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

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

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.

“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.