The Canadian Business Growth Fund?

A couple of weeks ago when I was in Toronto, I met George Rossolatos, CEO of the Canadian Business Growth Fund. I spoke with George earlier today and wanted to shine some light on CBGF's activities.

Before I get to our conversation, Kirk Falconer of PE Hub Network wrote a good introductory comment last July (2018) , Need to meet: George Rossolatos, CEO, Canadian Business Growth Fund:

Canadian Business Growth Fund, a mid-market fund launched this year with the backing of 13 financial institutions, is led by a former buyout pro turned business operator.

George Rossolatos, CBGF’s CEO since January, learned the private equity trade while working with Brent Belzberg, one of Bay Street’s most storied investors.

Rossolatos was with Belzberg for nearly a decade, first at listed merchant bank Harrowston, sold in 2001 to TD Capital, and then at TorQuest Partners, a firm they co-founded several months later.

TorQuest went on to become one of Canada’s foremost mid-market PE firms, overseeing more than $2 billion in capital. Rossolatos spent seven years there as a partner, a job that afforded exposure to a wide scope of North American companies and sectors.

In 2009, Rossolatos left TorQuest, deciding he “wanted to run a company” and accumulate “experience as an operator,” he told PE Hub Canada.

After exploring a number of opportunities, he invested in Avante Logixx, a security-tech provider that had fallen on hard times. Becoming CEO, Rossolatos and his team turned the company around, wiping out its debt and quadrupling revenue.

Rossolatos, 46, says the 17-year journey to Avante from Harrowston, which put him on both sides of the financing table, was “great training” for the new role at CBGF.

Conceived in 2017 by Ottawa and financial executives, CBGF aims to fill the unmet or under-met funding needs of small businesses in Canada.

Its focus, which Rossolatos describes as “starting where the banks stop,” is to supply equity and debt financing solutions, tailored to a company’s specific capital structure and demand requirements.

The fund will be a minority investor, ensuring that owners and entrepreneurs remain in the driver’s seat. It will also be a patient investor, holding stakes beyond the usual PE horizon of three to seven years.

CBGF was patterned after Britain’s BGF, which since 2011 has invested £1.4 billion ($2.4 billion) in 220 companies.

And like BGF, which was founded with the support of such U.K. financial majors as Barclays, Lloyds and RBS, CBGF is backed by Canada’s top banks and insurers.

In June, CBGF’s evergreen pool was capitalized at $545 million by BMO, CIBC, RBC, Scotiabank, TD, ATB Financial, Great-West Life, HSBC Canada, Manulife, National Bank, Sun Life, Canadian Western Bank and Laurentian Bank.

The pool will receive additional commitments as needed, Rossolatos said. Over 10 years it is projected to reach $1 billion.

Sourcing deals

Rossolatos has recently given priority to opening CBGF’s doors at a fully resourced Toronto office. He says the fund is now starting to look at deal opportunities that reflect “ambitious entrepreneurs driving proven business models with significant growth potential.”

CBGF is targeting companies with $5 million-plus in annual revenue. It will invest $3 million to $20 million in as many as 10 companies per year, sometimes in partnership with other like-minded investors.

Dealmaking will be coast-to-coast and in a variety of industries, though activity will most likely emphasize manufacturing, service and tech companies, Rossolatos said. He expects to build a portfolio that is a “microcosm of the Canadian economy.”

A central tenet in CBGF’s mission is encouraging successful owner-operators to build larger companies instead of slowing down or selling early, which is often the result of too few funding options, Rossolatos said.

“We want to help entrepreneurs navigate the complex stages of getting to a bigger business, to grow revenue from $5 million to $50 million or higher,” he said.

CBGF will do this by taking board seats and providing advice, coaching and access to talent pools. Rossolatos says a source of value-adding capability will be the networks of the fund’s institutional backers.

Rossolatos has so far assembled a team of 12 investment pros and other staff and remains in hiring mode.

They include Senior Investor Dale Tingley, formerly a managing director at BMO Capital Partners and CAI Capital Management, and Senior Investor Hai Tran-Viet, formerly a vice president at Regimen Partners and partner at Signal Hill Equity Partners.

CBGF is chaired by Dale Ponder, a co-chair of Canadian law firm Osler, Hoskin & Harcourt.

As I stated, I met George a couple of weeks ago in Toronto at a luncheon hosted by the Canadian Club where Michael Denham, President and CEO of the BDC gave a great speech.

One of the great things about this blog is I get to meet really smart and engaging people doing really interesting things and I want to cover more of these people and what they are doing.

