1, May 2024
Canadian pension funds should invest in Canadian tech companies.
There are five compelling reasons why Canadian pension funds should invest in Canadian tech companies:
- Their interests are aligned.
- It is profitable.
- The numbers are small so it won’t affect their risk-adjusted returns.
- It builds their long-term customer base.
- It builds expertise in the funds for future investing.
First of all, let’s look at Canadian pension funds. According to Statistics Canada Canadian pension funds had assets worth $2.2 trillion at the end of 2023. The World Bank evaluated Canadian pension funds, and a key conclusion from their report was:
“Canada is home to some of the world’s most admired and successful public pension organizations.
This was not always the case. As recently as the mid 1980s, many Canadian public pensions were invested largely or entirely in domestic government bonds, were funded primarily on a pay-as-you- go basis, lacked independent governance, and were administered in an outdated and error-prone fashion. Over the past three decades, a “Canadian model” of public pension has emerged that combines independent governance, professional in-house investment management, scale, and extensive geographic and asset-class diversification.”
So if we want to maintain this “Canadian model” we need to maintain the key aspects of their approach, most importantly independent governance, and avoid heavy handed rules to mandate more investment in Canada.
The debate
There is currently a very public debate about whether pension funds should invest more in Canada. On one side, government ministers and many business executives and others argue for more investment in Canada, in things such as infrastructure, shares, and to speed the climate transition. On the other side the pension funds have strenuously opposed the idea.
Canada represents about 2% of the global economy. Canadian pension funds currently have around 10% of their investments in Canada. This ‘home bias’ has some rationale – it provides a hedge for interest rates and inflation, and they have a home court information advantage.
Canada definitely has a serious problem with productivity. Lack of capital investment is part of that. But forcing pension funs to invest more in Canada is not a good solution, as it risks the pensions of millions of Canadians. It is also hard to see how investing in infrastructure, the stock market or real estate in Canada would do much for productivity.
Why investing in Canadian tech companies is a good idea.
- Their interests are aligned.
Pension funds are long term investors. If you step back and look at where the world economy is, we are at the start of the fourth Industrial revolution, that is being led by technologies such as quantum technology, artificial intelligence and synthetic biology. These are General Purpose Technologies that will be widespread throughout the economy in 20-30 years. These are exactly the technologies that many Canadian tech firms are pursuing. So it is in the interests of long term investors to participate in this asset class.
- It is profitable.
If you look just at early stage investing, The Business Development Bank of Canada has a 10 year return to 2022 of 14.9% on its venture capital portfolio. That is better than the return of most pension funds.
- The numbers are small, so it won’t affect their risk-adjusted returns.
In 2023 the total venture capital invested in Canada was $6.9 billion. For perspective this represents about 0.3% of the total assets of Canadian pension funds. About a third of all venture capital in Canada comes from the US.
- It builds a long-term customer base.
Canadian pension funs have an interest in maintaining a strong Canadian economy as that is where their future customers will come from.
- It builds expertise in the funds for future investing.
As technologies such as artificial intelligence, quantum technologies and synthetic biology grow, they will become a larger part of the global economy. Pension funds will need to develop expertise to invest in these sectors. Investing in Canadian tech companies is an ideal way to build that expertise.
How best to do it.
The topic of experimenting with policy is a popular topic at the moment. It is a perfect way for pension funds to approach how to invest in Canadian tech firms. The people who have the most expertise in investing in early-stage tech companies are venture capitalists. So, the pension funds could start by making an investment in a Canadian VC firm and monitoring the results. As their comfort level grows, and their expertise develops, they could expand this and begin to invest in later stage tech companies, and it may one day become a significant asset class. The same independence factor operates for venture capital funds, so they cannot be mandated to invest only in Canada. Some of this investment will go outside Canada. But the home bias will ensure much of it stays here.
Conclusion
Canadian pension funds are world class assets that need to be preserved by avoiding heavy handed rules to force them to invest more in Canada. Canada definitely has a serious problem with productivity. Forcing pension funds to invest more in Canada is not a good solution. Investing more in Canada – in the types of investments often discussed such as infrastructure, stocks and real estate – would do little for productivity.
It is in the long-term interest of Canadian pension funds to invest in Canadian tech companies. The best way to start doing this is by investing in Canadian based Venture capital companies.
Peter Josty
Ref 2 Brookings Institute Report “Experimenting with Experimentation. “https://www.brookings.edu/articles/experimenting-with-experimentation-4-model-bills-for-tech-policy-trials/
Ref 3 home bias advantage https://www.theglobeandmail.com/business/commentary/article-the-business-of-pension-funds-is-to-serve-beneficiaries-not-boost-the/
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