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The state of private equity investing in Canada: Is the outlook improving?

Like its US counterpart, the Canadian private equity industry has experienced a difficult couple of years. But, as 2004 begins, there is cautious optimism that brighter days are ahead, according to Heather Stone of Testa, Hurwitz & Thibeault.

Investment activity in Canada has picked up considerably. The recent acquisitions of Canadian technology companies (including Think Dynamics by IBM, Akara by Ciena, TrueSpectra by Scene7, Chrysalis-ITS by Rainbow Technologies and Pivotal by chinadotcom (through its CDC Software division)) have generated an increased interest in the IT sector in Canada. This renewed interest, combined with a recent increase in IT spending and the continued strong investment climate for life sciences companies, resulted in the third quarter of 2003 being the best fundraising quarter of the year for Canadian companies, according to data published by the Canadian Venture Capital and Private Equity Association and Macdonald & Associates Limited.

This recent trend is especially welcome after the roller coaster ride the Canadian private equity community has experienced over the last year. Although the final quarter of 2002 yielded greater than anticipated investment activity in Canada, that quarter was followed by two consecutive quarters of the lowest investment activity since 1996. It remains to be seen whether the upward trend in investment activity in Canada will continue uninterrupted, but there are a number of promising signs.

Quebec continues to be the hot spot of Canada with the largest number of financing deals, driven mostly by the large number of life sciences companies in Quebec and the continued popularity of deals in this sector. Life sciences companies in Quebec are supported by the major life sciences research parks located throughout the province, the significant research and development tax benefits in Quebec and the large number of multinational life sciences companies, such as Novartis and Roche, with significant facilities in Quebec.

Ontario’s IT sector, fuelled by increased IT spending and the recent increase in acquisition activity, captured the most dollars. The large numbers of IT start-ups in Ontario spring from the strong telecommunications and IT sectors in Ontario, the historic base of Bell Canada and Nortel in the province and the technical universities in the area (such as the University of Waterloo, the university that supplies the greatest number of computer programmers to Microsoft).

After their relative lack of activity in the first half of 2003, U.S. and other foreign private equity firms have recently shown a renewed interest in Canada. There is still quite a ways to go, however, before foreign investment activity in Canada reaches historical levels. Most foreign firms investing in Canada during the third quarter focused on software and semiconductor companies in Ontario, although some foreign firms participated in financings of life sciences companies as well, principally in Quebec.

How have the Canadian private equity firms themselves been faring with fundraising activities? This aspect of the Canadian private equity industry has not been as robust. It is unlikely that the 2003 fundraising total for Canadian private equity firms will reach even half of the 2002 total. To expand their fundraising base, several Canadian private equity firms are partnering with U.S. private equity firms. It will be interesting to see whether this trend continues and whether Canada will experience an increase in private equity fundraising in 2004 similar to that expected in the U.S.

Like its U.S. counterpart, the Canadian private equity community has experienced several difficult years. However, as 2004 begins, there is cautious optimism that brighter days are ahead.

This article is reproduced with permission of Testa, Hurwitz & Thibeault, LLP.  For more information about Testa, Hurwitz & Thibeault, LLP, please contact www.tht.com

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