Private Capital Pioneer Insights: An Interview with Sandy Slator, CVCA President 1991-94 By Steve Hnatiuk, Lighthouse Equity Partners Sandy Slator became the ninth President of CVCA, in the early 1990s, at a time of rapid change in Canada’s private capital industry. Private equity and venture capital investment in Canada was on the cusp of the first big wave of unprecedented growth and just beginning to specialize and mature into distinct asset classes. At the time, Sandy was CEO of Alberta-based Vencap Equities – one of the largest, if not the largest venture capital firm in Canada. Numerous investors who went on to build Canada’s venture capital industry honed their skills under Sandy’s leadership at Vencap. With energy exceeding that of many people half his age, Sandy’s “retirement” resume remains chock-a-block full of active corporate, industry, and philanthropic pursuits. He is a tireless Alberta entrepreneur. I have had the great pleasure of getting to know Sandy over the past decade in his role as board member at AVAC, an active LP and direct investor in Western-Canada. I caught up with Sandy this summer to talk about his time as CVCA President – now two decades ago and discuss the present and future of private capital in Canada. I hope that you enjoy the perspectives and insights from a true pioneer of the private capital business in Canada as much as I did. What is the most significant way that the PE and/or VC industry has changed since you were CVCA President? Slator: The change in approach to venture investing has changed quite a bit over the past number of years. In the past, the focus of the practicing venture capitalist was business building. While a number of current venture capitalists do follow that pattern, there currently appears to be more effort placed on financial engineering. In the past, as well, there seemed to be a greater incidence of direct, unsecured common equity investing whereas today, it appears that there is a greater focus on obtaining a running yield, through convertible preferred shares or convertible debt. I’m not suggesting that there is anything wrong with that approach; it is just a change from the past. What advice would you give to GP’s who are building their firms today? Slator: The “care and feeding” of your Limited Partners is of critical importance. Communicate well and often with them. If you do, and if you are reasonably successful, they will be around the next time you raise funds. Invest well, choose your management teams wisely and work hard to add value to the companies in which you invest. The hard work comes after you have made the investment. What were the biggest challenges our industry faced during your time as CVCA President?
Slator: We faced a number of challenges. Times were not really good then, particularly for the VC industry. We had to convince financial institutions that venture capital was one of the best asset classes to invest in. Unfortunately, more recent years were not as robust from a rate of return point of view, so the challenge of convincing was a daunting one. We also had challenges with CRA, convincing them to look favorably on the industry. There were discussions of eliminating capital gains tax for the industry and treating all gains as regular income; we had many discussions with Ottawa relating to the Canada/US tax treaty on how to treat venture income for US investors in Canadian VC companies. The Federal Government and a number of Provincial Governments responded to the concerns of the VC industry by establishing the Labor Sponsored Venture Capital Funds program; while I won’t pass judgment on this program, it did raise a lot of concern among our membership. If you had to do it all over again, how might you have approached the industry differently knowing what you know now? Slator: I’m not sure I could have or would have changed my approach to the industry. From an operating perspective I would have changed some things, such as replacing some of the management teams in which I had invested, sooner rather than later.
What are your views on Canada’s largest institutional investors/pension plans establishing active direct investing programs? I’m not sure how the institutions really operate in this class. For those who get into the VC area, or growth-oriented small and mid-sized PE-backed companies, I wonder if they really have the business building expertise within their organizations? In high-growth businesses, this is of paramount importance. The real work of a private capital investor comes after the investment is made, and business building capability is critical. Where do you think the best returns in private capital investing are likely to come from in the next decade? If I knew the answer to that I would come out of retirement and return to the industry! The best returns are going to accrue to the investor who can find great management teams. That criterion has not changed over the decades. I’ve always believed that I would rather back an “A” management team with a “B” product, service, or technology - rather than the reverse. What are your thoughts on the geographic scope of investing and fundraising, then vs. now? Slator: I think the trend over the past number of years has been to be more global rather than local. Free trade has boomed and ease of communication has made global competition much more the norm. Whatever one is working on locally, someone, somewhere else is working on exactly the same thing. This prompts greater collaboration and therefore more global investing, and by extension, fundraising. Hot sectors then vs. now? Slator: The hot sectors, during my time in the industry, were computer hardware and software related technology. There were other sectors, of course, but those were the primary focus of many funds. Today, in my opinion, the best sectors that I would pursue would be somewhat more specialized: 1) technologies focused on or related to food production, supply and
distribution, 2) technologies related to energy efficiency, in conversion, finding and utilization, and 3) water remediation. How do you feel about your time as head of CVCA and as an active investor in the Canadian market? Slator: Despite the many challenges, it was a most satisfying run. The fund for which I was responsible was really quite successful. As the head of the CVCA, I don’t believe we accomplished everything we had set out to do, but we did establish, I think, a little higher profile for the industry. We established the Entrepreneur of the Year Award, which did gain us quite a bit of favorable press. Would you do it all over again? Yes, I would definitely do it all over again, in a heartbeat.
Steve Hnatiuk is Chair of Private Capital Magazine’s editorial board, a member of CVCA’s Government Relations Committee, and a CVCA Director / Vice-President from 2004-2013. Steve is Managing Partner of Lighthouse Equity Partners, a buyout firm focused on lower middle market Western Canadian businesses.
Pull Quotes (suggested):
“The hard work comes after you have made the investment.” “The Federal Government and a number of Provincial Governments responded to the concerns of the VC industry by establishing the Labor Sponsored Venture Capital Funds program; while I won’t pass judgment on this program, it did raise a lot of concern among our membership.” “The best returns are going to accrue to the investor who can find great management teams. That criterion has not changed over the decades… I would rather back an “A” management team with a “B” product or service - rather than the reverse.” “Whatever one is working on locally, someone, somewhere else is working on exactly the same thing. This prompts greater collaboration and therefore more global investing, and by extension, fundraising.”