thin film PV, crystalline PV, wafering, metrology, materials, products and equipment in the solar value chain

2. Solid state lighting – LEDs, substrates, metrology, novel device designs, thermal management, light engines

3. Energy conservation technologies and software – Commercial-scale energy efficiency, smart buildings, smart materials, sensing, software controls and analytics

4. Novel memories – Next-generation data storage devices, novel materials, novel architectures

5. Lithography technologies – Advanced lithography solutions

6. Energy storage – Advanced batteries and energy storage systems

7. Displays – Next generation display technologies, front planes, back planes, equipment, materials

Please send all submissions to submissionsappliedventures@cvca.ca by close of business Thursday, September 9, 2010.

**Note: This communication is not an offer to buy any securities nor a solicitation of offers to sell any securities.**

MRM

Although Canadian equity research analysts are maligned for not being sufficiently critical of our home-grown success story, Research In Motion (RIM:TSX, RIMM:Q), the following snapshot from Dundee Securities sees the forest for the trees. For as long as I can remember, RIM has traded based upon headlines. But that doesn’t mean primary research should be discounted for long term tech investors:

Share price reflecting a 45% cut in EPS

· Is RIM really trading at 7x earnings? The market doesn’t think so. Companies that are growing double digits, both top and bottom line, generally don’t trade at 7x earnings. Over the past 6 months, numerous reports have shown that RIM’s competitive position is deteriorating. iPhone and especially Android are gaining share while the BlackBerry’s base of loyal customers is being eroded. As such, we believe it is fair to say that the market does not believe forward earnings consensus.

· We believe the stock is reflecting a 45% cut to forward EPS. Using Nokia and Motorola as benchmarks, we believe that shares are currently reflecting a forward EPS of around $3.30 as opposed to current consensus of close to $6.00.

· Investors have punished RIM far more aggressively and far more quickly than we saw with either of Nokia or Motorola. As of August 31, RIM’s stock has dropped 50% relative to the NASDAQ from its recent peak in September 2009. What did Nokia and Motorola look like after their respective 50% share price declines?

· It took RIM 342 days to fall 50%. It took Nokia 772 days and Motorola 383 days. At the 50% retracement level, Nokia’s device revenues had fallen 27% and operating margins were down 11 percentage points. Motorola’s device revenues were down 36% and operating margins were down 18 percentage points. RIM’s device revenues are up 17% and operating margins are up 7 points.

· Yes, RIM is losing market share but investors selling the stock today are pricing in a collapse akin to Nokia/Motorola. Yet, RIM’s fundamentals are vastly superior to Nokia/Motorola’s at the time of their 50% retracement levels.

· Maintaining BUY rating. RIM’s competitive positioning has clearly weakened. Now the question is are we going to see a recession scenario akin to Nokia or Motorola or are we going to see a soft landing whereby RIM’s fundamentals do slow but not irreparably. We are in the soft landing camp for the following reasons: i) Torch sales have been disappointing but not disastrous. Torch should in fact cause AT&T’s BlackBerry shipments to grow 50%+ in the coming months; ii) Various OS 6 products, including Torch in other geographies, should help to offset the deterioration in the core business, iii) The Tablet remains a significant unknown variable. While it is too early to gauge success, we would be hard pressed to say that any upside whatsoever is being reflected in the shares, iv) well positioned in emerging markets like India, China, Latin America and others given the NOC infrastructure and prepaid capabilities.

· We rate RIM a BUY/High Risk with a US$65 target based on our DCF. The stock currently trades at 7.7x our FTM EPS forecast.