So, this morning I had a scheduled call with  George Rossolatos, CEO of the Canadian Business Growth Fund. George is a super nice guy who is passionate about his mandate and I thank him for taking some time to speak to me about CBGF.

You can learn more about the Canadian Business Growth Fund here.  I note this on its history & shareholders:

The challenge that Canadian companies face in accessing growth capital was highlighted by the Minister of Finance’s Advisory Council for Economic Growth, which recommended the creation of a private sector growth fund to provide investments in established and high-growth Canadian businesses while contributing to an innovative and diversified economy.

In response, Canada’s leading banks and insurance companies came together to form CBGF, providing Canada with an independent, private sector fund that is focused exclusively on the financing gap facing Canadian growth companies.

We are proud to have the support o Canada’s leading financial institutions, and are excited to work with them to identify and back the next generation of Canadian business success stories.

Which were the leading banks and insurance companies which formed CBGF? You can see them here:

George told me that the Ministry of Finance's Advisory Council on Economic Growth wrote a report where it basically found while Canadian entrepreneurs are good at creating companies, they are not good at scaling them and since SMEs employ most of the people in Canada, it only made sense to create a fund to help them scale their operations.

In fact, from the BDC's website, you'll discover 10 things you (probably) didn’t know about Canadian SMEs:

Small business is big in Canada: 98.2% of all businesses have fewer than 100 employees. When you add in medium-sized businesses (100 to 499 employees), the percentage rises to 99.8%. They are the engine of the economy and their success is vital to Canada’s prosperity.

Here are 10 things you probably didn’t know about small and medium-sized enterprises (SMEs) and their impact on Canada’s economy.

1. There are almost 1.1 million SMEs in Canada.
2. More than half (55%) have fewer than 4 employees.
3. Only 1.6% are medium-sized businesses.
4. Small businesses employed almost 69.7% of private sector workers in 2012, or 7.7 million people across the country.
5. In the 2002 to 2012 period, small businesses were responsible for 77.7% of all jobs created in the private sector. Small businesses created around 100,000 jobs each year on average.
6. SMEs represent 54.2% of the economic output produced by the business sector (in 2005).
7. 90% of exporting companies have fewer than 100 employees, but produce 25% of the total value of Canadian exports.
8. The largest number of SMEs are in the wholesale trade and retail sector (18.8%).
9. Fewer than one out of four Canadian SMEs invest in research and development (R&D).
10. Only half of new firms (51%) survive their fifth year of operation.

Keep this in mind as it provides a glimpse into the environment the Canadian Business Gowth Fund operates under (although it invests in more established companies).

George told me the banks and insurance companies got together and committed long-term capital to help many Canadian companies scale their operations and grow all while the entrepreneurs retain a majority equity stake.

They appointed George to the position of CEO in October 2017 and last May, they committed $545 million in capital to the fund.

CBGF is still a fairly new fund but it's growing and my intent here is to give the fund the exposure it rightly deserves.

The purpose of this fund is to maintain Canadian companies in Canada longer which is why unlike US venture capital funds, they only provide entrepreneurs the capital they need, use innovative financing across the capital structure to take a minority stake and help grow the business over a long-term horizon.

"Typically, large US growth capital funds write a minimum cheque for $30 million, take a big chunk of equity and dilute ownership. Many companies don't need that much money and don't want to dilute ownership, so we help them with their financing needs, take a minority stake and advise them on how to properly scale their business over time."

I asked George if the BDC and EDC are doing this and he told me they are doing "some minority deals but it's a smaller part of their bigger mandate." He added: "We are working with both of them collaborating on helping Canadian companies grow.”

That's where I jumped in and asked: "What about Canada's large pensions? They are long-term patient capital and would be great partners to have."

George stated this: "Our ticket size ranges from $3 to $20 million and that's too small for these large pension funds, it doesn't materially move the needle but we would love to collaborate with them in the future."

Anyway, I asked him how he sources the deals and he said there are basically four ways:

1. Direct: Meet companies and build relationships with them.
2. Indirect: Companies come to them and they initiate contact.
3. Advisors: Mid-market investment banking advisors contact them about a company looking to grow their operations. Lawyers, accountants and other advisors also contact them about a company they're advising which fits nicely in their portfolio.
4. Shareholders: Banks and insurance companies send them opportunities as they know which companies would fit the criteria CBGF is looking for.

He told me they're not a VC fund, don't look at companies without at least $5 million in revenues (see their criteria here).

And unlike a VC, they're not looking for excessive returns as soon as possible, taking a big equity stake but will instead structure a deal that could include preferred shares, sub-debt or other financing options that deliver a blended return that's more optimal for the company.

