PRINT THIS PAGE Canadian private equity in 200602/05/2007. Source: CVCA, Thomson Financial.
Dramatic growth in the Canadian buy-out market led to record levels of private equity investment in 2006, according to Canada’s Venture Capital and Private Equity Association and Thomson Financial. The total value of disclosed investments into Canadian companies made by buy-out funds during the year amounted to US $10.9bn, more than double the US $4.5bn reported in 2005. Meanwhile, venture investment across Canada in 2006 amounted to $1.69bn, matching the total of $1.68bn invested in 2005. Fundraising by Canadian buyout funds also reached record levels, with C$6.4 billion in new capital commitments, more than four times the C$1.4 billion total raised in 2005.
“There is clearly no shortage of attractive investment opportunities in the Canadian buyout sector,” observed Rick Nathan, CVCA President and Managing Director of Kensington Capital Partners. “The dramatic growth in new capital committed to Canadian buyout funds – record levels in 2006 – still amounts to just half of the total value of direct buyout investments made by these funds into Canadian companies.”
Foreign investors are filling the gap. Of the total US$10.9 billion in reported buyout investment, approximately US$3 billion was invested by Canadian-based funds (27%), with US$4.1 billion invested by U.S.-based funds and US$3.9 billion from buyout funds based in the rest of the world.
These trends in the Canadian market are part of a broader global trend driving record levels of private equity fundraising and investment in the U.S. and other international markets. “In Canada, we are growing as fast as we can, but we are just barely keeping up with the global market,” noted Mr. Nathan.
Major Canadian private equity investors are also participating in the broader global markets. Canadian funds (including major Canadian pension funds making direct private equity investments) invested US$13.4 billion in the global private equity markets in 2006, up sharply from the US$5.4 billion invested in 2005.
Across the Canadian private equity market as a whole – including buyout, venture capital and mezzanine debt funds – total new fundraising in 2006 amounted to C$8.6 billion, more than double the C$3.9 billion reported in 2005, and another record level.
Canada’s Venture Capital Industry in 2006:
Stable VC Investment Levels Nationally
Venture capital investment across Canada in 2006 amounted to $1.69 billion, matching the total of $1.68 billion invested in 2005, according to the industry’s annual statistical report of 150 venture capital investment firms released today by the CVCA and research partner Thomson Financial.
In the fourth quarter of 2006, total investment amounted to $489 million, just below the $502 million of Q4 2005 but representing a 42% increase over the Q3 2006 level of $344 million.
“In spite of these generally flat results across the market as a whole, three significant underlying trends are clearly visible,” said Rick Nathan, President of the CVCA and Managing Director of Kensington Capital Partners. “First, there has been a substantial regional shift away from Ontario and into Quebec and British Columbia. Second, we are seeing a significant increase in the share of venture capital investment into Canadian companies by foreign investors, principally from the U.S., and third, there is a decline in the total number of companies receiving venture funding, with a corresponding increase in the average amount of capital invested per company.”
Regional Shift
Quebec performed very strongly in Q4 2006, leading all Canadian provinces with $247 million in venture investments compared to $104 million in Q3 2006. For the full year, Quebec saw $603 million invested in 179 companies, up 9% from the $552 million of 2005. British Columbia experienced even stronger growth for the full year 2006, where 52 companies received $298 million ($44 million in Q4), up 30% from the $230 million of 2005.
Growth in these markets contrasted with the decline in Ontario, which attracted $165 million in Q4 2006, consistent with $163 million in Q3 2006 and down 16% from the $197 million of Q4 2005. For the full year 2006, 118 Ontario companies received investment of $686 million, a decline of 9% from the $755 million reported in 2005.
For the full year 2006, Ontario remained the largest venture capital market in Canada with a 40% share (down from 45% in 2005), followed by Quebec with 36% (up from 33%) and British Columbia at 18% (up from 14%).
Investor Type
For the full year 2006, venture capital investment in Canadian companies from foreign (principally U.S.) VC funds amounted to $549 million, an increase of 19% from the $460 million they invested in 2005. Foreign VC funds provided 32% of all venture capital invested in Canadian companies in 2006, up significantly from their historical level in the 25% range (27% in 2005).
Investment by LSVCC’s amounted to $379 million in 2006, down 11% from the $427 million invested by this group in 2005, and accounting for 22% of all venture investment in Canada in 2006 (from 25% in 2005). Private independent venture funds invested $334 million in 2006, consistent with the $337 million of 2005 for a repeat 20% market share.
Companies Funded and Deal Sizes
157 Canadian companies were funded by VC firms in Q4 2006, down 25% from the 209 firms of Q4 2005 (up 23% from the 128 firm in Q3 2006). For the full year 2006, a total of 404 Canadian companies received venture funding, the lowest number on record and 28% below the 560 companies funded in 2005.
The decline in the number of companies funded – but not the total capital invested – led to a substantial increase in the average amount invested per company, a positive trend. The average Canadian VC investment in 2006 was $4.2 million, up 40% from the $3.0 million average in 2005.
North American Context
The CVCA has released data showing where the major Canadian markets rank in reported venture capital investment relative to activity in individual U.S. states. Ontario, Quebec and British Columbia finished 2006 in 9th, 10th and 17th place, respectively, compared to 2005 standings of 7th, 9th and 20th place.
The relative decline of Canada’s major markets arises from their overall flat performance compared to the steady growth in the U.S. venture capital market, which invested US$25.5 billion in 2006, up 12% from the US$22.8 billion of 2005. U.S. venture funds continue to invest substantially larger amounts than their Canadian counterparts in each of their portfolio companies with an average level of $10.1 million per company, or 2.4 times the Canadian average.
Investment by Sector
Activity in the Information Technology sectors continued to drive industry investment in 2006, with $882 million placed into 183 companies representing 52% of all disbursements (compared to $914 million in 2005). Within the IT sector, software led with $311 million (compared to $300 million in 2005), followed by communications and networking with $238 million (compared to $333 million in 2005), and electronics and semiconductors at $205 million (compared to $161 million in 2005). Biopharmaceutical and other life science investments increased in 2006 with 78 companies receiving $493 million (compared to $438 million in 2005). Venture investment in environmental “clean” technologies amounted to $119 million in 2006, an increase of 83% from 2005 and the highest amount invested on record.
VC industry fundraising
Fund-raising by the Canadian VC industry dropped substantially in 2006 after experiencing a strong growth year in 2005. New funding raised by venture capital funds amounted to $1.6 billion in 2006, a drop of 27% from the total of $2.2 billion raised in 2005.
LSVCC’s raised $907 million in 2006 down 25% from the $1.2 billion raised in 2005. The new LSVCC capital was overwhelmingly concentrated in Quebec, which received 85% of the national total.
Canadian private independent funds raised $666 million in new commitments in 2006, essentially matching the $672 million raised in 2005.
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 1100 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.
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