Special Report of the Auditor General of Québec to the National Assembly Regional Economic Intervention Fund, "regional investment funds" component

Transcription

1 Special Report of the Auditor General of Québec to the National Assembly Regional Economic Intervention Fund, "regional investment funds" component Presentation to parliamentarians December 2009

2 Audit results GP D E C R Good practice Deficiency Evidence Consequence Recommendation 2

3 Overview Portrait of venture capital in Québec in 2008 Financing in the form of equity (capital stock) or quasi-equity (debenture convertible into shares) in a company In 2008, investments in venture capital in Québec represented $349 million ($642 million in 2007) Companies located in the Montréal region benefited from 73% of these sums Par. 1, 3, 4, Illustration 2 3

4 Overview (cont.) History of the FIER Brunet Report (December 2003) Limited presence of the private sector in the regions in the small-scale lending market Budget Speech (March 2004) Creation of the Regional Economic Intervention Fund (FIER) with a $300 million budget: the FIER-Regions are one of the components The FIER helps to fill gaps in the financing chain of small- and medium-size businesses in the regions Investissement Québec creates the IQ FIER subsidiary to invest in the FIER-Regions Par. 8, 9, 11 4

5 Overview (cont.) Management structure of a FIER-Regions Figure 1 5

6 Overview (cont.) Operation of a FIER-Regions For each dollar invested by the partners (other limited partners), the government adds $2 All regions can submit projects to create a FIER-Regions, but no budget is attributed on a priori basis to each region Maximum capitalization of a FIER-Regions: $15 million The government waives the return on the invested capital for a 5-year period Par. 13 6

7 Overview (cont.) In February 2005, IQ FIER adopted an investment policy (see Schedule 3) and a policy dealing with conflicts of interests (see Schedule 4) in order to cover the activities of the FIER- Regions These policies were amended or clarified afterwards (see Table 2) Par. 20, 21, 22, Table 2 7

8 Objective and scope Audit objective Ensure that the sums allocated to the FIER-Regions are managed in accordance with the established rules and in keeping with sound management practices Scope of our work The board of directors of IQ FIER and the Auditor General of Québec signed an agreement to determine the scope of the work geared mainly to compliance Analysis of the files of 30 FIER-Regions with IQ FIER Request for additional information submitted to the FIER- Regions Par. 24, 25, 26, Schedule 1 8

9 Portrait of the situation As at June 30, FIER-Regions (created from 2005 to 2008) Capitalization of $283.7 million ($189.1 million from the government and $94.6 million from business communities) 246 investments made for a value of $150.6 million Approximately 400 limited partners Par. 27, 28, 31, Table 3 9

10 Portrait of the situation (cont.) Liquid assets Some FIER-Regions have significant liquid assets As at December 31, 2008, $81.9 million in liquid assets in 30 FIER-Regions, namely 39.9% of capital contributions (government and other partners) IQ FIER should examine if changes need to be made to its payment process Par. 39, 40, Table 8 10

11 Portrait of the situation (cont.) Syndication of regional funds In 2006, IQ FIER allowed FIER-Regions to invest in the same company (syndication) without exceeding their investment limit As at June 30, 2009: 21 FIER-Regions are part of a syndication 2 FIER-Regions with common directors or limited partners made joint investments in 6 companies (12 investments) 2 others, in the same situation, made investments in 7 companies (14 investments) Par. 41, 43 11

12 Our conclusions Compliance with agreements, policies and sound management practices Our work shows that generally FIER-Regions complied with the agreements and policies However, we found cases where some rules were not followed We also found situations that are not characterized by sound management practices Par

13 Compliance with agreements, policies and sound management practices (cont.) Location of the investment 50% of the accumulated amounts in authorized investments must be invested in the region identified at the time of creation of the FIER-Regions (see Table 9) D 7 FIER-Regions did not adhere to this rule as at December 31, had a rate varying from 40 to 47% 1 had a rate of 27% In May 2009, notices of default were issued by IQ FIER in order to have the FIER-Regions comply before June 30, 2009 As of June 30, 2009, the situation had not been rectified for any of them Par. 46, 47, 51, Table 9 13

14 Compliance with agreements, policies and sound management practices (cont.) Authorized investments according to the administrative regions Illustration 4 14

15 Compliance with agreements, policies and sound management practices (cont.) 58.3% of all authorized investments of the FIER- Regions, namely $87.7 million out of $150.6 million, are in the Montréal region and its surrounding area (Laval, Lanaudière, Laurentides and Montérégie) D The criteria that should be taken into account so that a FIER-Regions determines the location of an investment leaves room for interpretation E Par. 49, 53, 55 A same company having benefited from an investment by 3 FIER-Regions is considered to be part of 2 different regions 15

16 Compliance with agreements, policies and sound management practices (cont.) D D Maximum amount for an investment The limit on investments for a FIER-Regions is $750,000 or $1 million according to its size 5 cases did not respect this limit The investments must be made in companies whose total assets do not exceed $35 million 99% of the 246 investments adhere to this rule (3 cases do not) Par. 34, 66, 67, 75, Table 6 16

17 Compliance with agreements, policies and sound management practices (cont.) D D Conflicts of interests 75 of the 246 authorized investments were the subject of a disclosure of interests Managers or directors having disclosed a conflict of interests can attend the discussions at the time of the authorization of the investment, but cannot vote according to the policy dealing with conflicts of interests For 23 decisions, interests were reported, but the director(s) in question took part in voting For 10 of these investments, a private fund and a FIER-Regions, headed by common directors, made investments in the same companies In other cases, the directors in question deemed their interest insignificant, which in their opinion did not justify refraining from voting. We do not share this interpretation Par. 57, 59, 60, 62, Table 10 17

18 Compliance with agreements, policies and sound management practices (cont.) D D Approval of investment decisions For 4 FIER-Regions, the board of directors of the general partner is made up of 3 directors On 6 occasions an investment had been authorized by only one director since the other 2 were in a conflict of interests situation Remuneration 10 FIER-Regions confirmed that some of their directors had received remuneration when they were appointed to sit on the boards of directors of the companies (mainly attendance fees) Only 3 of these 10 FIER-Regions had provided this information to IQ FIER, despite the fact that this was a requirement under the agreements signed with them Par. 65, 69 18

19 Management of the program by IQ FIER GP The FIER has grown significantly since its creation We noted a positive evolution of the management by IQ FIER Considering: that the FIER is in its fifth year of existence, that significant liquid assets are available, the addition of $60 million announced in the Budget Speech in March 2009 R We recommend that IQ FIER make an evaluation of the FIER to make sure that it meets the objectives mentioned at the time of its creation Par. 76, 78, 82 19

20 Recommendations A few recommendations addressed to IQ FIER: continue its steps so that all regional investment funds make more than 50 percent of their authorized investments in the region identified in their agreement; clarify the criteria making it possible to determine the location of an investment and make sure of a uniform application by the FIER- Regions; specify certain aspects of its policy regarding the disclosure of interests and see to its application; review the provisions concerning the minimum number of directors who must authorize the investments; envisage the putting in place of a mechanism allowing IQ FIER to obtain the relevant information beforehand in order that the activities of the regional investment funds comply with the rules and procedures. Par. 83, 84, 85 20

21 Response of the entity IQ FIER is in agreement with the observations presented in the report and all of the recommendations