The Montreal Gazette, January 22, 2003

QFL’s Solidarity Fund provides financial muscle and expertise

By Warren Perley

PHOTO: PHIL CARPENTERPierre Genest, (front) president and CEO of the QFL's Solidarity Fund, is shown in the conference area of his office with Dany Laflamme (far left), vice-president for strategic development and investments, and Denis Leclerc (centre), executive vice-president shareholder services.

The mood I sense this bright winter day is one of prosperity and power as I sit in the Crémazie Blvd. office of Pierre Genest, president and CEO of the Solidarity Fund of the Quebec Federation of Labour, one of the largest venture capital funds in Canada.

Throw out all your precepts about radical, wild-eyed union firebrands. Genest and his Solidarity Fund brain trust are sophisticated, button-down investors with one eye on the balance sheet and the other eye on creating jobs for Quebec workers.

Louis Laberge, then QFL president, started the fund almost 20 years ago as a means to offset a recession which saw bankruptcies, high unemployment and interest rates of up to 20 per cent in the early 1980s.

The idea, backed by the provincial and federal governments, was to encourage Quebec workers to buy shares in the Solidarity Fund as a retirement investment which has the legal status of a Registered Retirement Savings Plan. As an incentive, each level of government - federal and provincial - agreed to allow investors annual tax credits of 15 per cent, in addition to the income-tax savings of between 30 per cent and 50 per cent associated with regular RRSP investments.

The mandate of the Solidarity Fund is to use those retirement funds to create jobs by investing in small and medium-size Quebec businesses. The numbers, as of June 30, 2002, tell the story of their success:

  • Net assets in excess of $4.5 billion, making it one of the largest venture capital funds in Canada;
  • Investments of more than $2.8 billion in 2,112 Quebec businesses;
  • 536,429 shareholders, most of them Quebec workers;
  • Investments of $1.7 billion in debentures, stocks and bonds;
  • Almost 100,000 Quebec jobs created, maintained or saved since the fund started
  • An average of $617 million worth of RRSPs sold annually to Quebecers during the last
    five years.

By any measure, this is big business. When you enter Genest’s 17th-floor corner office, you get a sense of the style of the Solidarity Fund. He is cool, relaxed, almost mellow. He is soft-spoken, much as you might expect of someone in his profession - actuary. Actuaries are number-crunchers who project trends, mostly for pension funds and the insurance industry, where Genest worked for many years before assuming the leadership of the Solidarity Fund in January 2002.

Genest, a fellow of the U.S.-based Society of Actuaries, can be found on any given weekday afternoon with his suit jacket slung over his chair, sleeves rolled up, seated at his conference table with senior vice-presidents, supported by one of the largest teams of venture capital experts in the country. Together, they vet applications from Quebec companies in need of strategic investments.

Have money, will invest

There are several facts which might surprise those not aware of how the Solidarity Fund works:

PHOTO: Courtesy Air TransatAir Transat is a Quebec company which has been helped in its growth by funding from the Solidarity Fund.

Fact #1: Whether or not a company is unionized plays no role in the Solidarity Fund’s decision on whether to invest. About 63 per cent of the companies in its portfolio don’t have unions. When it does invest in non-union shops, the Solidarity Fund does not try to proselytize. Its only concern is that workers be treated with respect, regardless of whether the company where they work has a union.

Fact #2: The Solidarity Fund does not seek to control a company in exchange for its non-secured investment. Normally, it seeks to buy between 20 per cent and 40 per cent of the company shares and to name two directors to the board. It leaves day-to-day management in the owner’s hands.

PHOTO: Courtesy of the QFLYvon Bolduc, executive vice-president for investments of the Solidarity Fund.

Fact #3: The Solidarity Fund is a long-term investor, referring to itself as a “value-added partner.” That means it typically holds on to its investments for up to 10 years, working with the company management to stimulate sales and job growth. Its exit strategy can involve a public offering or a buyout by a larger company or by the current management.

Fact #4: Unlike traditional lending institutions, such as banks, these fellows seem downright happy to invest significant amounts of money in smaller companies with growth potential.

“We are the perceived champions of lost causes, but most of our investments go into successful companies which are underfunded,” says Yvon Bolduc, executive vice-president for investments. “In the last three years, we have invested $500 million per year, most of it in successful companies which needed additional capital for growth. We want to support entrepreneurs. We want to help them grow their companies and to create jobs.”

Generous tax savings

The fund’s 19-year track record has been surprisingly strong, suffering its first loss for the fiscal year ending June 30, 2002, when the issue price of its share was fixed at $22.02, down from $24.98 for the fiscal year which ended June 30, 2001. By the end of December 2002, its issue price had decreased to $20.26. Despite the 2002 loss, the fund has shown an average annual return of 5 per cent since its launch in 1984.

Solidarity Fund officials attribute the drop in the share price to a ripple effect from the high-tech meltdown of two years ago and the overall weakness of North American stock markets recently.

