Anchoring Capital and Jobs:

Spotlight on Regional Investment Funds

(Owner's At Work, Summer 1995)

The development of a global economy puts pressure on Ohio manufacturers to compete with low-wage overseas manufacturing plants. Often these new plants replace manufacturing operations here in Ohio and across the country. The American hourly employees are frequently the most dramatically impacted when they lose their jobs and livelihoods. Ironically, some of the capital used to-create the overseas plants comes from the pension plans of the same American hourly workers who will lose their jobs.

Rather than trying to match third world wages, American industry must find new ways to increase productivity. These productivity increases can take many forms, improvements in machinery, training employees and development of high performance work systems. No matter what, to remain competitive in manufacturing requires substantial infusion of capital. Since financial capital is extremely mobile today and there are many investments which can turn a quick profit, the American Midwest has faced a long term lack of new business capital.

Canadians have long struggled with the problem of capital flight to the United States. Part of their solution has been to develop local, labor-sponsored investment funds. This O.A. W. special feature looks at these Canadian investment funds and at a new American model: the Industrial Valleys Investment Corporation created by the Steel Valley Authority. '

 Thank you: to the Cooperative Charitable Trust for its support of this special feature of Owners at Work. Extra copies are available from the NOEOC without charge while supplies last; contact Judy Wearden at the NOEOC.

Sherman Kreiner

 The labor-sponsored venture capital corporation model was initiated by, the Quebec Federation of Labour (FTQ) in the Province of Quebec in 1984. It was designed to meet equity capital gaps for small and medium-sized businesses in a manner which would address additional social policy concerns. The Fund was the most recent in a long tradition of capital retention strategies in Quebec, including pooling pension funds to assist local economic activity, and the development of a network of credit unions which re-lend deposits locally.

The Quebec Solidarity Fund

The initial plan called for a 35 % provincial tax credit only for individual investors. The plan was then presented to the Federal government which agreed to match the seed equity commitment of the provincial government ($10 million each) and to, provide matching tax credits, provided that the total tax credits were reduced to 40% (20% Provincial and 20% Federal).

The Fund undertook negotiations with the provincial securities commission to permit sales to be made by volunteer members of the FTQ. The Fund raised approximately $500,000 during

 Fund investments have resulted in the creation of more than 15, 000 new full time jobs.

 its first sales season. Since that date, the Fund has raised more than $1 billion dollars. While the bulk of sales are made through lump sum investments, these revenues are supplemented by investment via payroll deduction. In addition to mandating employers to implement payroll plans, FTQ-affiliated unions

 have undertaken a major initiative to establish collective bargaining agreement language which requires employers to match employee contributions made via payroll deduction on a dollar for dollar basis. Recent statistics indicate that about 65 % of Solidarity Fund shareholders are affiliated with the labor movement, the highest percentage among all Canadian labor sponsored venture capital corporations.

The Fund's current investment portfolio includes 167 companies with sales of $Cdn 2.9 billion and approximately 17,000 employees. Recent research by a team attached to Quebec's Institute national de la recherche scientifique has concluded that the Fund's investments have resulted in the creation of more than 15,000 new full time jobs, approximately half at invested companies, with the remainder in other Quebec companies. These investments have further resulted in $964 million in value added to the Quebec economy. In addition the Fund has placed assets in specialized funds serving innovative sectors or specific geographic regions.

The same research report also tracked the fiscal impact of the Fund and concluded that government recouped its seed equity and tax credit investments in the Fund within three years, after which government derives a net gain. Benefits measured included social assistance payments foregone, payroll taxes associated with new jobs-, sales taxes, employer contributions to the Quebec Health Plan, tax payments associated with increased activity of Quebec suppliers to investee companies, and taxes. generated from increased consumer spending derived from workers' salaries drawn from investee companies.

The second labor-sponsored fund was the Working Ventures Fund, established in 1989 by the Canadian Federation of Labour, a small national labor body for the construction trades. Unlike the Solidarity Fund, this Ontario-based fund was created with a national mandate under Federal legislation, and seeded with $15 million from the Federal government. Canadians are eligible to receive a 20 % Federal tax credit for investment in the Working Ventures Fund. Matching provincial tax credits are available in Ontario, Saskatchewan, New Brunswick and Prince Edward Island. Sales of shares are made exclusively by investment dealers. Total assets presently exceed $300 million, of which approximately $67 million is invested in small and medium-sized Canadian companies.