MRM
(disclosure – I own RIM)

We had a really good call yesterday regarding a new deal opportunity, and it struck me that there are some similarities to good first outings. The CEO and CFO of the would-be portfolio company were both on, and their experience in dealing with venture capital folks shone through. Herewith, are the few takeaways for everyone planning to raise capital this fall (not all of these lessons arose yesterday, btw):

- provide the financials and corporate overview in advance; you want people to have the chance to think about your business before you tell the story (see prior post “5 tools to make raising capital easier” Sept 3-08)
- ensure the forecast doesn’t project $1 billion of revenue four years out (do I have to mention this every time?)
- CEO does business and market overview, CFO does financial affairs, cap table, $ needs
- plan on 30-60 minutes for the intro call; no one has 90 minutes to hear a story for the first time, unless things are going so well that you’ve been asked 75 different questions
- don’t start off by asking about the fund’s background, who the limited partners are, etc.; that’ll either be relevant or it won’t be, but one has to assume that the call is happening ’cause the VC firm thinks their might be a fit “stage-wise”
- however, that doesn’t mean you shouldn’t ask about the fund’s process: that’s a polite angle to use to understand where you might stand, and how quickly the fund can move if it wanted to
- don’t belittle your current VCs, their funding situation, or commitment to the story (see prior post “Do’s and Don’ts of raising capital” Jan 14-08)
- propose a sensible timeline to the proposed capital raising process; fire drills suggest you’re either disorganized, there’s been a materially adverse event, or you’ve been turned down aplenty and have run out of time
- don’t start negotiating the deal terms
- keep track of which firms you’ve spoken to in the past: this can be handy 6-18 months later

The good news is that people are taking meetings and deals are closing. Customers are buying. Firms are growing. M&A is back on. VCs know this, and, from what we’ve seen, are ready to do business.

MRM

Each Fall, I get a series of polite notices from my insurers at Manulife, reminding me that my Family Term payments are due. Like any responsible, self-employed father with an admiration for George Bailey, I’m worth more dead than alive.

This payment cycle forces a moment of particular reflection. Not that I don’t need the insurance. But am I safe to stay with Manulife (MFC:TSX)? Just today, MFC shares rose 5.56% on the simple news that the Dow Jones closed handily above the 10,000 mark. It seems that momentum traders trade Manulife as though it is one of those double-leveraged ETFs that either climbs twice as fast, or drops twice as far, as the overall market.

Odd for a 120 year old insurance company, but that’s Manulife’s unfortunate lot these days.

According to its website, Manulife is “Strong”. Definitely something that I was counting on 9 years ago when I started to collect their policies. But is it? The stock quote tells me otherwise, but that’s old news of course.

Just last quarter, the net loss amounted to $2.4 billion. Mark-to-market accounting may have been the culprit there, and its not that we weren’t warned of this reality by former Manulife CEO Dominic D’Alessandro (see prior post “D’Alessandro: fair market value accounting is ‘perverse”” Sept 30-08). That $2.4 billion was a bit more than the $2 billion in new equity that CEO Donald A. Guloien recently added with the promise/justification that Manulife needed a “fortress” balance sheet.

Reminds me of how quickly Citibank eviscerated the capital they raised from ADIA in 2008.

Not that we needed to be reminded how quickly things can change, but boy, how quickly things can change. It was less that two years ago that Manulife was putting capital up to help keep long-standing quarry CIBC out of the ditch (see prior post “CIBC offering rumours prove true” Jan 14-08). And I was ruminating about how easy it would be for Dominic to swallow the bank whole, since Manulife was sporting a market cap. that was 3x CIBC’s in December 2007 (see prior post “Will Manulife come to CIBC’s rescue?” Dec 19-07). Today, CIBC’s market cap. is 30% higher than Manulife’s. Talk about missing the boat.

With $27.804 billion of shareholders’ equity as at June 30th, my stewards on Bloor Street can lose $2.4 billion for a few more quarters to come before things start to look bleak at Manulife. Mind you, if interest rates drop further, and the Dow has a hard time staying above 10,000, these quarterly $9.599 billion increases in actuarial liabilities could become regular appearances.

