Private equity and venture capital investors are the catalysts of the modern economy, identifying and nurturing high-potential startups that evolve into industry giants. Canadian companies like Shopify, Cohere, Wealthsimple and Lightspeed owe their early success to substantial investments and mentorship from private capital investors. These investors are not just financiers; they are drivers of innovation, job creation, and community transformation.
Yet, as was recently highlighted in an article in the Globe and Mail, investing in this success is out of reach to most Canadians, other than through pension funds. Today, most VC and PE funds in Canada and around the world are structured as limited partnerships, which are generally not qualified investments under existing, and dated, rules. Additionally, Canadians’ tax-advantaged savings plans, such as Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), offer extremely limited investment opportunities in private markets.
Canada’s policymakers recognize there is room to modernize the rules governing the qualified investments allowed in registered savings plans. This is why CVCA’s submission to the Department of Finance calls for modernizing these regulations to include private equity and venture capital funds. This change would expand investment options, allowing more Canadians to benefit from the high-growth potential of private capital markets.
Expanding access to private capital investments offers far-reaching benefits:
- increasing the pool of available capital, boosting the investment capacity of private equity and venture capital funds, which supports more startups and growing companies, driving innovation and economic growth;
- fostering more equitable investment opportunities, allowing greater access to high-yield investment opportunities traditionally reserved for specific investors;
- diversifying investment strategies with financial vehicles aligned with long-term time horizons and retirement planning;
- bringing fresh perspectives, fostering a dynamic and resilient environment for sustained technological advancement; and,
- keeping Canada competitive with regulations that reflect global financial trends.
Canada’s economy is already benefiting from the role of private capital. It has been instrumental in supporting Canadian startups, driving innovation, and fostering economic development, and investments from private equity and venture capital have led to the emergence of industry leaders that contribute significantly to Canada’s GDP and global competitiveness. For instance, private equity and venture capital investments in Canada totaled CAD $24.7B in 2023, with CAD $14.2B in private equity investments and CAD $10.5B in venture capital investments, highlighting the industry’s important role in advancing sustainable economic growth.
A key aspect of these investments is their role in lasting economic benefits. Private equity investments in Canada are focused on sustainable value creation, aligning with long-term growth and stability. Case in point, over 80% of private capital investments in Canada are below CAD $25M, meaning the majority of private equity deals in Canada are concentrated in small and medium-sized enterprises (SMEs), most of which is invested in succession planning strategies. This trend underscores a broader commitment to fostering enduring economic growth and stability.
Democratizing access to private capital broadens investment opportunities and addresses equity issues. Strong demand is demonstrated by the growing participation of high-net-worth individuals and family offices in the asset class. Reflecting global trends, large pension funds, including those in Canada, already allocate between 10 – 30% of their assets under management to private equity investments, a share that has been growing in recent years. If large pension funds can diversify their strategies, average investors should also have access to these high-yield opportunities.
Expanding Access to Private Equity and Venture Capital for All Canadians
Canadians are eager to invest in the success of homegrown companies. By modernizing investment regulations, we can give them the chance to participate in and benefit from the growth of private capital markets.
Recognizing the need for greater inclusivity, some platforms are already making strides in democratizing access to private capital for retail investors, including CVCA member Stack Capital Group Inc. (TSX: STCK). Stack Capital allows broader investor participation and access to a diversified portfolio of private businesses, including notable Canadian companies such as Hopper, a travel booking app. The Stack Capital platform addresses common concerns, such as liquidity and flexibility, which have held back significant movement in this area.
Concerns about the illiquidity of private capital investments are valid, but there are precedents for including illiquid assets in registered plans with proper safeguards. Additionally, since VC and PE investments are designed to be long-term, they align well with retirement planning strategies like RRSPs. Plus, platform operators can adopt consumer protection measures similar to those used for accredited investors.
Globally innovative strategies have also been implemented to manage liquidity in private capital investments. For example, Lexington Partners raised USD $22.7B for its fund focused on secondary market acquisitions, providing early exit options for investors and maintaining portfolio stability. Similarly, Goldman Sachs Asset Management has expanded its expertise to include real estate, infrastructure, and private credit, facilitating liquidity through secondary transactions and dedicated funds for these asset classes.
These examples demonstrate that with the right structures and regulatory guidelines, the illiquidity of private capital can be effectively integrated into appropriate investment strategies and products, making such investments more accessible and attractive to a broader range of investors. For responsible access by a broader range of investors, platforms can address illiquidity through increased awareness, enhanced investor education, and implementing structures that offer more frequent subscription and redemption options, aligning with successful global examples.
Building a Resilient Canadian Economy
Canada’s future economic success hinges on its ability to lead in technology and innovation. Private capital investments are critical for advancing sectors such as clean technology, artificial intelligence, quantum computing, and domestic chip manufacturing.
Canadians should have an opportunity to partake in our startup and scaleups success. As Canada looks to the future, ensuring that all investors can participate in the growth and success of homegrown companies is essential. The CVCA’s recommendations to the Department of Finance are not just about expanding access; they are about building a more resilient and competitive economy for all Canadians. For further insights and detailed recommendations, please refer to the CVCA’s submission to the Department of Finance on Qualified Investments for Tax-Advantaged Savings Plans. This comprehensive document outlines the proposed changes and the expected benefits, positioning Canada favourably on the global stage.
