Frequently Asked Questions
What is Venture Capital?
Venture capital (VC) is funding made available to companies
by venture capitalists, who take an equity stake in exchange
for their investment. VC investments in an enterprise can
range between $100,000 and $10 million, with the investor
expecting an annual return of 20% to 50%. According to Macdonald
& Associates, 2001 was the 2nd best year in the history
of venture capital in Canada. Disbursements totaled $4.9B,
well above the $3B in 1999, but below the $6.6B of 2000. Since
the major economic drivers are the knowledge-based industries
that include the information technology sector, much of the
venture capital pool is directed at such companies.
What do Venture Capital firms do?
Professionally managed venture capital firms generally are
private partnerships or closely-held corporations funded by
private and public pension funds, endowment funds, foundations,
corporations, wealthy individuals, foreign investors, and
the venture capitalists themselves. Labour-sponsored venture
capital corporations (LSVCC) operate in a similar fashion,
although they aggregate their capital differently. As a general
rule venture capital firms take an active role in the companies
in which they invest. Typically, the venture capitalist will:
- Invest for the long-term, taking higher risks with the
expectation of higher rewards;
- purchase equity securities; and
- add value to the company through active participation.
Venture capitalists mitigate the risk of venture investing
by developing a portfolio of young companies in a single venture
fund. Many times they will co-invest with other professional
venture capital firms.
What are the Advantages of Investing
in Venture Capital?
Venture capital, as an asset class, has historically enjoyed
the highest rate of return versus other asset classes.
Holding an alternative asset class, such as venture capital,
in a portfolio has been shown to reduce overall portfolio
risk despite the inherent risks of investing in private, early-stage
companies. This results from fluctuations in asset values
being tied to different variables than those present in the
public markets.
What are LSIFs?
In addition to being part of the exciting venture capital
industry, Axis Investment Fund is a Labour Sponsored
Investment Fund (LSIF) which entitles purchasers of its shares
to generous tax incentives on purchase.
Generally, LSIFs invest in eligible small and medium-sized
Canadian businesses. The aim of these funds is to develop
the Canadian economy by promoting the growth of small businesses
and create jobs in emerging areas such as telecommunications,
e-commerce, and biotechnology. LSIFs are similar to Venture
Capital funds with the exception that government legislation
imposes constraints and restrictions on the investments and
the timing of the investments in order to protect investors
and ensure that the government's goals of economic development
and job creation are met.
A LSIF is like a mutual fund in that it allows professional
money managers to make investment decisions on behalf of its
investors. Individuals investing in LSIFs indirectly share
in both the profits or losses from these investments through
fluctuation in the Net Asset Value per share of the particular
fund. By the LSIF investing in a number of different companies,
individual investors are able to reduce their overall investment
risk.
A LSIF investment portfolio differs from a mutual fund in
the fact that, since it provides venture capital, it will
include many private companies and thus offers its investors
the potential to enjoy a possible higher rate of return as
these companies mature and realize value through mergers and
public offerings.
In addition, an RRSP investment in a LSIF enables Canadians
to increase their RRSP foreign content limit. The limit can
be increased by $3 for every $1 invested in an LSIF, up to
a maximum in 2001 of 50% of the total RRSP, upon compliance
with relevant conditions. Since LSIFs invest in a number of
different companies, individual investors are able to reduce
their overall investment risk.
What's a Research Oriented Investment Fund
(ROIF)?
The Government of Ontario has demonstrated its commitment
to research and development through the provision of an additional
tax credit to labour-sponsored venture capital investment
funds that qualify as ROIFs. To qualify as a ROIF, a labour-sponsored
fund must hold at least 50% of its investments in businesses
that, generally, incur at least 50% of their expenses as research
and experimental development. The technology companies that
the Axis Investment Fund is focused on, typically
are making a transition from an R&D emphasis to a sales/marketing
emphasis. For the first time, Ontario resident purchasers
of Class A Shares of the Fund will qualify for an additional
five per cent non-refundable provincial tax credit, giving
these purchasers a total provincial tax credit of 20 per cent
to a maximum of $1,000 per year based on an annual investment
of $5,000.
What are the Tax Credits?
The federal government and several provinces provide non-refundable
tax credits to investors in LSIFs (see tables below). Generally,
the tax credits are available to an individual who purchases
shares of an LSIF. An investment in a LSIF must (under legislation
current as at January 31st, 2001) be held for a minimum of
eight years; otherwise, if redeemed before this time, the
tax credits are required to be repaid. This is consistent
with the principles of venture capital, often referred to
as "patient" capital, since it takes time for venture
capital investments to mature.
Investors wishing to maximize their investment could invest
any tax savings arising from their tax credits and any tax
savings received from making their LSIF investment through
an RRSP.
The federal and provincial tax credits
reduce the amounts of taxes payable, and the amount of the
combined tax credit varies by province, as the following tables
show:
Investment in Axis (through RRSP)1 |
$5,000 |
$5,000 |
$5,000 |
$5,000 |
$5,000 |
$5,000 |
$5,000 |
$5,000 |
Federal Tax Credit (15%)2 |
$750 |
$750 |
$750 |
$750 |
$750 |
$750 |
$750 |
$750 |
Ontario Tax Credit (20%)2 |
$1,000 |
$1,000 |
$1,000 |
$1,000 |
$1,000 |
$1,000 |
$1,000 |
$1,000 |
RRSP Tax Savings
Combined Fed & Prov. Tax Rates |
$1,103
22.05% |
$1,403
28.05% |
$1,558
31.15% |
$1,649
32.98% |
$1,849
36.98% |
$1,970
39.39% |
$2,170
43.41% |
$2,321
46.41% |
Total Tax Savings
Percentage of Savings on Original Investment |
$2,853
57.06% |
$3,153
63.06% |
$3,308
66.16% |
$3,399
67.98% |
$3,599
71.98% |
$3,720
74.40% |
$3,920
78.40% |
$4,071
81.42% |
NET COST |
$2,147 |
$1,847 |
$1,692 |
$1,601 |
$1,401 |
$1,280 |
$1,080 |
$929 |
Notes:
1The RRSP contribution assumes that the investor
is within their 2003 contribution limit. RRSP contributions
for 2003 must be made on or before the RRSP contribution cut-off
date of March 1, 2004. RRSP tax savings are not unique to
Labour Sponsored Investment Funds.
