Solidarity Fund QFL's success says a lot about Quebec
Labour-sponsored VC fund will top $6 billion in assets this year

While the RRSP season for most Canadian financial services firms ended on March 1rst this year, the Solidarity Fund QFL had to stop taking checks a day earlier.

The Quebec government had set a $700 million ceiling on the new money the labour sponsored venture capital fund could take in during its 2004-2005 campaign. After doing a few calculations, fund officials estimated that due to its heavy base of investors who contribute through payroll deductions, the fund risked exceeding the limit. As a result, on February 28th, the Solidarity Fund closed its doors to new investors until its new fiscal year begins another three months from now.

"We barely advertise and still can't meet demand," said Denis Leclerc, the fund's vice-president (shareholder operations).

Plagued by often-shoddy performance, questions about the value they provide to taxpayers and recent troubles at Manitoba's Crocus Investment Fund, Canada's labour sponsored venture capital funds have been going through a rough time lately. Not the Solidarity Fund.

At its current growth pace, during the next 12 months, the Solidarity Fund should top $6 billion in assets. This would rank it as one of the country's five largest and most widely held balanced investment funds. The Solidarity Fund now has more assets than the next nine biggest labour sponsored VC funds in the country combined.

But assets alone go nowhere near toward explaining the Solidarity Fund's importance. Its holdings in, and loans to some 2,148 Quebec businesses, (mostly SMEs) make it a key player in the province's economy. Hardly a single sizable investment deal takes place in Quebec, without fund officials either grabbing a piece of the action or at least sniffing around.

"They are good managers, very efficient at what they do," said Michel Audet, Quebec's Minister of Regional Economic Development and Research, who works with fund officials regularly.

The Solidarity Fund QFL is also a household name among ordinary Quebecers, who --like labour sponsored venture capital fund investors in the rest of Canada,-- benefit from 15% credits at both the federal and provincial levels, on top of their regular RRSP deductions. To give an idea of the fund's penetration: almost one in five (555,000) of the 2.9 million Quebecers who hold RRSPs, are also Solidarity Fund investors.

Much of the attraction is due to those hefty tax incentives. "It's a great deal," said Peter Thompson, an academic advisor at John Abbott College. "Contributions come right off my paycheck. With the (credits and) deductions, each dollar I put in costs me just 30 cents."

Performance, while far from stellar, has been respectable. After flat earnings during the early part of this decade, the fund rose 5.2% during the 11 months ended May 31, 2004, and has averaged a 4.9% return since inception.

Despite its clout and growing importance to the Quebec economy the Solidarity Fund QFL has gone under the radar in the rest of Canada. Part of this is due to the fact that the fund is run almost exclusively by francophone Quebecers, who have felt little need to broaden its reach beyond the province's French speaking RRSP investors. The vast majority of what little advertising the fund does is in French and although the fund has a province wide chain of 53 sales offices, not one is located in Montreal's predominantly English West Island.

That means the fund's brand awareness is much lower among Quebec's English speakers. (98 percent of the fund's investors request written communications in French, a proportion that fund managers estimate corresponds with the mother tongue of unit holders).

The Solidarity Fund's distribution structure also contributes to its lower visibility in English Canada. Most units are sold by volunteers, --often union workers,-- which means that it does not have to pay trailer fees to investment professionals. That means they have little incentive to cover or promote its activities.

But much of the Solidarity Fund's lack of visibility in the rest of Canada seems to have come from inertia among fund officials. Success has produced an inbred cockiness that reveals itself in small ways, such as the fact that it does not provide data to Morningstar, which rates and compares performance of industry players.

Set up by René Levesque's Parti Québécois regime during the early 1980s, the Solidarity Fund operates under Quebec rather than federal legislation, which governs most of Canada's other labour sponsored VC funds. But the Solidarity Fund's stunning success relative to its Canadian labour sponsored venture capital fund cousins has more to do with the nature of Quebec society than the laws that govern its operations.

Quebecers continue to be far more sympathetic to organized labour, than other Canadians. (40.7% of Quebecers paid union dues during 2004, compared to 28.4% of Ontarians). Quebec's large organized labour base gives Solidarity Fund canvassers a much larger natural constituency.

Francophone Quebecers also appear to have a more pronounced sense of themselves as a collectivity, and they have consistently supported the growth a wide range of private and public financial institutions to express that power on a national scale. According to Solidarity Fund's researchers, focus group participants list social motives as one of the key factors in their decision to invest in labour sponsored venture capital funds.

"It's very important to me," said Janette Wygergangs, a librarian and investor in Fondaction, a Solidarity Fund Quebec-based rival. "I am very happy that we are promoting job growth in Quebec."

According to Jean Marc Leger, president of Leger Marketing, one of the most astute observers of the province's social trends, Quebec businesses are much more comfortable in forming partnerships with government and labour organizations than those in the rest of Canada. This gives fund officials a wider range of attractive potential investments. "It's a very Québécois, phenomenon," Leger said.

Leger Marketing obtained $1 million from the Solidarity Fund at the beginning of the decade, financing that Leger credits as a key factor in subsequent rapid growth which saw the polling firm quadruple in size in just four years.

The Solidarity Fund's success has not come without controversy. Last year it took a $70 million hit when its backing of a bid by Tembec to reopen the Gaspesia paper mill turned sour. But there has also been a wealth of success stories. The fund's $35 million investment in SSQ Financial Group in 1993, has helped to parlay the company into one of Canada's largest players in the group insurance market. (Pierre Genest, who led much of that growth became the Solidarity Fund's president in 2002).

Questions about the Solidarity Fund range from the value that the generous tax breaks its contributors receive are providing Quebecers, to the methods it uses when valuing its shares.

Measuring the success of the fund's job creation and preservation mission is notoriously hard. Solidarity Fund officials claim to have created or preserved 90,000 jobs since its inception. The question is if the fund makes a loan to a company, can it rightly claim to have saved the jobs of the workers who work there? In many cases there's a good argument that if the fund had not provided the cash, the company would have found alternate financing.

Another of the Solidarity Fund's big challenges came sharply to light last September when Crocus Investment Fund announced a $15 million write down in its portfolio, which knocked $1.10 of its share price.

A large part of the Solidarity Funds investments are in private, closely-held companies. These businesses -unlike public companies, whose shares are traded regularly, -- are notoriously hard to value. In many cases, fund officials only truly know how much their investments are worth when they dispose of them.

Another challenge is the fund's size. There are increasing signs that the fund is running out of companies to invest in, that fulfil its traditional financial, social and job preservation goals. As a result, the Solidarity Fund has increasingly been forced to look beyond its traditional targets of Quebec-based manufacturing and knowledge based businesses. During the past five years the fund has made several investments outside of the province whose value to taxpayers is unclear.

For example the fund invested $15 million in the El Senador hotel in Cuba through its stake in Oak Trading. Investments were also made as far away as South America and Australia. The fund also sunk $10 million into Crocus three years ago, in a show of worker solidarity. And as recently as last month, the fund invested $7 million in the Laura Secord candy chain, despite its long term aversion to investing in the retail field, a sector in which the value added to the economy of the jobs preserved is highly debatable.

Fund officials stand firmly by their investments outside of the province, saying these are only made if the benefits that accrue to the Quebec economy are at least as large as the initial investment. They also confident that there remain a wealth of available investment opportunities within the province.

They'd better hope so. Because the $700 million of new money that Solidarity Fund officials collected during the last 12 months, is going to have to be invested somewhere.



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