Royal Bank of Canada’s CEO Dave McKay in his office in Toronto. Through the initial fund, the bank plans to take direct equity investments in up to 15 companies with growth that RBC believes it could help accelerate.Cole Burston/The Globe and Mail
Royal Bank of Canada RY-T is launching a $1.4-billion fund aimed at investing in Canadian technology companies that the lender believes could grow into “global powerhouses,” just days ahead of Ottawa’s summit geared at attracting foreign investment.
The country’s largest lender said the RBCx Growth Fund will focus on sectors where it believes the country’s greatest strengths lie, as a way to help Canadian entrepreneurs grow their businesses in Canada.
RBC chief executive officer Dave McKay plans to pitch the fund to foreign investors at next week’s Canada Investment Summit, which is part of Ottawa’s efforts to bolster its nation-building ambitions and diversify trade and global partnerships away from the United States.
Canada is “just not scaling these companies that we need to form the next great multinational corporations,” Mr. McKay said in an interview.
“We’ve seen this for quite some time. We’ve watched it atrophy, and we decided we had to do something about it.”
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As startups scale beyond early-stage funding, fewer sources of Canadian capital are available for growth-stage companies looking to expand their revenue and enter new markets.
In recent years, access to growth capital in Canada has degraded. Previously, about 50 per cent of growth capital came from domestic investors. Now, about 33 per cent comes from Canadian investors, with foreign investors making up the rest, according to Mr. McKay.
Dependence on foreign capital sometimes influences Canadian entrepreneurs to move to the U.S. to access greater funding and talent pools. RBC intends for the fund to fill that gap and help Canada retain ownership, influence and the economic benefit of scaling companies.
In the United States, the ratio has remained relatively consistent, with about 75 per cent of U.S. growth capital coming from domestic investors, Mr. McKay said.
Among the top 20 growth companies in Canada, 70 per cent of their early-stage funding rounds were led by Canadian investors. That dropped significantly to 20 per cent as those businesses graduated into later-stage funding, according to Sid Paquette, the head of RBCx, the bank’s technology and innovation unit, and lead on the fund.
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He added that Canadian taxpayers help fund early-stage startups through government initiatives, but once a business has built a viable product, growth capital to expand to the next level is lacking.
“Canada doesn’t lack ambition. What we’ve always lacked is domestic capital that matches it, and that’s really at the crux of why we created this fund,” Mr. Paquette said in an interview.
Through the initial fund, the bank plans to take direct equity investments in up to 15 companies with growth that RBC believes it could help accelerate. The fund is denominated in U.S. dollars and is valued at US$1-billion.
RBC will invest up to $416-million (US$300-million) – with the remainder coming from investors – and provide companies with access to commercialization opportunities, strategic partnerships and other support that the bank says is typically unavailable through traditional investors.
RBCx has also identified 50 additional companies with about $70-million in revenue that meet the fund’s investment criteria.
Pressure has mounted for Canada’s six biggest banks to increase lending for small- and medium-sized business and for pension funds to boost investments in the country. In June, Canada’s banking regulator cited a fund by JPMorgan Chase & Co., the world’s biggest bank, at a Senate committee and said Canadian banks should “step up and make the same commitment to Canada.”
Last year, U.S.-based JPMorgan said it will invest US$1.5-trillion over the next 10 years in industries that bolster the U.S. economy. Earlier this year, the bank said it is expanding that support to Europe, Britain and Canada.
Canada has an opportunity to grow significantly. The country could unlock $1-trillion in incremental capital expenditure over five years, which would translate into $950-billion in GDP and up to 1.4 million direct jobs, according to a report Tuesday by RBC and McKinsey.
RBC said its fund will focus on companies in five key growth areas. In enterprise software, it will focus on applied AI, cybersecurity, and data and analytics. Its health tech investments will target digital health, care delivery platforms and clinical software.
The “frontier” tech category will include aerospace, dual-use defence, quantum and advanced computing. It will also focus on energy and climate tech across carbon management and energy transition, as well as agriculture tech with a focus on precision agriculture, field automation and supply chains.
The fund has already attracted significant interest from investors. The bank has had initial, conceptual conversations with domestic and foreign investors, including those in the Middle East and the U.S. Mr. McKay has meetings set up with large global investors at the Canada Investment Summit to have more detailed conversations on how the fund works, and encourage investment in RBC’s stock and key Canadian industries.
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He is also meeting with sovereign funds and large-scale investors from global markets, including Asia and Scandinavia.
Mr. McKay said the summit has attracted a “powerful group,” the majority of which are under-indexed to Canada and see an opportunity to invest in the country.
With limited space, the summit is at capacity, and there are investors that are unable to secure a spot in the room.
Organizers are prioritizing large investors with at least $1-trillion in assets under management, according to a source familiar with the matter. The Globe and Mail is not naming the source because they are not authorized to speak publicly on the matter.
In April, the lender first announced its plans to deploy the growth fund. Advancing Ottawa’s growth ambitions would require the private sector to step up, Ottawa to attract foreign investment, and companies to remain and grow in Canada, Mr. McKay said in an interview at the time.
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Since then, Mr. McKay said he has seen “enormous interest” about Canada, but the country has yet to produce enough investable opportunities. However, projects are moving at a greater pace than they have in a long time, giving Mr. McKay more confidence that these initiatives will get off the ground.
RBC has also seen rising interest from global investors in its shares. Following the summit, Mr. McKay is travelling to Britain to pitch its stock to foreign investors.
Foreign investors are “seeing the conviction we have to diversify our economy, which we have to do away from the United States and to a more diversified global economy,” Mr. McKay said.
To secure that investment, Canada needs to move faster to approve projects, remove red tape, reform its tax structure and reduce provincial barriers. While investor interest in Canada is rising, they are impatient and will quickly move on to opportunities in other markets, Mr. McKay said.
“If things take too long and are slow and bureaucratic, that inhibits the confidence that the project will be successful,” he said.
“We sat down with an investor from UAE. They said ‘You guys just have to show pace because that gives us confidence that you’re going to get it done.’”