The federal government is trying to entice pension funds and institutional investors to back more Canadian startups and larger companies with two pools of funding potentially being announced in next week’s mini-budget, The Logic has learned. 

A draft of a section of the fall economic statement obtained by The Logic shows the government is considering new funding for the Venture Capital Catalyst Initiative (VCCI), as well as a new investment fund for mid-cap companies—typically considered firms with market capitalizations between $2 billion and $10 billion. 

“Pension funds have increasingly looked to expand their portfolios through strategic VC and high-growth investments, but often face challenges in terms of scale and transaction sizes,” the document reads. 

The document was shared with at least two of Canada’s largest pension funds ahead of Monday’s statement, and could change before then. However, it provides insights into how Ottawa could incentivize more domestic funding from the country’s largest investors. 

The Liberals have been trying for years to get Canada’s big pension funds to invest more in the country. In April’s budget, the government called upon former Bank of Canada governor Stephen Poloz to consult with institutional fund managers to find ways to make it easier for them to do so.

Poloz told The Logic in June that he wants to avoid a prescriptive solution for attracting pension investments, like mandated targets, for example, favouring “carrots, not sticks.” 

The Department of Finance declined to comment on the record. 

The draft document shows the government is considering creating favourable investment terms for pension funds to lure them into Canadian deals, including through another VCCI program. 

This will be Ottawa’s fourth round of VCCI funding since it was launched in 2013 with $390 million from the then-Conservative government. The program, originally called the Venture Capital Action Plan, is meant to encourage investment in Canada’s startup sector by providing government money to select asset managers. Those investors then raise additional capital from the private sector for what’s called a fund-of-funds—a pool of capital they invest in other VC funds. 

The government’s latest VCCI program, announced in 2021, included $350 million for fund-of-funds and another $100 million to invest directly in startups. 

The draft document seen by The Logic proposes $1 billion for the next VCCI fund. “To leverage more private capital, this round will include more enticing terms for pension funds and other institutional investors,” it reads. 

It wasn’t guaranteed that the government would continue with the VCCI program past the current fund. When the program launched a decade ago, it was meant to help develop Canada’s fledgling VC industry to a point where the private sector could take over. “This is not a crutch the industry should rely on,” Kim Furlong, CEO of the Canadian Venture Capital and Private Equity Association (CVCA), a lobby group, told The Globe and Mail in 2022, adding that it didn’t plan to advocate for a fourth VCCI fund. 

Since then, however, startups and VC funds themselves have had difficulty raising money amid a perfect storm of high inflation and interest rates, broad economic uncertainty and weak investment returns. 

CVCA has since lobbied for a pooled fund-of-funds program that involves commitments from pension funds. The organization worked with the Department of Finance and Poloz as part of his pension consultations over the summer on the initiative, Furlong told The Logic.

Along with the new VCCI fund, the government may propose a separate $1-billion fund for larger companies. Government dollars would make up 25 per cent of the fund, with private capital, including from pension funds, accounting for the rest. Ottawa would select a private fund manager to make the investments through the fund. 

Poloz told Bloomberg in September that such a pooled fund was one option he was considering to attract more pension funding in Canada. A common fund could reduce some of the costs associated with investing in smaller assets in the country, he said. 

Also in September, The Logic reported that asset management giant Brookfield was in talks with Canada’s pension managers to create a $50-billion fund to invest domestically, including in housing, physical and digital infrastructure, renewable energy and privatized public assets. 

Links between Brookfield Asset Management chair Mark Carney and Prime Minister Justin Trudeau have raised conflict of interest concerns that many said made the proposed fund untenable. 

Editor’s Note: This story has been updated to include more details about CVCA’s recent work.