Growth fund backed by big banks looking to pick up the pace of investment

An investment fund bankrolled by Canada’s biggest financial institutions that targets minority stakes in mid-market businesses is planning to pick up the pace of its deal making this year.

The Toronto-based Canadian Business Growth Fund was launched in June 2018 with an initial commitment of $545 million from 13 banks and insurers, including Royal Bank of Canada, Toronto-Dominion Bank and Manulife Financial Corp.

The CBGF aims for investments of between $3 million to $20 million in already-established Canadian companies, seeking ownership stakes of between 10 and 40 per cent in return.

So far, there have been three such investments announced by the CBGF: in Kelowna, B.C.-based Lift Auto Group, a “consolidator” of car-collision repair shops in Western Canada; in Toronto-based PayBright, a fintech company that provides customers with instant financing for e-commerce purchases; and, in a deal announced last week, in Mobile Klinik Professional Smartphone Repair, which bills itself as Canada’s biggest professional smartphone and tablet repair business.

The CBGF is now intending to increase the tempo.

“Whereas we’ve done two transactions in our first year, our goal is to do five to seven in our second year, and then to further ramp up in our third year,” George Rossolatos, chief executive of the Canadian Business Growth Fund, said in a recent interview. “We’d love to get to the point where we’re doing 10 to 12 investments or follow-ons a year. And I think when we get to that level, we could make a real impact in the Canadian economy, in job creation and helping these entrepreneurs reach their potential.”

Inspiration for the CBGF came from the federal government’s Advisory Council on Economic Growth, which identified a lack of sources of “growth” capital in Canada and recommended support for a private-sector-led growth fund. “The problem is that many companies do not grow after a certain point,” one of the council’s reports noted.

Rossolatos called it a “capital gap,” where seed and venture funds are available for startups, but there is a lack of “patient” funding to help companies get from small to big.

Following a similar initiative in Britain, Canada’s big banks and insurers came together to form the CBGF. The fund has no participation, tax incentives or subsidies from the federal government, a spokesperson for the federal finance minister said in an email.

The independent chair of the CBGF’s board of directors, Dale Ponder, noted that the fund is essentially a group of competitors that have come together for a common purpose.

Ponder, the national co-chair at law firm Osler, Hoskin & Harcourt LLP, did work for the mining industry for years and watched the debate over the “hollowing out” of corporate Canada rage as companies such as Inco were snapped up by large multinationals — in Inco’s case, by Brazil’s Vale S.A. in 2006. Ponder was lead mergers and acquisition counsel for Inco on the deal, she said.

“Getting behind Canadian industry, and helping them to scale up so that we regenerate ourselves, and we keep the best talent in this country, and employment, in particular, was something I could easily get behind,” Ponder added.

For its investments, the CBGF targets companies bringing in more than $5 million in annual revenue. The fund’s indefinite lifespan gives it flexibility in structuring deals and in helping entrepreneurs avoid selling too early, Rossolatos said.

As for other investment criteria, the CEO said the fund is “industry agnostic,” albeit with a few restrictions, such as no real-estate deals or financing for resource-extraction companies. Cannabis and cryptocurrencies are also currently a no-no.

“Our goal is that when you look at our portfolio in three years it will be a microcosm of the … Canadian economy,” Rossolatos said.

The fund launched with 12 people, but now employs 17, with a plan to grow to around 22 or 23, said Rossolatos, a former CEO of Toronto-based security company Avante Logixx Inc. and a co-founder of private-equity firm TorQuest Partners. The CBGF is also expecting future contributions from its shareholders that would push the fund to $1 billion.

“The spirit of it was that we were going to get going, get launched, do some investments, get our brand out there and prove the concept, which I believe we’re doing,” Rossolatos said. “And the next stage will be then to broaden it and make the impact even bigger.”