Investment fund makes $1-billion bet on owners who control their companies

Mr. Rossolatos’ father came to Canada from Greece, started an auto-repair shop in Ottawa, and drove a taxi at night to help pay the bills. His son, the founding chief executive of the newly launched Canadian Business Growth Fund, began helping out by the age of 9. Looking back, the 46-year-old financier says a patient, long-term outside investor would have made a world of difference in building his father’s businesses.

“Canadian entrepreneurs find it difficult to secure the funding they need to grow, while maintaining control of their business,” said Mr. Rossolatos, who started his own career as a private-equity investor at TorQuest Partners Inc., then ran tech company Avante Logixx Inc. for seven years. He said the new fund, created by the federal Liberal government but backed by the country’s largest financial institutions, will offer an alternative to traditional venture-capital and private-equity funds, which typically demand control of a company in exchange for their money.

“Our goal is to help entrepreneurs scale up their mid-market businesses as a patient, minority capital partner,” Mr. Rossolatos said. The growth fund formally opens its doors on Tuesday with a $545-million capital commitment from 13 Canadian banks and insurers, which have the option of increasing that backing to $1-billion if the concept proves to be a money maker. Mr. Rossolatos joined the fund in January and has spent the past five months setting up the business and hiring a team of a dozen investment professionals.

Backers expect the new fund will help solve what’s perceived to be a chronic problem for small to medium-sized Canadian companies: Owners sell control relatively early in the businesses’ development, and miss out on the opportunity to build regional or even global champions.

“With access to more growth capital, Canadian businesses have an even greater opportunity to achieve scale and become leaders in their fields,” said Dale Ponder, chair of the fund and co-chair of law firm Osler, Hoskin & Harcourt LLP.

The fund will target minority investments of $3-million to $20-million in growth companies − typically, these businesses will have annual sales of $5-million or more. The mandate is to sprinkle capital across the country, in any sector. Mr. Rossolatos said the initial focus is likely to be on technology, manufacturing and service companies, many of which struggle to get loans from banks because they lack hard assets to use as collateral.

The new fund will make equity and debt investments in growth companies, and Mr. Rossolatos said the goal is to earn returns in step with those of rival private-equity and venture funds, and “commensurate to the risks that we take.” The only sectors the fund plans to avoid are businesses that directly own resources, such as mines or oil fields. Mr. Rossolatos estimates the fund will make eight to 10 investments a year and said: “In five years time, I want to be able to say we supported companies that anchor the Canadian economy.”

The Toronto-based fund is patterned on a British initiative, the £2.5-billion ($3.8-billion) Business Growth Fund that was launched in 2011 and has since taken stakes in more than 220 small companies, making it Britain’s most active venture-capital investor. Mr. Rossolatos spent time this spring at the British fund, and plans to adapt one of its initiatives for the Canadian market, a “talent network” that informally ties together business owners with seasoned entrepreneurs, financiers and experienced managers.

The new fund was initially promoted by federal Liberals and Bank of Canada Governor Stephen Poloz. But the money is coming from the country’s largest financial institutions, including Bank of Montreal, Canadian Imperial Bank of Commerce, Royal Bank of Canada, Bank of Nova Scotia, Toronto-Dominion Bank, ATB Financial, Great-West Lifeco, HSBC Bank Canada, Manulife Financial Corp., National Bank of Canada, Sun Life Financial Inc., Canadian Western Bank and Laurentian Bank of Canada. These institutions have put referral networks in place to steer potential opportunities to the new fund, although Mr. Rossolatos stressed his fund is under no obligation to invest in any businesses that’s sent its way.