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Green light to be given to $500-million growth fund backed by big banks

Canadian bank headquarters stand on Bay Street in Toronto.

Brent Lewi/Bloomber

Canada's largest financial institutions are set to unveil a new $500-million-plus fund on Thursday to help finance growing Canadian businesses and spur economic growth.

The experiment, known as the Business Growth Fund and egged on by the federal government and Bank of Canada Governor Stephen Poloz over months of discussions, is now a reality. But precisely when the funds will start flowing remains to be determined, sources say.

Participants include Canada's six largest banks, as well as other financial institutions such as HSBC Bank Canada, Manulife Financial Corp., Sun Life Financial Inc. and Great-West Lifeco Inc. With their backing, the fund is expected to serve as a bridge between early-stage angel investors and venture capital firms, and the public markets. But it is also a gambit to keep ownership of growing Canadian companies local by extending a helping hand that offers an alternative to U.S. private equity.

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The first order of business is to appoint a chair and start a search for a chief executive officer to steer the fund, according to sources. In the meantime, a board of directors will be populated by senior executives from the partnering institutions.

The mandate will be to invest in small and medium-sized Canadian companies across a range of sectors, providing them with a source of patient capital – as well as advice from expert advisers – to help fuel long-term growth. With a typical investment timeline of five to seven years, the fund will take minority stakes in the companies it backs.

Speaking at an event in Toronto in mid-February, Canadian Imperial Bank of Commerce chief executive officer Victor Dodig lamented that entrepreneurs often "hit a wall at some point."

"They need long-term, patient capital that has a minority ownership stake," he said.

It is not a novel idea. The Bank of Canada began pushing the country's banks to craft something in the image of a similar growth fund for businesses in Britain, which launched in 2011 with £2.5-billion ($4.1-billion) in capital from five of the U.K.'s largest banks. Most of its individual investments range from £2-million to £10-million.

Critics in Britain have warned the fund could crowd out private-sector investors, while generating less-than-stellar returns for the founding banks. Some pundits have suggested the fund was a politically motivated move by the U.K. government in response to the banks' role in the financial crisis, as well as much lower lending to smaller companies than has been the case in Canada.

Some of Canada's larger players were initially hesitant about replicating the British model. Over the past decade, Canadian Imperial Bank of Commerce, Royal Bank of Canada and Toronto-Dominion Bank have all either scaled back or exited their forays in venture capital and private equity, retreating from poor returns.

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Yet the sector's main players all came around, keeping them onside with federal Finance Minister Bill Morneau, who urged the initiative forward and assigned a senior departmental staffer – former Onex managing director Tim Duncanson – to help the initiative.

The new fund is a departure from the partners' core businesses but, if successful as advertised, it promises a path to faster economic growth, and perhaps even some welcome returns on investments in the years to come.

Pension funds may also be looking for a way to join in, perhaps through a second tranche of the fund.

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About the Authors
Banking Reporter

James Bradshaw is banking reporter for the Report on Business. He covered media from 2014 to 2016, and higher education from 2010 to 2014. Prior to that, he worked as a cultural reporter for Globe Arts, and has written for both the Toronto section and the editorial page. More

Sean Silcoff joined The Globe and Mail in January, 2012, following an 18-year-career in journalism and communications. He previously worked as a columnist and Montreal correspondent for the National Post and as a staff writer at Canadian Business Magazine, where he was project co-ordinator of the magazine's inaugural Rich 100 list. More

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