Despite the drop in share value, the number of shareholders continues to grow - up by 48,000 to 536,429 as of the fiscal year ending June 30, 2002, compared with one year earlier.

Part of the growth can be attributed to the generous tax treatment accorded the fund’s RRSPs by both the federal and provincial governments - a 30-per-cent tax credit that is above and beyond the tax savings available with RRSPs sold by other institutions.

However, part of the growth is also likely due to a certain pride among Quebecers who want to buy into a fund that reinvests their money in Quebec businesses with great prospects for expansion.

It is that spirit of helping to grow local businesses that motivates Genest. “Our job is to find the good companies with growth potential,” he said in a recent interview.

PHOTO: Courtesy of DatamarkA press operator at Datamark Systems Group Inc., one of the companies invested in by the Solidarity Fund. Datamark is a total business document solutions provider.

There are social parameters attached to such investments. For example, the fund will not invest in companies which exploit child labour and which don’t respect the environment.

“We have an ethics code for investments,” Genest said. “We do a ‘social audit’ before we invest. We send representatives to the company in question to ascertain whether the workers are being treated correctly.”

Part of their mandate is to educate employees of firms they invest in as to the workings of business - how to read balance sheets and financial statements, understanding the importance of profits to ensure the long-term viability of a company.

“We try to create a better communication between workers and management in order to create confidence and success,” Genest said. “Better management and more motivated employees are keys to growth.”

The social aspect of the investments with their emphasis on developing roots in the communities appeals to Genest’s inner sentiments. At heart, he is a country boy from his childhood village of St. Romuald on the south shore of the St. Lawrence River across from Quebec City.

Long before he knew how to calculate premiums, reserves, dividends and annuity rates, Genest knew the value of a chicken and a potato. This was during the mid-1950s before The Quiet Revolution empowered the entrepreneurial class of Quebecers.

PHOTO: Courtesy of Keystone IndustriesA worker stands near an automatic fabric cutter in the Montreal plant of Keystone Industries which has received funding and expertise from the Solidarity Fund.

Genest’s father was a dentist, so he grew up privileged. But he wasn’t unaware that most of his neighbours just managed to eke out hardscrabble existences, putting in long shifts at the big area employers: the Davie shipbuilding yard and the local B.V.D. underwear plant.

When layoffs were announced and money was tighter than usual, the local townsfolk would pay his dad with chickens and potatoes. Genest himself got a taste of manual labour, delivering beer in the summers and working part-time as a wrapper at a Ste. Foy supermarket.

After graduating in 1969 from the Université Laval with his diploma in actuarial sciences, Genest worked for a succession of insurance companies, ending up in 1986 with the SSQ Financial Group, which he helped transform into one the largest group life insurance companies in Quebec.

By 1991, with the company in a free fall because of a diminishing real-estate portfolio and a burgeoning file of long-term disability claims, Genest was named president and CEO to try to save it. SSQ Financial Group’s valuation fell from $60 million at the end of 1991 to $20 million by the end of 1992.

Genest turned to the Solidarity Fund for help, negotiating a $33-million investment in 1993 in exchange for 57 per cent of the company. The deal worked out well for both parties. Up to 2001, the $33 million investment had returned 19 per cent per year on a compounded basis to the Solidarity Fund, while company revenues were rebuilt from $300 million in 1993 to $850 million in 2001.

The relationship between the two organizations also returned dividends for Genest. When Raymond Bachand, then CEO of the Solidarity Fund, resigned in 2001, Genest was tapped as his replacement.

“Coming here was a way to fulfill my childhood ambition to work towards creating more jobs and prosperity for my neighbors,” Genest said with a smile. “The fund is the best instrument in Quebec to help build businesses in our communities.”

Spread the wealth

Its track record is impressive. Among the amounts it has committed:

  • $100 million in paper mill Gaspesia;
  • $50 million to set up a fund called Fintaxi to help drivers buy their own permits, which can cost between $100,000 and $150,000 each;
  • $15 million in Sidex, a fund to finance mining exploration;
  • $14 million in Polycor Inc.; and
  • $27 million in airline Transat A.T. Inc.

Other companies which have been investment recipients are:

  • T-shirt manufacturer Gildan;
  • Steel manufacturer ADF Group
  • Groupe Datamark Systems Inc.; and
  • Groupe Cartem Wilco.

Len Miller, president of Keystone Industries Ltd., has a typically positive story to tell about his involvement with the Solidarity Fund. His company, which manufactures women’s apparel - cotton denim stretch jeans and other products such as skirts, jackets, dresses and coats - under the label “French Dressing,” has forged ahead because of the $3.3 million invested by the fund since 2000.

PHOTO: Courtesy of Datamark PHOTO: Courtesy of Keystone Industries Len Miller, president of Keystone Industries Ltd., says of the Solidarity Fund: “It’s a pleasure to have them around.”

“It took all of 90 days to work the deal out with them,” Miller said in a recent telephone interview. “They’re business people. They don’t care whether you speak English or French or whether you’re unionized or not. They want the business they invest in to maintain jobs and to make a profit.”

