In the first nine months of 2012, the Canadian buyout and private equity market sustained a robust pace of activity, with deal volume showing year-over-year growth, while levels of Canadian venture capital investment came in virtually identical to the prior year. These were among the findings of statistics released today by CVCA – Canada’s Venture Capital & Private Equity Association and research partner Thomson Reuters.
BUYOUT & PRIVATE EQUITY
For Q3 2012, 55 buyout and related private equity (PE) deals were done in Canada with disclosed values totaling $2.6 billion. This represented a year over year increase in transaction values of 78%. For the nine months ended September 30th, transactions totaled 223, up 11% over same time in 2011, and disclosed disbursements totaled $8.9 billion, which is just shy of the $9.3 billion of the same period last year.
“Private equity deal-making has remained steady on a year-over-year basis in 2012, but strong investment activity in the normally quieter third quarter suggests that the market is poised to surpass 2011 activity levels” said Peter van der Velden, President of the CVCA and Managing General Partner of Lumira Capital Corp. “This is excellent news for the Canadian market, and for the Canadian economy as a whole, particularly given that the broader economic indicators have been weaker or subject to greater volatility in recent months.”
The Q3 data revealed that Canadian buyout-PE deal volume was well-diversified by industry sector to date in 2012, with manufacturing and resource sectors accounting for close to half of transactions. Due to the continuing prominence of large-cap deals – including Q3 2012’s largest transaction, the $1.1 billion acquisition of Montréal-headquartered Garda World Security Corp. – dollar flows have been more concentrated, with business services, oil and gas, and financial services sectors leading trends.
“The strong mid-market orientation of deal-making in Canada has meant that private equity is reaching a wider array of businesses, in a broader number of industries,” observed Mr. van der Velden who added “In addition to traditional sectors of the economy, which have long been the focus of market activity, buyout funds are increasingly active in technologyintensive sectors, as evidenced by Madison Dearborn Partners’ Q3 2012 acquisition of Toronto-based QuickPlay Media Inc., which had previously been backed by venture capital funds.”
In parallel with investment activity, exit activity in Canadian PE sector continued to show good momentum in the first nine months of 2012, with domestic and foreign fund realizations of Canadian-based portfolio companies totaling 63 at the end of September, matching the number recorded for the entire of 2011.
The results for the quarter also highlighted an increase in international deal-making by Canadian buyout-PE funds, which led or participated in 22 cross-border transactions, totaling $15.5 billion. This was by far the highest level of activity abroad in recent years and for the year to date ended September 30, 2012 has resulted in 55 transactions with disclosed dealvalues of $21.1 billion , the highest number recorded since 2007.
In the first nine months of 2012, Canadian buyout, mezzanine and other PE fund-raising activity also appeared steady if slightly below 2011 levels. To date, 19 domestic funds have attracted new capital commitments of $3.3 billion, only just behind the $3.7 billion that was committed in total last year.
In the venture capital (VC) sector, the Q3, 2012 data showed $363 million invested across the country, representing a 6% reduction from the same period in the prior year. During the quarter 87 companies received venture capital financing, which was a 33% decrease over the same period in the prior year. Despite the slight reduction in investment in the quarter, the amount invested by venture capital funds year-to-date for the period ending September 30, 2012 was identical to 2012 at $1.1 billion which continued to be well above the levels in 2009 and 2010.
Given the substantial number of closings in first half of the year it was not surprising to see Canadian VC fund-raising slow Q3 2012, with new capital commitments to VC funds totaling $42 million, a mere fraction of the $365 million committed in Q3 2011. Despite the Q3 decline, the $1.5 billion in capital raised as of September 30th, will mean that 2012 that 2012 has already surpassed total fund raising activity in 2011 and that 2012 will be the strongest year for new fund formation in the past five years.
“I think the VC investment data highlights an important inflection point in the market, and while it might be disappointing to some to see flat year-over-year venture capital investment levels, a deeper dive into the data highlights the investment activities of funds that have closed in past 12 months, and this bodes well for the balance of the year”, said Mr. van der Velden. “At the same time the data reveals that funding and investment levels in VC sector continue to materially lag the US, and that many of the provincially and federally sponsored funds of funds sources that have been vital sources of capital for VC funds closed during the past 12 months no longer have the capital to back new funds. The lack of visibility on continuity of capital sources, reinforces the urgency of improving market supply conditions in Canada, and of increasing the number of supply sources available to venture capital firms in fund-raising mode,” he added. “That is the only way to ensure continuous investment activity that effectively responds to the increased demand coming from Canada’s innovative businesses and sectors.”
Q3 2012 was notable for several major deals VC done in Canada, including the $80 million financing of Kitchener-Waterloo’s Desire2Learn, Inc. – the largest VC investment in a Canadian software firm in over a decade – and the US$35 million financing of Montréal’s Thrasos Innovation, Inc. – the largest financing commitment for a Canadian life science company this year. Despite these significant financings Canada-US deal capitalization gap did not narrow, as Canadian innovative firms continued to garner only 43% of the dollars going to American firms to date in 2012, unchanged from 2011.
Commenting on this continuing trend Mr. van der Velden noted, “While it is encouraging to see a handful of innovative companies securing the risk financing they need to meet their growth potential”, the fact remains that on average Canadian companies cannot, or do not, raise the same amount as US peers on a round by round basis and this remains an important issue if Canada is to be able to fully exploit the natural strengths inherent in our emerging technology sectors and entrepreneurial communities.”
Canadian deal-making in the third quarter of 2012 was driven in information technology (IT) and life sciences sectors. IT companies obtained $208 million in this period, or 57% of all disbursements, and up 14% from the year before. Life sciences sectors captured $95 million, up 3% from Q3 2011, and accounting for a 26% market share. In contrast, dealmaking in clean technology sectors lost ground for a third consecutive quarter in Q3 2012, attracting only $14 million of new investment.
VC-backed exit activity remained steady over the first nine months of 2012, with fund realizations of Canadian-based portfolio holdings totaling 26, which already approaches the number recorded during the whole of last year. Exit trends remained heavily influenced by strategic sales although Q3 2012 witnessed the year’s only VC-backed IPO to-date – the US$106 million offering of the Toronto-based Eloqua, Inc.
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 1900 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
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