Fiscal Update 2022: 

Ottawa willing to accept lower returns, more risk to put $15-billion growth fund to work

Barbara Shecter -  Financial Post

Deputy Prime Minister and Minister of Finance Chrystia Freeland and Prime Minister Justin Trudeau before delivering the fall economic statement on Parliament Hill in Ottawa.

The federal government’s new $15-billion Canada Growth Fund is prepared to accept a lower return or increase its potential loss exposure in order to stimulate institutional investment in innovation and green projects with risky economic foundations, Ottawa announced Thursday as part of the fall economic update.

The fund, first announced in the April budget, will make what it calls “concessional” investments — in which the return and loss metrics would not be acceptable to classic private equity investors.

“Launching the new Canada Growth Fund … will help bring to Canada the billions of dollars in new private investment required to reduce our emissions, grow our economy and create good jobs,” Finance Minister Chrystia Freeland said, adding that the projects will have meaningful Indigenous participation and meet “the highest” environmental standards.

“From critical minerals, to ports, to energy , we will continue to make it easier for businesses to invest in major projects in Canada.”

The Liberal government has made several attempts to entice pensions and other institutional investors to fund projects to create jobs, improve Canada’s productivity and commercialize intellectual property.

In this latest iteration, the Canada Growth Fund will seek direct investments including co-investments with private investors and bilateral partnerships where the fund will invest in industrial emitters, clean-tech companies and other companies “across low-carbon supply chains” such as those involved in the production of critical minerals .

To “address demand risk and improve project economics,” the fund will also enter contacts to provide revenue for a certain volume of production in cases “where sufficient demand from prospective private buyers is still developing.”

It will provide anchor equity to fund projects in cases where the risk level or capital required would attract limited interest from private capital.

The fund plans to piggyback some of its investments on the pipelines of private funds, but there will also be sponsorships, where the fund identifies opportunities and tries to convene multiple financial and strategic partners.

Investment management teams will target companies and projects with “a reasonable chance to strengthen the development of Canadian workers and generate knowledge that will produce long-term benefits for the Canadian economy beyond those realized directly by the specific investment in the project or company,” according to a background document shared by the Finance Department as part of the economic update.

For example, companies and projects with a focus on intellectual property development and commercialization would be desirable, as would those that demonstrate an ability to improve Canadian competitiveness through new or existing value chains.

Investments will span the capital structure, and could include equity, debt and derivative contracts.

Ottawa said it will expect private investing partners to share in any downside, and will only make the concession investments — such as debt instruments where the Canada Growth Fund earns below-market returns or has higher exposure to loss through low-interest loans or subordinated debt — to the extent necessary to get a worthwhile project or company off the ground.

“While CGF may accept a first-loss position, for example, investors should share in the financial downside of under-performing investments,” according to the document.

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What’s more, institutional investors will not be rewarded with “returns in excess of what the private sector requires to proceed with an investment given the level of risk it is bearing.”

Ottawa says the aim of the new fund is to generate returns on an overall rather than individual basis, “recovering its capital on a portfolio basis and recycling its capital base over the long term.”

Over the past seven years, Justin Trudeau and his government have made several attempts to attract Canada’s globally active pension fund investors to finance domestic projects.

In September, for example, industry minister François-Philippe Champagne, said he would be reaching out to large funds about building of dozens of electric battery plants in Canada and leasing them back to the automotive industry, a plan he said would help clear a “bottleneck” by accelerating construction of production facilities to process critical minerals that are abundant in Canada such as lithium, nickel, cobalt, manganese and graphite.

One of the most prominent and least-successful attempts to attract widespread interest from profit-seeking private investors was the creation five years ago of the Canada Infrastructure Bank. The vision behind the $35-billion CIB was to attract $4 to $5 of private money for every dollar invested, but it has fallen well short of that target.

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