In his article written last June, Thinking scale and long term growth with the Canadian Business Growth Fund, David Crane notes the following:

This new fund is quite different from venture capital. For starters, it has a much longer time horizon. More important, it will only take minority positions in companies, seeing its investments as partnerships – it also has an innovation network to link up its companies with experts who can provide help to these companies.

Unlike many venture capital investors who are focussed on exiting their investments as early as possible even if it means selling the company to a multinational, this new business growth fund is to help entrepreneurs build large Canadian headquartered companies, what Rossolatos calls anchor firms. It’s all about scaling up.

In Canada, we are underperformers when it comes to turning our smart and clever start-up companies into much larger scaled-up companies. We start many promising small companies only to see them sold to foreign owners or die from lack of growth capital. This represents a huge loss of potential opportunity.

The role of the new fund is to take minority stakes in promising Canadians companies with at least $5 million in annual sales, a demonstrated growth trajectory and a clear pathway for accelerated growth, George Rossolatos, says. There is certainly a hunger for this kind of capital. Although the fund has only just been launched it has already had more than 20 approaches by Canadian companies. While the fund can provide equity or debt from $3 million to $20 million, Rossolatos says he would like to see the fund focus on companies with needs closer to the $20 million range.

Scaling up really does matter. “The growth of companies as they develop new markets is the main mechanism by which the economic benefits of inventors and innovation are realized,” as a study by the Industrial Performance Centre at the Massachusetts Institute of Technology says. “How well an innovation-oriented econmy fares in this dimension of performance is no less important than its initial success in encouraging the formation of new companies in the first place.”

I asked George if he can give me an example of a company CBGF invested in.  He told me about their first investment, Lift Auto Group, a Kelowna-based consolidator of automotive collision repair centers across Western Canada:

With six locations in British Columbia and Alberta, Lift is well-positioned to become a leading player in a highly fragmented industry.

Lift is led by Mark Reineking (President & CEO) and Michael Schurink (COO), who both grew up in entrepreneurial families that owned businesses in the collision repair industry. Along with their team, Mark and Michael are leveraging their experience to bring a sophisticated approach to an industry that is becoming increasingly complex over time. The increasing cost and complexity of operating in the industry is a catalyst for consolidation, providing an opportunity for well-capitalized and well-managed companies like Lift to acquire small operators and build the scale to properly address industry demands.

And he told about their second investment, PayBright, a technology-enabled point-of-sale (“POS”) real-time consumer payments and lending platform based in Toronto, Ontario:

The company began its operations in 2009 as a provider of consumer financing for Canadian healthcare procedures that were not covered by insurance benefits. In recent years, PayBright has invested in its technology platform to support merchants in the retail industry, including both e-commerce sites and physical store locations. PayBright has since become the leader in its space, providing an alternative payment option for purchases through a superior customer experience. By partnering with PayBright to offer an installment payment method, merchants make purchases more affordable for their customers and see increases in conversion, average order value, and repeat traffic. Clients include Wayfair, Endy, and Casper.

Led by Wayne Pommen, the PayBright leadership team has strong industry experience, and the company is viewed as a leading innovator in the fintech industry. PayBright’s omnichannel technology platform (for online, in-store, and call center environments) has helped it secure a leading position with e-commerce companies and traditional retailers operating in Canada. The company is well positioned to benefit from ongoing trends in e-commerce spending and consumer payment preferences.

I asked George which sectors they will be investing in and he told me all of them except for estate and resource extraction.

I find CBGF's mandate fascinating because I recently covered how Canada's pensions are embracing new technologies and talked about the Caisse's investment in Lightspeed POS (ticker symbol: LSPD.TO) and how much I like this Montreal-based company and its CEO, Dax Dasilva.

George told me he's very passionate about CBGF's mandate and thinks over time, they will have a "huge impact on job creation and entrepreneurship in Canada."

He said they did their two first deals at the end last year, plan on doing four this year and are ramping up to do 10-12 deals a year in the future. He's growing his team and for him "having the right culture" is critically important so they can execute on their business plan.

I told him he needs more exposure and we need to get the word out on the Canadian Business Growth Fund to as many stakeholders and companies as possible. I'm just doing my small part here.

Below, George Rossolatos, CEO of Canadian Business Growth Fund, talks about a new fund aimed and smaller businesses and entrepreneurs on BNN Bloomberg. Great clip, listen to his insights.

I also embedded a short clip introducing CBGF which is worth watching. Fee free to contact the fund here for further information.

Lastly, I embedded once again the speech BDC President & CEO Michael Denham gave to the Canadian Club in Toronto in late March, A Vision for Growing Entrepreneurship. If you want to understand what is the engine of economic growth, watch this and the other clips below.