I can’t say I fully understand how this is all the new CEOs fault, however. He was, of course, CFO prior to his promotion. One of the reasons why I’ve always been a fan of Dominic’s (see prior post “Which public company CEO do you trust?” Sept 25-08) was that he seemed so closely associated with the daily cut and thrust of Manulife’s buisness. And now, I hear that that libelist TT has a story in the National Pest about how Dominic can’t believe how things have turned so badly, so quickly. Weren’t, one must ask, these invasive policies written some years ago? Liabilities that University Avenue-based actuaries might say could not have been laid off, and therefore weren’t appropriate for an insurance company to take on in the first place?

If things get worse for MFC, the window might just open for RBC CEO Gord Nixon. As much fun as he may be having doing a life insurance start-up, would he not rather start with a sales force of 45,000 in 22 countries? Absolutely.

I know that current federal law prohibits a merger of RBC and Manulife, but I doubt that Finance Minister Jim Flaherty would rather that AXA or Allianz buy it. Minister Flaherty undoubtedly appreciates that Manulife is two or three bad quarters away from needing to do something big. Right?!?

And if you know anything about Canadian bank CEOs, they don’t buy distressed assets of any chunky size. Finance Dept.’s public servants certainly can’t expect RBC to wait ’till Manulife is on its heels before they make their move. RBC’s shareholders wouldn’t go for it at that point. Ironically, it is only a stable Manulife that is a viable merger partner for a made-in-Canada solution.

Which brings me back to my payment reminder. I’m cutting the cheque tomorrow on the basis that, either way, things will be fine. I hope and expect Manulife’s deep management team to work things out for the comfort of their customers and shareholders. And, if market forces make that increasingly impossible, I’m fully expecting Minister Flaherty to recommend to the PM that the “Seven Independent Pillars” strategy will have to be amended in the blink of an eye.

Let’s not repeat the Confederation Life debacle.

MRM
(disclosure – we own RY in our household; this post – like all blogs – is an Opinion piece)

Congrats again. We are here to serve!

MRM

My sources tell me that Toronto-based SocialDeck, a BlackBerry Partners Fund investment, is in the final throes of negotiating its acquisition by Google. This would be the latest in a series of acquisitions designed to bolster Google’s social networking capabilities. Earlier today, the WSJ reported that Google had acquired Angstro, a tech play designed to make it easier to manage your social network universe.

SocialDeck’s website describes itself this way:

enabling “anywhere, anytime, anyone” gaming. The company has launched several titles for the iPhone, Facebook, and BlackBerry using its social gaming platform technology, which enables simultaneous game play across multiple mobile devices and social networks. SocialDeck’s technology also facilitates viral content discovery, distribution and monetization.

The deal makes sense for the Android platform, which Google wants to be able to work with every game and application developed anywhere, by anyone, for any device.

Although no one at the BlackBerry Partners Fund would ever talk about a pending deal (so I won’t ask), SocialDeck received a small-ish first round angel-type investment in March 2009 from team members Matt Golden and Rick Segal (now of Fixmo fame). This will be a nice financial win for the two year old fund.

Rumour is that, upon closing, some members of the SocialDeck employee team will make their way down to Google’s growing Waterloo office, while others may wind up in California, which SocialDeck also calls home. Interesting that Research In Motion (RIM:TSX, RIMM:Q) isn’t the buyer here, but its capital is still serving to grow the Waterloo tech hub nevertheless. If anyone thought that RIM’s role in the BlackBerry Partners Fund would turn off other global giants from picking off the fund’s portfolio investments, this deal will put that to rest.

Congrats to the SocialDeck and BBPF teams.

MRM
(note to DTM folks, see the © notice below; oh, and prior post “Hunger Strike – Day One” June 16-10)

As you settle into your new cabinet role, the next couple of weeks will be consumed with the necessary ministry briefings. On behalf of the entrepreneurs and funders who make up your new official constituency in Ontario, welcome to the job! We are excited to have you.