2The additional tax credits
granted by both the federal and provincial governments are
subject to recapture if the labour sponsored funds are redeemed
before the end of eight years (subject to some exceptions).
These credits are generally available provided that the investor
has tax otherwise payable against which to offset the tax
credits.
Why is Venture Capital such an important
asset class in Canada?
Venture capital, as an asset class, has historically compared
very favourably in its rate of return versus other asset classes.
Also, holding an alternative asset class in a portfolio can
help reduce overall portfolio risk through diversification.
Venture capital plays an important economic role in job creation
through the provision of start-up and follow-on financing
for promising new companies. Venture capital investors provide
crucial financing which enables the growth and development
of small and medium sized enterprises. For early stage or
rapidly developing firms, which frequently have insufficient
assets or collateral to secure traditional bank financing,
venture capital is often the only financing option available.
What is the Net Asset Value (NAV)?
Like a mutual fund, each venture fund has a net asset value
(NAV), or the value of an investor's holdings in that fund
at any given time. However, unlike a mutual fund, this value
is not determined through a public market transaction, but
through a valuation of the underlying portfolio. Remember,
the investment is illiquid and, at any point, the partnership
may have both private companies and the stock of public companies
in its portfolio. These public stocks are usually subject
to restrictions for a holding period and are thus subject
to a liquidity discount in the portfolio valuation.
Each company is valued at an agreed-upon value between the
venture firms when invested in by the venture syndicate. In
subsequent quarters, the venture investor will usually keep
this valuation intact until a material event occurs to change
the value. Venture investors value their investments using
guidelines and standard industry practices as outlined in
the prospectus of the fund. The venture investor is usually
conservative in the valuation of companies, but it is common
to find that early stage funds may have an even more conservative
valuation of their companies due to the long lives of their
investments when compared to other funds with shorter investment
cycles.
What causes fluctuations in
the NAV?
While the private companies in the Fund's portfolio are valued
at cost and remain relatively stable, a significant percentage
of the Fund's value will eventually be in public companies
that are re-priced every day according to the closing market
prices. Therefore, this portion of the Fund's portfolio will
eventually be subject to market volatility.
What is the Management Expense Ratio (MER)?
Fund companies deduct a management fee in cash, monthly,
out of a fund's portfolio. Near the end of the year, the company
will deduct additional money for such expenses as legal, accounting
and custodial fees. Taken together, these charges, expressed
as an annual percentage of the portfolio's value, constitute
the fund's management expense ratio, or MER.
Why is the MER higher than for mutual
funds?
Venture capital investment is different than investing in
the publicy-traded stocks. Venture capitalists spend a tremendous
amount of time during the pre-investment stage sourcing and
identifying investment opportunities within their researched
focus areas. Once identified, there is typically a negotiation
phase with the potential investee company, through which the
terms of the investment are established. Post-investment,
the venture capitalist manager is often involved with the
investee company at the board and strategic operational levels.
Consequently, the operating expenses of a venture fund will
be higher than those of a mutual fund or other pooled investment
vehicle.
What is the Internal Rate of Return (IRR)?
Internal rate of return is the growth rate of your money
over a time period relative to the amount invested. IRR, which
compares the profit to the amount invested, is expressed as
a percent gain or loss for easy comparison with other percent
changes for the same time period. The IRR calculation is based
on continuous compounding.
What is Capital Under Management?
The total amount of capital committed by investors in a fund
(typically at cost) regardless of how much is still available.
What are Disbursements?
The total amount flowing from investors to investee companies.
What is an Investee Company?
A firm that has secured an equity or quasi-equity investment
from one or more venture capital investors. A company could
attract more than one round of financing in a given year.
What is the difference between
Realized and Unrealized Gains?
A gain is realized when an investment is sold for more than
the purchase price through merger, acquisition, or a public
offering. An investment that has increased in value, but has
not yet been sold, has an "unrealized" gain.
What is Return on Investment (ROI)?
The dollar amount of your investment earnings divided by
the dollar amount of your investment. ROI is expressed as
a percentage.
For example, if you have a $1,000 investment that earns $100
you will have a 10 per cent return on investment: 100 (earnings)
divided by 1,000 (investment) = 0.10 (or 10 per cent).
What is a Registered Retirement Savings
Plan (RRSP)?
A RRSP is a plan that allows a taxpayer to save for her or
his retirement on a tax-deferred basis by making tax deductible
contributions. Any withdrawals from the plan are taxable.
There is a maximum amount which can be contributed to the
plan each year based on the prior year's Earned Income and
the current year's RRSP Dollar Limit.
What is the Fund Code?
Axis Investment Fund offers two series of Class A Shares,
Series 1 and Series 2. The fund code attached to the Series
1 Shares is TAL 178. The fund code attached to the Series
2 Shares is TAL 180.
Who designed our website?
MARSWorks Inc. helped
us with the creation of our website. They assisted us in designing
our site to match our vision and branding. The principals
of MARSWorks worked closely with Axis to ensure
that all aspects of the design process worked out seamlessly.
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