© Copyright 2002 Rogers Media. The following article first appeared in the April 2002 edition of BENEFITS CANADA magazine.

There have been plenty of hopeful signs for the future of Canada's private equity market over the past two years. A study conducted last year by Macdonald & Associates Ltd. of Toronto found that private equity capital under management has risen to nearly $40 billion--thanks to a recent spate of fundraising and intense deal activity, particularly in this country's technology-oriented venture industry.

But this achievement pales in comparison to the U.S., where the private equity pool is estimated at US$680 billion. This suggests that the Canadian market is under-capitalized and under-penetrated.

The missing ingredient in Canada is an engaged institutional investor community. In the U.S., a growing number of pension funds, insurance companies, university endowments and other institutions embraced private equity over the 1990s, allocating 3% to 5% of their assets, on average, to a burgeoning industry of professionally managed funds. The result was a boom in buyout, mezzanine and venture investment.

Even in 2001, when a weak economy slowed market activity, U.S. institutional investors remained upbeat. Many raised their allocation ceilings beyond 5%, often to 10%, 15% and even higher. In fact, institutions now represent over 80% of new capital inflows on an annual basis to private equity in the U.S., half of which originates with pension funds.

By contrast, Canadian private equity has been hobbled by inadequate supply conditions. In recent years, this situation improved somewhat, chiefly due to institutional giants such as CDP Capital, the Ontario Municipal Employees Retirement System, Ontario Teachers' Pension Plan Board and a handful of other large pension funds and insurance companies. The 2001 study says that these "mighty few" provided $7.1 billion or 35% of the capital backing private equity funds in Ontario and Quebec that participated in the survey.

Canadian institutional investors on the sidelines may require more incentive. To this end, Macdonald & Associates, the Canadian Venture Capital Association and Quebec's Reseau Capital are developing a returns performance database. In addition, the federal Minister of Finance announced welcome tax changes last year that should encourage domestic and non-resident pension fund participation in Canadian limited partnerships.

Still, a key gap remains. Canada does not have an institution-friendly market infrastructure with effective advisers, including American-style gatekeepers that help fiduciaries evaluate limited partnerships.

Just as important are vehicles that address organizational barriers to participation such as funds-of-funds that typically pool the assets of multiple investors and place them according to predetermined criteria.

Funds-of-funds became attractive to U.S. pension funds, because they share the risk of undertaking private equity activity in a cost-effective manner. Indeed, according to the U.S. magazine, Private Equity Analyst, there are over 120 funds-of-funds south of the border, with assets in excess of US$60 billion. These funds are now responsible for 15% of all new capital commitments to private equity.

The good news is that made-in-Canada funds-of-funds are on the horizon. This month, TD Capital will complete its first closing of a premiere version with a target of US$300 million, that will include several first-time institutional investors.

This fund-of-funds will have global reach, concentrating 60% of its assets on the buyout side of the market and 40% on the venture side in fund placements occurring over the next two to three years in North America and Europe.

Business Development Bank of Canada's Venture Capital Group also aims to seed a $300 million fund-of-funds, targeted at small- and medium-sized pension funds. Hopefully such initiatives will be foundation stones in a new strategy for encouraging institutional investor participation in a fast-growing market.BC

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."