Once you’ve had your fill of Powerpoints, we are looking forward to meeting you, and ensuring that you have the same sense of the state of the ecosystem that we do. As our third Minister in 14 months, we are hopeful we haven’t become the bastard child of Queen’s Park. Please prove it to us, and quickly. As a lifelong activist yourself, we know you’ll appreciate the frankness with which our industry is addressing the ongoing crisis in Ontario’s start-up and venture capital universe.

Think back just a few short years: Cognos, Delrina, Accellio, Hummingbird, ATI, Nortel, Newbridge…. All were important tech employers in their local markets. All of them are now gone to varying degrees. And all but one were acquired by international players.

Where’s the next generation?

Your job is, in part, to help the Ontario start-up and VC industry seed and grow the next generation of global corporate leaders. So far, things aren’t going so well. If, during your briefings, you’d like to ask your Deputy Minister some particularly insightful and perhaps prickly questions, feel free to crib from this post. He won’t mind a bit.

To make it easy for you, I’ll try to tackle just the key / testy topics. But there’s a treasure trove of information available beyond your Ministerial briefing books. Lots of useful work has been done by groups such as the CVCA, the Toronto Board of Trade, OCRI, etc. And, make sure you look at the primary material, not the departmental summaries; no offense to your advisors, but the horse’s mouth is the way to go.

One quarter does not a trend make

The headline in your briefing book may well be “VC Industry Rebounding” or “Provincial Government Initiatives Stabilizing VC Industry”, and this just isn’t the case. The Q2 2010 national capital deployment statistics showed something of an uptick, with $643 million invested in the space during the first half, up 31% from a particularly brutal 2009. Since the benchmark being used was the year of the worst financial and economic crisis since the Great Depression, a 31% increase is not something to get excited about.

As the CVCA points out, the 13-ish year long negative trend hasn’t reversed. Not to mention the fact that the number of companies receiving funding actually slipped by one between Q2 2010 and 2009.

More dollars is good, of course, but the capital is largely going to follow-on rounds. Although the CVCA’s quarterly release didn’t break out Ontario’s specific allocation of the 2010 financings, Ontario-based fundings have fallen well behind Quebec over the past few years, despite having twice the population and multiple tech hubs (see prior post “Quebec’s VC world is rolling” Jan 28-10 and “Tories pounce on Grits over Ontario VC stats” March 2-10). There are several reasons why this is, and the two key ones are simply the strength of Quebec’s Labour-sponsored fund market (see representative prior post “Digging through the 2007 Venture stats” Feb 13-08) and the Quebec Provincial government’s overwhelming and effective direct support for local venture capital funds (see Private Capital Magazine article Summer 2009 pg. 28).

OVCF

When it was first announced in June 2007, I was skeptical that the Ontario Venture Capital Fund was the solution to anything (see prior post “$165MM MRI Fund: blessing or curse?” Dec 3-07). Sure, $205 million into funds was better than zero, but the OVCF only served to cannibalize the limited partnership universe, as I pointed out at the time. OMERS, TD, RBC and Manulife were all viable LP targets for several VC funds, and despite their corporate support for the government’s initiative, they were no longer going to be funding — on a direct basis — the likes of many of Canada’s best-known venture capital funds. Your department put up the first $90 million in the summer of 2007, and the corporate and Federal Crown Corp. LPs rounded out the additional $115 million in the months that followed.

The Province puts up all the money at the start (ie., the corporate LPs don’t cut a big cheque until the first $90 million is drawn by OVCF’s managers), and we taxpayers have agreed to take the first loss on the fund (so I’m told). If things go awry and the VC funds who tap the OVCF lose “only” 43% of their capital, Provincial taxpayers have essentially guaranteed big corporates that they probably wouldn’t lose money on their OVCF own commitment. And they did the Premier (he called some CEOs personally) a favour when they signed up at the outset.

Which investor wouldn’t love that?

