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The Chair: I welcome you to our meeting on the state of the domestic and international financial system. I am Michael Meighen. I am from Ontario and am honored to chair this Committee. I might, by way of introduction, introduce the senators here present. We have an interested group of senators and I am sure some other senators will be here shortly. We are continuing with our special study regarding the financing of growth capital for SMEs.

I wish you, gentlemen, a warm welcome. If you have an opening statement, please proceed. The floor is yours. Afterwards I hope you will be amenable to answering questions from senators. Thank you for being here. It is a pleasure to address you this afternoon. It is the name we operate under in the market. Pittman is Vice President of Private Equity.

He is familiar with the private equity market and venture capital market, and invests in this market. We appreciate your invitation to appear before your committee as senators take stock of the situation with respect to financing for small- and medium-sized enterprises, or SMEs, in Canada. To put our input in perspective, I would like to begin this afternoon by briefly outlining the role and mandate of our organization. We also manage employer and employee contributions to the Reserve Force Pension Plan made after March It is important to note that we are an investment manager and not a pension plan manager.

Responsibility for liabilities lies with the federal government. PSP Investments came into being at a time when the structure and financing of public pension programs in Canada had been undergoing substantive changes. Traditionally such plans had been financed and administered directly by the government in question, inevitably raising concerns that governments could interfere with investment decisions.

The new model that emerged entailed building up reserve funds and investing them in a portfolio of assets, managed by an independent professional investment management organization which would be able to, yet strictly at arm's length from, government.

PSP Investments statutory objectives, and I quote, "Are to manage the funds entrusted to it in the best interests of the contributors and beneficiaries of the plans, and to maximize investment returns without undue risk of loss, having regard to the funding policies and requirements of the plans and their ability to meet their financial obligations. We report to the President of the Treasury Board and to each of our stakeholders through respective ministers, the Minister of Public Safety and the Minister of National Defence. Prior to , all of our investments were passive. We were replicating the public market benchmark indices.

At that point, we embarked on a successful diversification strategy that continues today, introducing private market asset classes such as real estate, private equity and infrastructure, while extending our reach to seize more opportunities in global markets.

Percentage wise that puts us at the top of list compared to our peer group. In absolute dollar terms, it very nearly matches a couple of other pension funds in Canada whose total assets more than double those of PSP Investments. We are proud of the contributions PSP Investments has made to stimulating and supporting economic development and job creation here in Canada, through these important Canadian investments. For instance PSP is a controlling shareholder of Telesat.

Back in , we were instrumental in bringing together Telesat Canada and Loral Skynet to form one of the world's leading satellite services providers, which, of course, is based right here in Ottawa. In addition to housing its world headquarters, Ottawa is also home to Telesat's world-renowned research and development lab. Revera Inc. With nearly 30, employees, Mississauga Ontario-based Revera operates in locations across Canada and in the United States. Those are just a couple examples from a portfolio of ificant Canadian investments too numerous to list today.

Let us turn to the current focus of your committee: venture capital financing for SMEs. Most committee members are aware that these sorts of investments tend to be high risk. By way of illustration, a typical venture capital fund strives to raise sufficient money to invest in 10 deals. On average, four of those deals will fail during the term of the fund, with the result that the investors lose money. Another three may do okay, although they would require additional injections of capital. That essentially leaves investors dependent on the three best performing start-ups in the fund to recoup their initial investments and, hopefully, realize some returns.

At PSP Investments, incidentally, venture capital is part of the private equity asset class. In contrast to that high risk venture fund scenario that I outlined, we expect other types of private equity deals to return approximately 15 per cent to 20 per cent annually. Aside from their aggressive risk profile, venture capital investments, in particular start-ups, are expensive to administer and oversee. They tend to require an inordinate amount of time and resources relative to the size of the investment.

That was a major reason behind the decision approved by our board of directors to invest via the funds route and utilize mostly external investment managers in Canada for our venture capital investments. Finally, I should note that due to the relatively small size of the Canadian venture market, deal flows are limited in . That represents 5. This reflects the reality that despite what we hear about a shortage of venture capital, it can be difficult to actually get money out the door and into what one hopes will prove to be sound investments.

Which brings us back to PSP Investments' legislated mandate, namely to maximize investment returns without undue risk of loss. This is not to say that large Canadian pension investment funds — individually or collectively — cannot have a ificant positive impact on the SME sector.

That is an important sum of money, of which a ificant portion is coming from large pension funds. Moreover, going forward, we expect that constructive dialogue between members of the pension fund investment community, private equity pools and Canadian entrepreneurs and possibly government will lead to innovative solutions to meet the crucial capital needs of SMEs.

For our part, you may rest assured that while maintaining an arm's length relationship with government, PSP investments will continue to be a major investor in the dynamic Canadian marketplace, helping drive economic development and job creation while complying with our mandate to maximize returns without undue risk of loss.

On that note, my colleague Jim Pittman and I would be pleased to field any questions the honourable senators might wish to direct our way. Thank you very much. The Chair: Mr. Valentini, thank you for an excellent presentation, which I am sure will give rise to many questions.

No doubt the last paragraph on 7 will interest senators to have that discussion with you here as to how we can find solutions to help meet the "crucial capital needs" of SMEs, to quote you. That is what we are trying to determine, and your input will be valuable. We will go directly to questions.

Senator Greene: I have a general question. We have had some testimony from other witnesses who have questioned labour funds. Could you comment on that? Pittman: We have not studied that in great detail. Our general view on labour sponsored funds is that a lot of money was raised in a short period of time.

There were some negative biases toward investing that money in a short period of time. One of things we have learned in allocating money, whether to private equity generally or venture capital even more so, is that if you are forced to invest that money in short periods of time, it is a negative bias toward the types of investments you may invest in. That is one of the problems. There may be other problems with the labour sponsored funds as they pertain to the management ratios. That is our broad comment on labour sponsored funds.

Senator Stewart Olsen: Have you recently increased your venture capital funding? What types of funds and businesses do you pick? Who picks them and what are your criteria? Have you sustained losses on your venture capital funding? Pittman: The best way to respond is to say that initially we allocated most of our money through a funds program in We invested it, as Mr. Valentini mentioned, in 15 partnerships. Those funds have invested in approximately 75 underlying companies.

As we look through that portfolio, we see that the performance broadly in venture capital, per se, is about 10 per cent below what we expect in our broad private equity portfolio. It is much below expectations; but it is early days. Venture capital tends to take a while to create value. As my colleague mentioned, it is not unusual in the early days of venture capital to lose a few of the companies while you grow others.

Pittman: Absolutely. As we go forward, we will continue to invest in Canada, but we are cautious, particularly as it pertains to venture capital. Pittman: We are about 10 per cent behind. We expected it to perform plus 5 per cent to 10 per cent; but it is clearly below that. Valentini: Historically the gap, based on data we have on the market over the last 10 years, has exceeded almost 10 per cent to 15 per cent between a venture capital and a buyout.

Only that gap exceeds what our targeted rates of return are on our overall portfolio. That is the challenge. The data are historical, not ours. That is the reality of historical returns between venture capital and what we consider traditionally as private equity investment. Would it be more SMEs and more opportunities? Pittman: Under our mandate, we are required to find managers who can allocate money successfully. Our biggest criterion is people who have generally a good successful track record that we can continue to allocate money to.

They then allocate that money to the underlying companies. We are very measured in how we look at that. That is perhaps our biggest criteria at this point. I would say that is not specific to venture capital. It will happen definitely in venture capital, but it is also in private equity generally: a little bit less so in Canada and much more ificantly, as a matter of fact, in the United States.

Couple seeking 49227 ont

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