Riding high, Novacap Technologies raises north of $250 mln for first close of Fund IV

Novacap Technologies, which recently completed two major portfolio exits, will soon announce the first close of its fourth private equity partnership, Novacap TMT IV LP, at well over $250 million, peHUB Canada has exclusively learned.

The raise puts the new fund within close proximity of its $350 million hard-cap target. That’s according to Pascal Tremblay, president and managing partner of Novacap Technologies, one of two sector-focused investment groups at Longueuil, Québec-based Novacap – which is among Canada’s oldest PE firms.

What’s more, upon its first closing, capital committed to Fund IV will already exceed by nearly 40 percent the total raised by Fund III, which closed at $180 million in 2007.

Novacap has succeeded in a highly competitive fund-raising market by re-upping with the vast majority of its existing LPs, mostly Canadian, U.S. and European institutional and high net-wealth investors. Many of these increased their commitments since the last time around. The firm also managed to attract a substantial number of new investors.

Tremblay said his group has found a particularly rich vein of opportunity among American funds-of-funds, pension funds and other institutional investors. That’s because U.S. LPs, familiar with the high-profile deals of technology-focused PE firms like Silver Lake and Francisco Partners, are drawn to Novacap’s long-standing track record of acquiring mid-market businesses in established technology, media and telecommunications sectors.

New and existing LP backers are also signaling confidence in Novacap Technologies’ team of investment pros, said Tremblay. Totaling half a dozen at present – including recent hire Don Morrison, who for more than a decade served as Blackberry‘s COO – the group has over 90 years of hands-on operational experience, sector knowledge and a talent for actively managing high-growth organizations.

“Fund-raising has, of course, been tough, but we have found it easier this time to sell our value proposition,” said Tremblay. “Investors these days understand and appreciate our technology focus, and recognize our company-building practices. They know that Novacap has been doing this for 33 years, and that we plan to be here for another 33 years.”

Fund-raising has also gained traction from some lucrative portfolio realizations.  In October, Novacap and investment partner Desjardins Capital de risque sold Creaform, a manufacturer of portable 3D optical devices, to Ametek for US$120 million. And in November, the firm sold hosting and cloud provider iWeb to Internap for US$145 million. These exits helped Novacap Technologies return a very sizeable chunk of Fund III capital to LPs in just the last few months.

Creaform was bought at the bottom of the economic recession in 2009, but the Lévis, Québec-based company still managed to achieve strong growth with sales increasing at an average of 75 percent per year. Montréal-based iWeb, acquired in a take-private transaction in 2011, also performed strongly early on with a doubling of EBITDA. And because iWeb was in “a very hot space”, Tremblay soon received “lots of inbound calls from interested strategic investors.”

Novacap Technologies has demonstrated its mettle in other investments as well. For example, it played a key role in the rapid expansion of music services specialist, Stingray Digital. Novacap and Telesystem invested in the Montréal company in 2007, the year of its founding and of Stingray’s first acquisition – the Karaoke business of SoundChoice. With their backing, Stingray later that year bought another core asset, Galaxie, from the CBC for $65 million.

In a classic case of buy-and-build, Stingray in six years invested about $150 million in 17 strategic acquisitions. That allowed the company to produce a diverse array of music and video content on multiple platforms, including digital TV, IPTV, the Internet, mobile apps and game consoles. The company’s combined services reach over 85 million households and 170 million users in 82 countries. It’s not surprising that Stingray ranked among the top 15 winners of this year’s Deloitte Technology Fast 50™.

Stingray President and CEO Eric Boyko attributes much of this success to Novacap. Tremblay’s team helped the company raise money during the depths of the credit crunch and improve profit margins through advice on such issues as cost structure management and human resources, he said.

Boyko views Novacap not as a shareholder, but as “a value-adding strategic partner”, that will continue to lend support as Stingray pursues its goal of reaching 400 million households in the next two years.

Tremblay believes there’s no stopping Stingray.

“It’s the largest music provider of its kind in the world, in part because competitors lack its reach,” he said.

He also views Stingray as a good example of the type of company partnerships Novacap tends to do. The firm prefers that senior managers hold significant equity stakes in their businesses – in Fund III’s portfolio, for example, management holdings have averaged around 40 percent.

Tremblay is not planning any change in investment strategy with Fund IV. Rather, Novacap will continue to make majority investments, usually within a range of $25 million per company. It will also stay focused on deal-making in Canadian technology hubs, though the firm is prepared to invest abroad where it finds “replicas of its existing investment thesis.” That was the case with the Jan. 2013 acquisition of Boca Raton, Florida-based Host.net, a provider of infrastructure services focusing on co-location, cloud computing and storage.

Transaction flow is generally sourced through proprietary networks. In Novacap Technologies’ third partnership, for example, 90 percent of opportunities emerged from proprietary leads. The firm’s knack for deal sourcing stretches back to its founding in 1981 – Novacap’s earliest investment was in data processing and communications company Memotec, which entered the spotlight in 1987 when it bought former crown asset Teleglobe Canada. Memotec today operates as a subsidiary of Comtech.

What’s next for Novacap Technologies? Tremblay said the focus in the coming weeks will be on bringing Fund IV to a close. Additionally, he’s working on yet another exit transaction, several dividend recaps and two brand-new platform investments.

Novacap’s other investment group is Novacap Industries, which targets acquisitions of mid-market businesses in traditional sectors. When the two groups are taken together, the firm’s assets under management total more than $800 million. Along with its Québec headquarters, Novacap this year opened up a second office in Toronto.

Photo of business and technology courtesy of Shutterstock.

Photo of Pascal Tremblay courtesy of Novacap.