As for getting money out the door into needy VC hands, that has proven to be even more difficult than raising the original OVCF fund three years ago (see prior post “UAE’s Sheikh Khalifa Fund vs. Ontario’s OVCF” Jan 10-10).

Although commitments have been made to four or maybe five funds (rumoured to be Mayfield, Georgian Partners, Edgestone Partners, XPV Water and Lumira), we’ve only seen formal closings for XPV and Georgian. A few months ago, OVCF had both Edgestone and Lumira on their website as “investments“, but those are no longer posted. One must assume that someone tipped the webmaster to the fact that a fund commitment isn’t the same thing as a fund close.

Lumira’s fund marketing is going well, and Bridgescale will almost certainly pick up Edgestone’s $20 million commitment, so it only a matter of time before those dollars make their way back into the “committed” column.

In the interim, that means about $30-40 million of the $205 million has closed since the government first launched OVCF in the summer of 2007 (see prior post “$165MM MRI Fund: blessing or curse?” Dec 3-07). And closed doesn’t mean drawn for new investments. OVCF also did two small syndicate participations with I Love Rewards and Bluecat Networks; good VCs are involved there, but were small syndicate positions really the core purpose of the fund?

Three years into the fund, and less than $10 million of hard cash has actually gone into action, so far (ignoring fees to the manager, that is). Unless I had a really good excuse, I’d likely have been fired by my LPs if I was 5% out the door after year three.

Why has it been so slow you may ask? Minister, I can’t quite put my finger on it. Maybe not enough funds are closing, so OVCF hasn’t been able to do as much as they’d have liked. Maybe the OVCF process is as slow as molasses in January — in more than one case taking 8 months to get back to certain Ontario-based VCs about their fund presentations.

Perhaps there are just too many funds with poor returns knocking on their door, and the OVCF team is stuck with more money than there are funds to commit to.

Some may say that can’t be the case, as Montreal-based Teralys Capital has been able to commit more money than OVCF in one third the timeframe.

For me, the situation is just plain curious. OVCF should be working, but for some reason, it isn’t; at least not to expectations. As one of the marquee elements of Ontario’s IT regeneration effort, this is worth understanding better. Keep an open mind.

ETF

Although the concept was announced in the Provincial Budget with not a moment of industry consultation, the CVCA took it upon itself to provide some ideas in the days that followed in the hopes it could help design the Emerging Technologies Fund to achieve the maximum impact. The fact that the ETF has been used by VCs a dozen times so far is proof that collaboration is crucial to the success of any government program. An envelope of $50 million a year only replaces a fraction of the capital that used to flow to local entrepreneurs from the Labour-sponsored Fund industry, but we can’t blame you for that decision.

The summary to date on the ETF is this: it appears to be working as designed when it comes to the VCs. Hopefully, the Angels will soon begin to tap it as well.

LSIFs

I know, I know, this is the third rail within your department. Any entrepreneur or VC who publicly questions the government’s decision to kill the Labour-sponsored Fund program gets 30 months in the penalty box. I’ve been there forever it seems.

That need not be your concern, however, since you have the luxury of playing the “new guy”. Ignore what otherwise brilliant academics might tell you about LSIFs making universally poor investments (see prior post “LSIF funds see another win as Microsoft acquires Opalis” Dec 27-09). Toss out the self-interested advice of traditional VC GPs who would have you believe that LSIF funds crowded-out their traditional access to LP capital.

Is the program expensive? Not at all. When the Ontario government puts $30 million into a “Green V-8″ engine plant near Windsor to preserve 300 jobs (see prior post “CVCA’s budget pitch to Ont. Premier McGuinty” March 17-09), the LSIF program is a steal.

Do one simple thing as you learn about your new role: hear out the remaining large LSIF funds yourself. Ask them to show you job creation stats. Have them account for the “tax room” that they consume via their program. Make them explain how some in their midst feel it is appropriate to raise $5,000 and then rebate investors 10% in cash on the following day as an incentive to invest in the first place.

