It is predicted that private equity will continue to expand beyond the US, UK and Continental Europe because of its strategic importance, creativity in financing and increasing profitability. Venture capital is an essential part of the sustained global growth of private equity; in 2005 alone, Canada’s venture capital market contributed approximately one and a half billion dollars to 590 companies.

In 2007, nearly half of all private equity investors received net returns in excess of fifteen percent over the life of their portfolios. The level of skill and industry knowledge of the General Partners and their teams is what drives the degree of success of private equity enterprises, in terms of growth and value.

Private Equity’s high returns have strengthened public and private pension funds; contributing to higher education scholarships and offering grants to medical research and other important causes. The public perception of private equity will continue to be positively influenced through increased transparency and reporting; encouraging investment in this asset class and perhaps influencing regulatory bodies to relax certain tax treatments and entry levels of participation.

The requirements of accessing Registered Retirement Income Funds (RRIF) are based on outdated data, 1992 to be precise. The article makes a case for reducing, amending or even abolishing current legislated requirements. Life expectancy in Canada for men and women has increased according to the latest actuarial report on the Canadian Pension Plan (OCA 2007), showing life expectancy for men at age 65 to be 19.3 years compared to 14.9 years; and for women those numbers are 22 years compared to 19.1.

Real returns on investments have decreased and life expectancy has increased; if current policies towards minimum withdrawals persist, this group will encounter more financial hardships as they grow older.

The article mentions that the new tax free savings account to take effect in 2009 may provide some relief, in that it will permit reinvestment of unspent withdrawals without repeated taxation. In some cases withdrawals may engender a claw back of certain asset tested benefits.

A look at past experiences of investments into seed, startup, and early stage firms, with a view to improve and promote future investments in this particular industry.

In Canada, most early-stage ventures for the period covered occurred in British Columbia, Ontario, and Quebec (85-90% of total early stage ventures and representing in excess of 90% of total dollars invested). Private independent financing largely contributed to growth in seed investment up to 2000 and has remained pivotal to activity since then.

A vibrant venture capital (VC) market can, despite its relatively small size, achieve superior, risk-adjusted returns for its investors, and simultaneously have a disproportionately large impact on a nation’s economic growth, employment and productivity levels.

Key findings were identified that would enhance interest and investment in this field:

The first finding was concentration on management skills; too few fund managers with adequate skills and experience. Management skills add value and improve growth and development. There appears to be higher demand for skilled managers in specific fields such as IT and Telecommunications.
The second finding was the need for more and larger sized funds, and increased deal sizes. This issue often brings the entrepreneur’s and investor’s attention to look further south for opportunities.

The findings suggest a strategic role for Government involvement to create the necessary environment that would encourage investment in this asset class, applied to a wider choice of regions.

Venture capitalists from around the globe took part in this survey for the purpose of identifying the best locations and alternatives for future (over the next five years) venture capital activity, specifically focusing on industries of technology (Telecommunications, Semiconductors, and Software), life sciences (Biopharmaceuticals, medical devices and equipment) and alternative energy.
Large, easily accessible markets and high performing entrepreneurs do not in themselves create the most desirable environment for attracting venture capitalists. The addition of elements of innovation, and a government that is entrepreneur and foreign investment friendly, make that country very attractive to venture capitalist investment.
The following is a synopsis of the survey findings for each category:

Telecommunications: The U.S. is the primary country of choice (according to 57% of respondents); Japan is the secondary country, for potential investment in this category;
Semiconductors: The U.S. is again the primary country (70% of respondents), Taiwan is the secondary;
Software: The U.S. (87% of respondents) the primary and India as the secondary country;
Biopharmaceuticals: The U.S. (85% of respondents) the primary and Germany and the U.K. as secondary;
Medical devices and equipment: The U.S. (85% of respondents) the primary and Germany the secondary; and
Alternative/Clean energy: The U.S. (56% of respondents) the primary, and Germany the secondary.

Canada is seen to be one of few countries trying to effect changes that would enhance cross border and foreign investment, namely by amending tax treatment of such investments and simplifying rules.

Read the full report: “2008 Global Venture Capital Survey: U.S. Report”. U.S. report sponsored by Deloitte LLP in association with the National Venture Capital Association (NVCA), 2008.

2007 was a memorable year for Private Equity (PE) investors in Canada largely influenced by three main factors:

Record private equity activity (in fund raising and investments);
Dramatic collapse in debt markets (stemming from the U.S.); and
The emergence of Sovereign Wealth Funds (taking significant stakes in PE firms)

Investment interest in environmental technologies seems to show a trend for the future.
Key urban locations (Vancouver, Toronto, Waterloo, Ottawa, and Montreal), are gaining global recognition for fast maturing innovative hubs. Increased cross-border activity is also likely; PE investors interviewed regarding cross-border activity would welcome federal action to remove cross border tax barriers, such as non resident tax filing requirements.

This report determined that private equity resources reached seventy six billion dollars in Canada in 2007. Attractive returns of private equity investments will be one of the factors that will generate increased capital in the years to come; investments in PE provide diversification which in turn minimizes risk. Higher returns over a long period, combined with minimal risks, make this asset class attractive to investors

A Trill is a new form of debt security proposed by this study that would offer Canadian investors an equity stake in the Canadian economy. Coupon payment of this stake would equate to one trillionth of Canada’s Gross Domestic Product (GDP): thus the name “Trill”.

Pension fund managers and investors are confronted with a pressing issue; finding available investment opportunities that offer stable, long term cash flow investments to fund payments to pensioners. The traits of the Trill would attract the interest of both public and private pension fund managers, as well as individual investors, because the coupon would preferably mature in the long term, perhaps in perpetuity, and it would be connected to Canada’s gross domestic product (GDP). To investors, the benefits would come from inflation protection properties which would be comparable to that of Real Return Bonds (RRBs) because the GDP would be used to determine Trills’ value. Diversification is also a valued benefit by minimizing the risk element in investment.

The federal government, who becomes the issuer, would benefit from the performance of the Trill in times of prosperity and in times of lesser wealth. During prosperous times the Trill would perform well and in turn the government would have to pay out more, but it would also have collected more taxes. During leaner years when the Trill performance is lower, lower payments are made, but remain proportionate to tax revenues. The government could allocate these revenues to unfunded government obligations, or to an investment fund similar to the Alberta Heritage Fund. If other countries adopted the Trill investment model, mutual investment would have several positive outcomes, diversification being the main benefit. Increased international interaction would have a stabilizing effect on world economies, hence becoming a deterrent to engage in mutual trade wars.

The study cites several reasons and benefits of adopting such a concept, but also identifies reasons why the federal government may shy away from the idea. When all is considered, the benefits seem to outweigh the drawbacks.

The absence of a standard definition or measurement of what value mutual funds are expected to deliver to investors, contributes to the status quo of current practises of charging fees that the market will bear. The range in fees charged by mutual fund managers when working with pension funds averaged .25% whereas fees charged by managers working with the average mutual fund investor averaged 2.75%. Part of the reason this practise continues is that investors in mutual funds are generally found to be unsophisticated; buyers seem to know much less about these products than sellers do. This situation creates a perception that mutual funds are sold, not bought.

It is estimated that sixty percent of Canada’s work force does not have any form of employer pension plan; this situation is grave enough for the author to suggest the possibility of some form of federal and/or provincial government intervention, and for these governments to examine what other areas of the world have successfully done to remedy this situation.