Canada's Buyout-Private Equity & Venture Capital Markets in Q3 2013: Venture Capital Investment Up Sharply, Buyout-PE Deal-Making Down Slightly

TORONTO, Nov. 25, 2013 /CNW/ - Canadian venture capital (VC) investment rose sharply in Q3 2013, while Canadian buyout and related private equity (PE) deal-making showed continued moderate decline over the same period in 2012. These were among the key findings from data released today by CVCA- Canada's Venture Capital & Private Equity Association and research partner Thomson Reuters.

VENTURE CAPITAL

Investing Highlights: Q3 2013 - The Strongest Quarter in Six Years

Investment activity in Canada's VC market rose sharply in terms of both deals and dollars in the third quarter of 2013. Disbursements by VC funds totaled $541 million between July and September, up 48% from the $366 million invested at the same time in 2012. In the same period, the number of VC financing rounds involving innovation-based Canadian companies totalled 103, up 17% year over year.

Higher levels of Canadian VC activity in Q3 2013 helped push dollars invested to a total of $1.4 billion as of September 30th, which is 27% greater than the $1.1 billion invested during the first nine months of 2012. In fact, VC investments to year to date already nearly match the $1.5 billion invested in the whole of 2012. The 322 VC financings completed in the first nine months of 2013, is comparable with deal-making of the year before which is indicative of the current trend in the Canadian market toward relatively larger deals. Financings of innovative companies averaged $5.3 million in the third quarter, up from an average of $4.2 million one year ago, and from an average of $3.1 million in Q3 2011.

It should however be noted that the average size of Canadian VC financing rounds in Q3 2013 was heavily influenced by several major transactions, including the US$165 million Series B financing for Vancouver-based HootSuite Media, the largest VC deal ever for the Canadian market.

"This upswing in VC financing activity is very encouraging for entrepreneurial companies and for the Canadian economy as a whole and really exactly what we would have expected to have seen following the relatively successful new fund formation activity in 2012." said Peter van der Velden, President of the CVCA and Managing General Partner of Lumira Capital Corp. "This level of activity is particularly encouraging given the recently released data on the very positive impact of VC investment in terms of job creation, revenue growth and asset growth."

The increase in the average deal size over the first nine months of 2013 helped to narrow the gap of what innovative Canadian companies raise relative to their US peers to 58%.  This was an increase relative to the to the 47% average overall last year.

American VC funds and other foreign investors have played an important role in capitalizing some of the larger Canadian financings in the first nine months of 2013. To date, foreign VC funds have invested $564 million which amounts to 40% of all dollars invested. This level of activity is 86% more than these investors accounted for in the domestic market at the same time last year but is again skewed by a couple of large deals.

In terms of sector activity, the HootSuite financing of Q3 2013 helped ensure that software and other information technology (IT) sectors led the way. As of September 30th, IT companies had absorbed 45% of all investments. A number of major agribusiness and non-technology deals have contributed to greatly increased dollars going to traditional sectors in 2013. Year-to-date, traditional companies have garnered a total of $337 million, or 24% of total VC investment. Levels of activity in this period were more than triple the $106 million invested in related sectors the year before.  Deal-making in alternative energy and other clean technology sectors came in at $261 million for first nine months of 2013, an amount which is well ahead of the $52 million that was invested one year ago. As a result, clean-tech companies accounted for 19% of total dollars invested so far this year.  Finally, VC investment in biopharmaceuticals and other life sciences sectors to date in 2013 lagged historical metrics. Life sciences companies captured $170 million in total for the period, down 36% from the $264 million invested in the same period in the prior year. This resulted in life sciences investments accounting for a 12% share of all disbursements in the quarter.

Fund-raising Highlights: Better Quarter Helps Relatively Weak Year

In contrast with Q1 2013 and Q2 2013, Canadian VC fund-raising activity increased on a year-over-year basis between July and September. The reported number for Q3 was $258 million of new capital for funds.  The new capital raised in Q3 was much better than the $42 million in dollars committed to funds at the same time last year.

This growth was a consequence of several major VC fund-raising events in the third quarter, including the $120 million final close of the fourth partnership of EnerTech Capital, the launch of a Canadian side-car fund managed by U.S.-based Sanderling Ventures; and the allocation within the BDC of $135 million to its Healthcare Fund.  While not closed in the period the other positive development in the quarter was the announcement by the federal government of the Venture Capital Action Plan's intent to make a total of $50 million in commitments to CTI Life Sciences II, Lumira Capital II, Real Ventures Fund III and Summerhill Ventures II.

Despite the strong quarter, levels of new VC capital fund formation raised year to date were nonetheless well below those of same period in  2012 coming it at $940 million or 37% less than the $1.5 billion committed in the first nine months of last year.

Labour-sponsored and other retail VC funds accounted for the largest share of new commitments reported so far this year coming it at or $421 million in total while private-independent VC funds raised $363 million of new capital in the same period.

Commenting on year to date fund-raising, Mr. van der Velden said "We have had some really positive news this year on the fund formation side of the equation with the implementation of the Federal government's VCAP initiative, but the numbers are non-the-less very concerning, particularly in light of the fact that $421M or 45% of all fundraising year to date was attributable to retail funds which may soon be negatively impacted by proposed tax changes. Fund-raising this year is well below the CVCA's projected required replacement rate of $1.3-$1.7 billion and it is therefore vitally important for all stakeholders in the VC and innovation ecosystems to continue work together to promote a healthy fundraising environment from all possible sources including; institutions, individuals and foreign entities in order to ensure a viable and competitive venture ecosystem to support Canadian entrepreneurs."