Once you review the pros and cons of the industry, you’ll determine exactly what B.C., Quebec and others have come to realize. This program puts money directly into the jeans of innovation companies. Far more effectively than any government program ever could. Sure, the industry needs to fix what quantum of fees they charge investors and how they determine performance bonuses. But, the original decision to fire the sector was a classic case of throwing the baby out with the bath water.

Direct Corporate Investing / Lending (aka Corporate Welfare)

Every few months, we read about another “investment” by the Ontario government into a local tech company. Sandvine and Redline are just two examples of publicly-traded companies that have tapped the Provincial treasury for capital of late. These are public companies, with access to capital, who are at your doorstep. Huh?

In the case of Redline, some of your colleagues gave the company a $10 million interest free loan last year (see prior post “Why is Ontario getting into interest free corporate lending?” May 11-09). For a company that had burned $4.5 million in its previous fiscal quarter, and had just $4.4 million of cash on hand as at the prior quarter end (ie. one more quarter of burn). What were they thinking?

Sadly, revenue recognition issues have since arisen, and one can only imagine where that’ll go. The TSX cease trade order came soon after. The company hasn’t filed financial statements since November, and things look bleak to say the least. But the problems are about revenue recognition; this was a disaster-in-waiting the day Her Majesty cut the cheque. If bureaucrats can’t read financial statements before they put taxpayer capital at risk, perhaps such deals should be left for the private sector to arbitrate.

That’s what we are here for, after all. I’ll let you in on a little secret: not every tech or biotech firm deserves a cheque.

But that’s not the biggest gamble we’ve seen. The Samsung and Ubisoft deals take that prize. The Ubisoft one, in particular, seemed so disconnected from reality at the time it was announced. Sure, Vancouver and Montreal had created nice creative gaming software development hubs for themselves. The me-too strategy seemed almost natural. But was this the move to have made? $263 million in exchange for a loose promise to create 800 jobs over time (see prior post “Can Rainbow Six save Ontario’s economy?” July 6-09). To date, I’m told that the actual number of new jobs has reached 75. I guess that’s something, but it’s neither creative nor cost-effective, as I wrote last year:

Premier McGuinty’s $263 million swamps what the State of Michigan had to put up to attract General Electric’s Advanced R&D Centre just 10 days ago (see prior post “General Electric R&D Centre an idea to emulate” June 26-09). And it also exceeds all of the money that has been committed over the past three years to help secure the future of Ontario’s venture capital industry ($90MM for OVCF and $150MM for ETF). And Canada’s VC industry has created 147,000 jobs according to a recent independent study prepared for the CVCA.

In summary Minister, you’ve been given a tough job. But it’s a job that the Premier himself once wanted (and kept). Take that as an important sign — your Boss wants this portfolio to succeed in every possible way. No Premier in the nation appears to have a more inate interest in technology than our man in Ontario. Perhaps that’s why, like a frustrated major league baseball coach, he keeps changing his Pitchers at MRI.

The problems are clear. The current suite of solutions aren’t doing the job well enough. There’s lots of capital swirling around, but it is winding up in the wrong pockets. Success can be yours without new spending.

Rather than think big, or even long term, look for practical solutions that your allies in the ecosystem can put to use immediately. Ontario doesn’t have a shortfall in research dollars or on-campus activity, it has a paucity of recent commercialization successes. Not enough companies are being launched, and the VCs that do exist don’t have enough capital to fund the good ones. With few budding global tech champions lying in the weeds, awaiting their time in the sun, the byproduct of the past five years is clear.

Help us fix that, and they’ll name a University after you someday.

MRM
(disclosure – this post, like all blogs, represents a personal view and in no way reflects the official position of the CVCA, etc., etc.)

