The pace of Canadian venture capital investment was slightly slower in Q2 2013 but reflected net growth at the end of the year’s first half, according to CVCA, Canada’s Venture Capital & Private Equity Association.
Canadian buyout and related private equity deal-making meanwhile, showed continued moderation in both periods.
Dollars invested in Canada’s venture capital (VC) market declined slightly in Q2 2013, with CAD485m invested in total, down three per cent from the same time last year. However, VC investments over the first half of 2013 of CAD886m were up 17 per cent vs. the first half of 2012. The number of deals was lower in both periods as a result of more capital being committed on a per deal basis. In fact the size of the average financing round increased from CAD3.5m in Q2 2012 to CAD4.4m in Q2 2013. The results were in part skewed by several large financings, such as the CAD50m financing of Montréal-based clean-tech company Enerkem in June.
"Some of Canada’s highest-growth technology companies have been able to secure the financing they require in order to turbo charge their growth," said Peter van der Velden, president of the CVCA and managing general partner of Lumira Capital Corp. “The average financing transaction for Canada’s innovative companies is still only 53 per cent of that for innovative companies in the US. Some of this is of course a function of financing stage, but our goal is to continue to close the gap, something that will only happen as a result of continued improvements in the domestic supply of venture capital in Canada."
In terms of sector activity in the Canadian VC market, information technology (IT) led in the second quarter of 2013, with CAD171m invested, or 35 per cent of the total (this occurred despite a 45 per cent year-over-year drop in IT-related activity). In contrast, dollar flows to the clean technology sector were up almost threefold compared to the prior year and accounted for 28 per cent of investment activity and CAD136m of investments in Q2, 2013. In third position was life sciences which garnered CAD69m of investments, down 23 per cent from Q2 2012.
The data for Q2, 2013 Canadian VC fund-raising activity continued to highlight a disturbing trend that was first evident in Q4, 2012. New capital committed VC funds totalled CAD297m in Q2 2013, down 62 per cent. At the end of the first half of 2013, domestic VC funds formation totalled CAD678m which is less than half of CAD1.5bn that was raised at the same time last year. Of the capital raised to date in 2013 more than 53 per cent has been by retail venture capital funds and a further 17 per cent has come from individual versus institutional investors.
"If you look at the sources of capital deployed in the first half of 2013 it is clear that domestic funds formed in the last three years have played a very significant role," says van der Velden. "As a result, the sharp decline in new capital commitments going to domestic funds in the first six months of the year is extremely concerning. To ensure the future prospects of thousands of promising Canadian entrepreneurs and technology companies, we must redouble our efforts to strengthen fund-raising conditions for Canadian venture capital firms. Programmes such as the federal government’s Venture Capital Action Plan should be one key leg of a multi-tiered strategy for the increasing domestic venture capital. But, in light of global competition with respect to building innovation centric economies, we would encourage domestic governments (both provincial and federal) to leave no stone unturned when it comes to working with the industry in securing stable, long term sources of capital from individual, institutional and corporate sources both domestic and foreign."
VC fund realisations of Canadian portfolio assets continued to show strong momentum in Q2 2013. At the end of the first half of 2013, liquidity events totalled 22, which is well on track to exceed the 30 events that were reported for the whole of 2012. Strategic acquisitions accounted for over 80 per cent of total exits, though initial public offerings also made small gains.
Deal-making in Canada’s buyout and related private equity (PE) market continued to moderate in Q2 2013, with reported transactions totalling 72, down 27 per cent year over year. Disclosed deal values in Q2, 2013 totalled CAD2.3 billion, down 42 per cent. For the first half of 2013, disclosed dollar flows in the Canadian market reached CAD4.6bn, which was 25 per cent lower than in the prior year.
"While it is difficult to draw too many conclusions from year to date data it would appear that most of the decline is attributable to a lack of "big deals" as the midmarket buyout and growth-equity deals are still getting done at levels consistent with what we have seen for the past two to three years," says van der Velden.
In terms of deal volume, Canadian buyout-PE market activity continued to be led by natural resource sectors, which captured 30 per cent of total transactions completed over the first half of 2013. With respect to disclosed disbursements, trends in this period were led by healthcare and other sciences sectors, which took a 28 per cent share, primarily because of CAD1.2bn acquisition of CML Healthcare by PE-backed LifeLabs Medical Laboratory Services. Mining-related deals obtained the second largest share of dollars invested, or 26 per cent.
The report found that in the first half of the 2013 Canadian buyout, mezzanine and other PE fund-raising activity was tracking well ahead of activity in 2012. New capital commitments totalling CAD3.7bn went to 19 funds in this period, which is close to double the amount committed in the prior period and certainly lays the foundation to exceed the CAD4.8bn raised in all of 2012.
"The fund-raising environment for buyout and private equity funds has been challenging one in recent years. As a result, the pace of fund-raising activities in the first half of 2013 is very encouraging. With fund-raising activity in the domestic market on the verge of exceeding activity in 2011, and well ahead of the pace for 2012 this has been viewed as good news for traditional small and medium-sized businesses in Canada that are seeking value-added risk capital," says van der Velden.
Along with deal activity, buyout-PE fund realisations of Canadian portfolio companies appeared to moderate in the first half of 2013. Exits from Canadian assets totalled 33 in this period, down 11 per cent from the number of exits reported at the same time last year. Strategic acquisitions continued to drive exit trends, accounting for 61 per cent of the total.
According to the data, Canadian buyout-PE deal-making abroad accelerated in the second quarter of 2013, with transaction values, totalling CAD4.7bn, representing the second largest deployment by funds over the past twelve months. For this reason, activity in Q2 2013 was up 87 per cent year over year. As of June 30th, Canadian funds have led or participated in a total of 28 international deals valued at approximately CAD6bn.