 Crocus also has a specific mandate to promote employee ownership and employee participation among its investee companies.

 Provincial funds generally modeled on the Solidarity Fund were established in British Columbia (Working Opportunity Fund) and in Manitoba (Crocus Investment Fund). Both funds use social criteria to choose investee companies, similar to social screens utilized by ethical mutual funds. Crocus also has a specific mandate to promote employee ownership and employee participation among its investee companies. While Working Opportunity is sold by investment dealers only, Crocus is also sold by trained and licensed volunteer Manitoba Federation of Labor union members. Crocus is the only- fund in English speaking Canada to incorporate this Solidarity Fund feature. Crocus, which is the first fund established in a small population province, also has provision for investment by institutional investors to supplement its capital base. Both Working Opportunity and Crocus have met the timetables established by their respective provincial governments for placing assets in small and medium-sized provincial businesses. A provincial fund in New Brunswick, modeled on the Solidarity Fund template, is expected to begin raising capital in late 1995.

 The importance of the funds

The Solidarity Fund and Working Ventures were the first and third largest venture capital institutions in Canada, according to a 1994 study by the Canadian Labour Market and Productivity Centre. Overall, labor-sponsored funds make up 31.5 % of all resources under management and made 35 % of new and follow-on investment. More than 281,000 Canadians were investors in the funds, slightly more than half of whom were union members.

The last year has been marked by a proliferation of funds in Ontario. Two new funds went to market in January 1994, and nine more went to market in January 1995. These funds came into being as a result of a decision by the Ontario government to change the criteria for fund sponsorship. The provincial labor body, the Ontario Federation of Labour, has not been able to reach consensus on the establishment of a provincial fund. Industrial sector unions, including the Steelworkers and the United Food and Commercial Workers, have been supportive. Public sector unions have been in opposition. They have been joined in that opposition by the Canadian Auto Workers.

 New Initiatives

The New Democratic Party government in the province wished to proceed with this initiative, passing legislation which permitted labor organizations (or a federation of cooperatives) to serve as fund sponsors. Three types of initiatives emerged. First, highly specialized niche funds were created; for example, the DCG Entertainment Ventures Fund, sponsored by the Directors' Guild is targeting investments in the Canadian film industry, the Medical Discoveries Fund is sponsored by a union for scientists, doctors, lawyers and other professionals employed by government, and is targeting medical research. Second, Quebec-style funds with a mandate for a diverse portfolio and a social mandate were developed; these include the First Ontario Fund, sponsored by the United Steelworkers, the Communication, Energy and Paperworkers Union, and the Ontario Federation of Worker Cooperatives. Third, funds were initiated by private capital management firms, to bring tax advantaged capital into their existing pools. These funds have no social mandate and, in some instances, oppose that concept. In some cases, they partner with the sponsoring labor organization; in others, they buy the labor affiliation through the payment of an annual fee. In these "rent-a-union" schemes, the labor organizations have no active role in fund operation.

The Ontario developments stray quite far from the initial fund concept and the special contributions of the labor movement regarding mandate and constituency. Their specialized focus also creates greater risk. They have been excoriated by the Ontario media and by the national media which, to date, has ignored activities in the other provinces. Due to the activities in Ontario, the future of labor-sponsored funds is more uncertain. The provincial funds in Quebec, British Columbia and Manitoba work in close alliance to encourage the government to maintain the special features of the concept and, if sanctions need to be imposed, to impose them on specific funds which fall short, rather than on all of the funds.

 These activities serve as a dramatic counterpoint to the globalization of capital and are worthy of emulation.

 The Canadian labor-sponsored venture capital corporation concept is a unique capital strategy for labor. It utilizes targeted tax incentives to retain capital in communities and uses that capital for economic development activities with the greatest potential for quality job creation. It also serves as a catalyst for other capital retention strategies. Together, these activities serve as a dramatic counterpoint to the globalization of capital and are worthy of emulation.