Canadian Labor Provides Stake for Tent Firm, Others
Bernard Grandchamp is the proud owner of the largest tent in all Quebec--an enormous 40,000 square feet of space when assembled, far larger than the 16,000-square-foot warehouse in this industrial park at Montreal’s edge, where the tent lies packed and ready between rental gigs at corporate banquets and weddings.
The big tent is proof positive of the rapid expansion of his Location Grandchamp party rental business. Fittingly, Grandchamp means “big field” in French. But when he approached area banks for a $500,000 loan last year, they folded him down fast.
“Banks want something solid,” said Grandchamp, 34. “They want to lend to you on buildings . . . not tents.”
Grandchamp, like small and medium-sized entrepreneurs everywhere, needed venture capital from a deep-pocket investor willing to take a risk. He quickly got it from the oldest of Canada’s labor-sponsored pension funds, the Fonds de Solidarite des Traveilluers du Quebec, or Solidarity Fund of Quebec Workers.
In short, he got his money from the unions.
Now he’s planning to expand to warm, wealthy Southern California in time for the millennium, where he figures he can make a killing on New Year’s Eve 2000 party tent rentals.
Born of severe recession in the early 1980s, when thousands of industrial jobs were being lost daily, Canada’s labor-backed investment funds have since been backed by politicians across a wide spectrum, from conservative Brian Mulroney to Quebec separatist Jean Chretien.
But they are not universally beloved. Both free-market competitors and the nation’s largest private sector union, the Canadian Auto Workers, disapprove heartily--the former claiming unfair government backing, the latter calling them a reckless risk to working folks’ money.
Still, more than a dozen labor funds now provide half of all venture capital in Canada, a recent study found. The concept is being imitated in Scandinavia and examined in the U.S..
The idea--which served as a model for a fund newly established by three major U.S. unions--is to educate and provide a reasonable rate of return for working-class investors, and guarantee the creation of jobs.
As part of his partnership, Grandchamp had to pay fund managers to hold classes at the warehouse, educating his $12-an-hour employees about how the company works, including how to read a spreadsheet, balance books and make investments.
“It’s good,” Grandchamp said. “Often the employee only knows one thing: that I am signing their paychecks.”
This year, Grandchamp will match up to $250 put up by each employee for investment in the fund.
Independent analysts say these funds may offer a healthy investment for a piece of a retirement package, although by their very nature they are risky.
Rates of return vary sharply: The Vengrowth Investment Fund earned 20.25% last year, while Solidarity has an 8.1% annual average over 10 years. The group average over 10 years is a “tepid” 6% annually, in the words of one analyst.
But that’s misleadingly low: The tax breaks added on top make the difference, experts say.
On dreaded federal tax day, Canadians receive a whopping 30% to 70% tax break on $5,000 worth of income realized from labor funds, thanks to provincial and federal law.
This has helped lure about $4.2 billion to labor-sponsored funds--roughly half of the $8.5 billion in national venture capital.
In Quebec alone, Solidarity officials say their fund, by far the largest, with holdings of nearly $3 billion from 380,000 shareholders, has invested in 1,100 companies and saved or created 72,000 jobs. They partly own the Montreal Expos, an investment made when the baseball team was being wooed to move to the United States.
“I recommend these funds to someone with a few thousand dollars to invest, for two reasons,” said Robert MacKenzie, a financial advisor in Ottawa. “First, for the tax credit, and also, because it puts a little fun into investing, to create jobs and to create research for new products.”
In many Canadian provinces, anyone who invests up to $5,000 in an approved labor-sponsored fund receives 15% off federal taxes and an additional 15% off provincial (state) taxes. Stick the money in your Registered Retirement Savings Plan, similar to a 401(k) plan, and you get a tax deferral as well, up to 40%.
But there are disadvantages that may cancel out the tax boon, experts warn. You have to leave the money in the fund for eight years in most provinces--in Quebec it’s until you retire--or pay back those unpaid taxes.
“For the average worker who may unexpectedly lose a job or have other major bills, that’s a problem,” MacKenzie said.
Some of the smaller, newer funds have high management-expense ratios--close to 4% of net assets, nearly twice the average for mutual funds.
Solidarity has kept its fees low in part because shares are sold by volunteers, mostly union shop stewards, eliminating salesmen’s salaries and commissions. Some unions have paycheck deduction programs. Workers contribute their own money, separate from pension contributions.
Even for funds with excellent rates of return in a given year, the investor won’t necessarily see it, depending on whether the fund lends money to companies or takes an equity position in them. MacKenzie and others advise workers it is far safer to invest in a fund that makes loans, rather than gaining ownership equity.
Grandchamp, the tent rental man, and the Solidarity Fund are a case in point.
In exchange for $500,000, Grandchamp sold a piece of his company to a regional branch of Solidarity Fund. He has nearly doubled his staff, from 42 to 70, and sales have shot skyward.
Grandchamp now plans to expand to San Diego, which he describes as “very rich and very clean. There is money there, lots of money.” After a recent trip, he also learned there are “zero tents available for Dec. 31 there. And I’ve got them right here in my warehouse.”
But back in the frozen north, Solidarity investors may not see one Canadian dollar of Grandchamp’s profit unless the company goes public or he sells it. If he dies or goes bankrupt, “the investor gets what’s left over,” MacKenzie said. “If it’s in equity ownership, there is a risk of losing everything.”
Private-sector money managers who can’t offer the same tax breaks resent the labor funds. John Sartz, manager of two conventional small-capital mutual funds in Toronto, calls them “pigs” that live off the taxpayers.
He was especially angered by Working Ventures Fund, which parked millions in safe companies rather than investing in venture capital projects a few years ago. Facing government fines, the fund has refocused.
Some funds are controversial for another reason. Called “rent-a-union” funds, they pay a fee to a union to use its name, then do business as they please.
In response to the pretenders, five of the biggest funds backed by union members’ money have formed an alliance. Workers who invest in them also can report firsthand about problems they see within the company.
But there is also the view that these unions have climbed in bed with management. Buzz Hargrove, president of the mammoth Canadian Auto Workers, thinks the funds are dangerous.
“We’re fooling with workers’ money here,” he said. “From the conservatives’ point of view, this is going to teach them how to be part of . . . the capitalist system. The workers are then supposed to teach the company how to behave wonderfully through their investments. I don’t buy it.”
Hargrove also complains that the funds are free to invest in nonunion businesses, and he worries that the tax breaks will be used as an excuse for cutting funds from social programs such as Medicare.
But the concept of labor investment funds is being tried by some U.S. unions. The Heartland Fund was established recently in Pittsburgh with the backing of the international steelworker, electrical and textile unions to create jobs, albeit without tax credits.
And a White House “new markets” initiative making its way through Congress has latched on to the tax credit idea for funds that specialize in inner-city and other local economic development, with no labor link.
“It is using this idea of tax credits, which is very similar to the labor-sponsored funds in Canada,” said Tessa Hebb, a Canadian economic consultant.
But some Canadians figure it will be a long time before labor-sponsored funds penetrate the freewheeling U.S. free markets.
“I doubt that your government would give the incentives offered by the Canadian government,” MacKenzie said. “Big money talks in your country . . . not small investors.”
