The federal government should shift its focus away from nurturing the venture capital (VC) sector and toward bolstering the appeal of other forms of private equity (PE) investment, a new paper from the C.D. Howe Institute argues.
The Toronto-based think tank is calling on the government to consider policy changes designed to enhance the availability of private equity capital.
“The positive role of private equity in Canadian economic development could be further enhanced by steps that would increase quality investment opportunities and the depth of equity markets in Canada, and at the same time increase the chances that firms will remain in Canada, either through a sale to a Canadian buyer or eventually through an IPO,” the paper states.
In particular, the paper recommends that governments create a capital gains tax exemption for certain investments in small businesses that would require investors to hold qualifying shares for at least five years.
It also suggests revising existing preferential tax rates for small businesses to target young, growing companies. “The idea is to encourage rather than disincent growth,” it says.
Finally, the C.D. Howe paper calls for policy-makers to dismantle barriers to infrastructure investment by private investors.
“This lack of investment opportunities at home is part of the reason Canadian institutional investors seeking to match their liabilities with longer-term assets very actively invest in infrastructure abroad,” it says. “Investing in domestic infrastructure is good for domestic productivity, and allowing more investment dollars to stay at home would provide a more robust environment for efficient capital allocation.”