Miller, 61, said his sales have shot up to $33 million as of Oct. 31, 2002, compared with $21 million as of Oct. 31, 1999, before the funds were injected. In return for its investment, the Solidarity Fund received 45 per cent of the company.

“The Solidarity Fund has given us the chance to solidify and grow,” Miller said. In addition to a union plant which employs 225 in Thetford Mines, Keystone has 75 non-union workers in Montreal. With sales to 2,700 independent retail outlets throughout North America, Keystone is now looking to open a third plant.

As well as working on sales, production and marketing, the fund is helping Miller to put together a succession plan which will ensure the survival of his company. Of the five-member Keystone board, two are nominees of the fund and three are Miller’s choices. One of the fund’s directors is an outside industry expert who Miller meets once a month for brainstorming sessions.

Business is ‘a pleasure’

“I also go to their (Solidarity Fund’s) conferences,” Miller said. “It’s a pleasure to have them around. It’s all been positive. They have money and expertise to help. I brought my son into the business 1 1/2 years ago because I think he has a wonderful future here.”

Dany Laflamme, vice-president of strategic development and investments at the Solidarity Fund, explains that its monies are dispersed to companies like Keystone through any one of its community networks.

For example, investments ranging between $5,000 and $50,000 are done through 85 autonomous local development societies set up by the fund throughout the province and known by the French acronym “SOLIDE.”

Investments of between $50,000 and $2 million are done through 17 centres known as Solidarity Regional Funds. Investments of up to $100 million are executed through the main Solidarity Fund.

The fund also has experts in various fields to assess investment potential in such areas as aerospace, biotechnology, wood and paper, textiles, financial services, consumer goods, mining and metal products, as well as the auto sector.

Although most investments are in Quebec, the fund will invest outside the province if there is a benefit for Quebec employment. For every dollar invested outside Quebec, the fund insists that a dollar’s worth of services or goods be produced in the province. For example, the fund recently backed the construction of a hotel in Cuba. Many of the products for the hotel, including its dock, were made in Quebec.

The Solidarity Fund is a staunch supporter of good community causes, donating to such organizations as the Montreal Heart Institute, Centraide, the Fondation Charles-Bruneau for children suffering from cancer, the Orchestre Symphonique de Montréal, as well as the Université de Montréal and the Université Laval.

Unlike other venture capitalist funds which typically want out of their investments after five or seven years, the Solidarity Fund is a long-term investor, often up to 10 years.

“We’ll be there through the tough times,” Laflamme said. “When there are problems, other venture capitalists want to clean up and close. We want to help solve the problems and save the jobs. We have a team of about 12 turn-around specialists to deal with such circumstances.”

Once again, the figures speak for themselves. One of every two biotechnology transactions in the Montreal area is financed by the fund. “We were pioneers in developing this sector and today we have one of the largest biotechnology investment teams in North America,” Laflamme said.

Genest emphasizes that the Solidarity Fund’s employees work relentlessly to make sure that the Quebec companies they invest in do more than just survive - they want them to thrive.

“Our employees spare neither time nor effort to support this cause in which we all deeply believe,” he said.

Solidarity Fund RRSPs offer extra 30 percent tax credits

Mid-January through the end of February is a hectic period at the Quebec Federation of Labour’s Solidarity Fund as Quebecers’ thoughts turn to saving taxes through the purchase of RRSPs (Registered Retirement Savings Plans).

When it comes to selling RRSPs, the Solidarity Fund is a major player in Quebec with sales of $870 million in 2002 and an average of $617 million sold annually during the last five years.

The reason for the popularity of the Solidarity Fund RRSPs is that they offer purchasers an additional savings of 30 per cent in the form of tax credits over and above the normal savings of between 30 per cent and 50 per cent associated with conventional RRSPs.

A Quebecer earning up to $25,999 annually who wants to purchase a $1,000 RRSP with the Solidarity Fund will save an extra $300 in tax credits, in addition to the approximately $294 saved on income tax when purchasing a normal RRSP fund. In total, he or she saves about $594 ($300 + $294) on the purchase of a $1,000 Solidarity Fund RRSP.

The extra 30 per cent in tax credits comes from the federal and provincial governments - 15 per cent each. Both levels of government accorded the generous tax credits when the Quebec Federation of Labour (QFL) started the fund almost 20 years ago in order to boost job creation in the province of Quebec.

Denis Leclerc, Solidarity Fund vice-president in charge of share ownership, says that 100 per cent of the $500 million invested annually by the Solidarity Fund in Quebec business ventures comes from sale of the RRSPs.

In addition to the 14 QFL offices which sell the RRSPs across Quebec, 50 temporary offices are opened in mid-January until the RRSP purchase deadline of Feb. 28. Of the 50 temporary offices, five are in the Montreal area - downtown, Kirkland, Brossard, Laval and Pointe aux Trembles.

Those seeking more information can call 514-383-3663.

Warren Perley, a former career journalist, is president of Ponctuation Grafix, a marketing and graphic design studio (www.ponctuation.com).

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