BDC recently released its Annual Report for the fiscal year ending March 31, 2023. The full fiscal year numbers for 2023 extend and deepen the weak results for its venture capital operations that were already evident as at the end of Q3, 2023.
BDC reports that there was a net loss $637.9 million in FY 2023 versus net income of $988.0 million in 2022, a stunning negative about face of just over $1.5 billion in evaporated value. What’s more, this net loss was significantly under the corporate plan for venture capital which had anticipated a net income of $148.7 million (BDC AR: The unfavourable variance of $786.6 million was due to higher-than-anticipated net change in unrealized depreciation on investments and lower net revenue on investments. It was partly offset by higher net foreign exchange gains.).
BDC ascribes this jump from solid black to deep red to several factors, including:
- High volatility in the fair value of venture capital investments
- Higher macro-economic uncertainty
- The decline in public markets, especially the tech industries
- Tighter investment activity
- Reduced growth expectations from investee firms.
However, there may be more at play here.
A recent CD Howe institute study authored by Charles Plant noted, “What is problematic though is that Canada has an underperforming venture capital community … one must ask whether it is worthwhile for governments in Canada to be supporting this industry… Furthermore, government investments appear to be creating slower-scaling firms …”
BDC states that it holds investments in 125 venture capital funds. Therein may lie a large part of the problem. The crown corporation’s Annual Report declares, “BDC … focuses on helping top-performing funds evolve into globally competitive mature funds over time. The performance of BDC’s own portfolio of fund investments – a good proxy for Canadian industry performance – has improved significantly in recent years.”
Essentially, BDC has adopted an index strategy with respect to its investments in venture capital funds. As such, it is unlikely to outperform that index and deliver alpha returns to the shareholder, namely the government of Canada.
Consequently, one can look beyond BDC’s own numbers for clues about the performance of Canadian venture capital. If BDC is indeed a proxy for the entire Canadian venture capital industry, then that industry has likely not experienced any better results than has BDC. It would be interesting to examine the performance of another federal crown corporation that has become quite active in the venture capital space, with both direct and fund investments, namely EDC. However, as of this writing EDC had not yet released its own FY 2023 Annual Report.
The travails of venture capital in 2023 as set forth in BDC’s Annual Report provide some illumination about status of the VCCI-2 program, a successor program to the VCAP and VCCI-1 programs. All three programs were designed to attract matching contributions from the private sector (and provincial governments) and both the VCAP and VCCI-1 variants enjoyed considerable support from non-federal sources of capital supply.
BDC, which manages these programs on behalf of Ottawa, is notably silent in its Annual Report concerning any private sector contributions to VCCI-2 received by March 31, 2023. The Annual Report notes a commitment to deploy $450 million to VCCI-2 by the federal government and that “VCCI recorded authorizations of $350.0 million as of March 31, 2023.” Curiously, no mention is made of any sums having been allocated to the program from the private sector. One suspects that the downdraft in venture capital fortunes has made potential private sector (and provincial governments) wary about financial commitments to this federal initiative. It is interesting, in this regard, that only one of the four funds of funds selected to access VCCI monies has announced a first close, and that back in early April 2023.
Richard Rémillard
Richard Rémillard is President of Rémillard Consulting Group (RCG), a unique, Ottawa-based, bilingual consulting firm specializing in providing private sector, government & trade association clients with creative, research-grounded solutions to business issues and public policies involving the Canadian financial services industry. For more information: rremillard@bellnet.ca
BDC Annual Report can be downloaded from
https://www.bdc.ca/en/about/corporate-governance/financial-results