The overview (December quarter in brackets, in current currency exchange rates):

Paid in Capital: $16.333 billion ($16.649B)
Reported Value: $11.498 billion ($11.419B)
Distributions Received: $7.410 billion ($7.353B)
Reported Value plus Distributions: $18.905 billion ($18.772B)
Capital Calls still to fund: $12.776 billion ($13.042B)
Total Committed: $29.108 billion ($29.691B)

That looks to be a 16% increase in the net asset value of CPPIB’s PE investments over the life of the program. But there’s more to it than that.

CPPIB’s exposure to the private equity world is dropping, and that has all to do with the appreciation of the Canadian dollar. Here’s the drop in the currencies between December 31st and March 31st, for example.

The difference:

US$ 1.0156 (versus 1.04)
Euro 1.3737 (v 1.50)
CNY 0.1488 (v 0.153)
JNY 0.01087 (v 0.011)

The swing is far more dramatic if you look back to December 2008, when the PE program had $33.611 billion committed to it. The Euro at 1.70 and USD at $1.225 will do that.

And that’s the tricky part. On December 31, 2008, we had $16.841 billion invested in private equity funds (and another $16.77B still to fund). Of which $10.277 billion was invested in US dollar denominated funds, and another $5.154 billion was sitting as paid-in-capital in Euro-denominated funds. As it understand it, CPPIB doesn’t hedge investments of these nature. Which makes it very hard to actually analyze how we are doing with our program.

What we do know is this:

The $10.277 billion invested in US dollar PE funds as at December 31/08 is static, and yet the current value of that same capital is now worth 17.1% less, leaving aside what may have happened to the underlying value of the capital invested during the subsequent five quarters (ie, increase or decrease of individual NAVs); what we know anecdotally is that PE investments have bounced back to pre-crisis levels. If you use the average exchange rate of 1.1214 for 2005-08, we are down 9.4% assuming the lion’s share of US dollar commitments were funded during that period.

The Euro’s performance has had a similar impact: down 7.8% on $5.154 billion of money that was already out the door (using the avg. exchange rate of 1.4905 for 2005-08).

The Yuan and Yen investments are so small that we can ignore them for this currency analysis.

In aggregate, our U.S. and Euro capital calls from December 31/08 are down ~8.9% as the C$ has stengthened. What that also means is that Distributions we received during that period are also understated today, so we’ll have to solve for that.

At the CVCA AGM last May, a CPPIB executive made the point that hedging currencies for PE investments was not in the cards. What this means is that the apparent 16% rise in the program’s value (which is based upon reported NAVs plus Distributions received), is more like an 8.9% increase.

I know at least one senior Ontario pension fund manager who would say that on a program that has been in place for the past decade, the IRR on a return profile of this nature is infintessimal. Somewhere between zero and one percent. That’s not all to do with the strong C$, mind you, but it is just another reminder of the perils of putting 95.8% of the capital committed to external private equity and venture capital managers outside of your home country.

There’s no way around that, of course. Canada doesn’t have enough investment opportunities to satiate a fund of this size. What the CPPIB could do, however, is also publish their returns as they actually are, in Canadian dollars, and not solely based upon the home currency of the General Partner in question.

This currency analysis is rudimentary, but what it does imply is that there may have been a $1.14 billion swing on capital we’ve put into the PE marketplace. That’s a significant unrealized mark-to-market loss. Given that the CPPIB financial statements lump the entire PE program into “Foreign Developed Markets” or “Emerging Markets”, we really have no idea how things are going. The PE program returns themselves are reported in the quarterly financial report as such: “Investment results by asset class are reported on an unhedged Canadian dollar basis.”

Which means the CPPIB needs to be more clear on one simple thing: how much did we put into the program, and what’s it worth now, in Canadian dollars? And what’s the IRR after our first ten years at it?

With $29 billion (made up of capital drawn plus $12.8B still unfunded) of CPPIB’s $130 billion of assets tied up in these vehicles, it is a large enough investment allocation to warrant more transparent disclosure. CPPIB executives seem proud of the strategy to date; it would be fabulous if we all could understand why.

MRM