Exit Highlights: Strong and Led by Strategics

Exits from Canadian-based VC portfolio companies in the first nine months of the year appeared to be on the cusp of surpassing activity in 2012. VC fund realizations totaled 30 at the end of September, which is only one short of the number reported for the entire of last year. Strategic acquisitions continued to drive VC-backed exits, accounting for 87% of the total in this period.

BUYOUT & PRIVATE EQUITY

Investing Highlights: Investment activity lags while fund-raising accelerates

Both deals and disbursements in Canada's PE market showed year-over-year growth. PE transactions totaled 68 in this period, up slightly from one year ago. Disclosed values for these transactions totaled $4.0 billion, which is more than double the $1.5 billion of Q3 2012, and the highest level reached so far this year.

Despite the strong quarter, weakness in the first halve of the year continued be a drag on year to date activity. For the nine months the end of September, a total of 212 deals were done, down moderately from the same time in 2012, while disclosed dollar flows, totaling $7.4 billion at this juncture, were 17% below the previously reported $8.9 billion.

"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 fewer "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 2-3 years." said Mr. van der Velden.

As of September 30th, two transactions sized greater than $1 billion have garnered over half of all disclosed disbursements made in the Canadian market. Deals sized between $100 million and $500 million accounted for the second largest share of the total, or 27%, while deals sized less than $100 million accounted for the balance.

The largest transaction of Q3 2013 saw NRDC-backed Hudson's Bay Co. undertake a major add-on acquisition of New York-based Saks Inc., announced at a price of US$2.9 billion. Other major deals in this period included: the $315 million equity financing of Saguaro Resources Ltd. of Calgary, in a deal led by Pine Brook Partners; the $170 million equity investment made in Calgary-based TORC Oil & Gas Ltd. by Canada Pension Plan Investment Board; and the $110 million add-on transaction announced by Apax-backed Garda World Security Corp. of Montréal, which involved G4S Cash Solutions (Canada).

Fund-raising Highlights: A Bright Spot

In the first nine months of 2013, Canadian buyout, mezzanine and other PE fund-raising activity had already surpassed activity reported for full year activity in both 2012 and 2011. Twenty five partnerships and other funds raised $6.1 billion of new capital commitments in this period which was 27% higher than the amount committed during all of last year. 

A number of major partnership closings in Q3 2013 contributed substantially to the year-over-year growth in fund-raising. These included: the US$1.5 billion final close of Drug Royalty Fund III, managed by DRI Capital; the US$1.2 billion first close of Onex Partners IV; the $535 million final close of TorQuest Partners Fund III, and the $250 million raised to date by Imperial Capital Acquisition Fund V. All of the firms have headquarters in Toronto.

Exit Highlights: Continuing Sluggishness

While buyout-PE fund realizations of Canadian portfolio companies continued to take place at post-slowdown levels in the first nine months of 2013, activity nonetheless suggested moderation relative to 2012. Exits from Canadian assets by domestic and foreign funds totaled 53 in this period, down 16% from the number of exits reported at the same time last year. 

Strategic acquisitions continued to drive exits, accounting for 60% of the total number as of September 30th, followed by financial acquisitions, which obtained a 23% share. Domestic market activity in Q3 2013 featured the announced sale of Ainsworth Lumber Co. Ltd. of Vancouver to Louisiana-Pacific Corp. for US$1.1 billion, which will give an exit to Brookfield Capital Partners, and the completed sale of Pivot Data Centres Inc. of Calgary to Rogers Communications Inc. for $155 million, giving an exit to Sverica International.

Buyout Activity Abroad: Up Considerably Year over Year

Canadian buyout-PE deal-making abroad continued to occur at higher levels in the third quarter of 2013, with disclosed transaction values totaling nearly $4.0 billion which was only moderately below the $4.7 billion of Q2 2013. On a year-over-year basis, international activity between July and September was up 28%.

To date in 2013, Canadian fund activity in global transactions was still moving at a slower pace vis-à-vis the especially strong activity shown in years since 2010. For example, as of September 30th, Canadian funds have led or participated in a total of 40 deals valued at approximately $10 billion, compared to the 55 deals valued at $21 billion that was reported in the first nine months of 2012.

CVCA

The CVCA  Canada's Venture Capital & Private Equity Association, was founded in 1974 and is the association that represents Canada's venture capital and private equity industry. Its over 2000 members are firms and organizations which manage the majority of Canada's pools of capital designated to be committed to venture capital and private equity investments.  The CVCA fosters professional development, networking, communication, research and education within the venture capital and private equity sector and represents the industry in public policy matters.
www.cvca.ca

Thomson Reuters

Thomson Reuters is the world's leading source of intelligent information for businesses and professionals. They combine industry expertise with innovative technology to deliver critical information to leading decision-makers in the financial, legal, tax and accounting, scientific, healthcare and media markets, powered by the world's most trusted news organization. www.thomsonreuters.com

SOURCE: CVCA - Canada's Venture Capital & Private Equity Association

To arrange an interview with Peter van der Velden, President of the CVCA and Managing General Partner of Lumira Capital Corp, or Richard Rémillard, CVCA's Executive Director, please contact Lauren Linton, Director of Marketing, [email protected] .