Canadian PE And VC Deal Value At Record Levels

Updated on

Canadian PE And VC Deal Value At Record Levels by PitchBook


The current Canadian private investment scene is shaped by a few key, relatively singular drivers. Proximity to the U.S., as well as key tax provisions, clearly plays a considerable role in the flow of private equity and venture capital financing alike, with more and more U.S. firms migrating north in search of investment opportunities over the past few years. Domestic investor activity is substantial as well, with 134 unique Canadian PE firms cutting deals within the country last year alone. In addition, Canadian pension funds such as Ontario Teachers’ Pension Plan or Canada Pension Plan Investment Board are not only responsible for a wide variety of deals but also exemplify the growing trend of limited partners co-investing or making direct deals themselves. In short, local investors remain quite important within the overall Canadian private investment landscape.

From a private equity perspective, the breadth and depth of Canadian companies, particularly in the middle market, is quite considerable. In addition, there is relatively less competition for quality assets and, subsequently, a cooler deal-making environment, where deal multiples aren’t quite as elevated as they have been elsewhere. Furthermore, on a sector-by sector basis, Canada presents plenty of opportunities for either specialist PE firms or investors with sector-dedicated teams, particularly in light of current economic conditions. Consequently, there is likely to remain fairly healthy PE deal flow for the short to midterm, particularly within the Canadian lower and core middle markets.

In the eyes of venture capitalists, meanwhile, Canada’s startup scene is definitely maturing, as evidenced by the small yet significant group of tech companies that have either achieved lucrative exits or raked in comparatively large sums of VC, as well as the growing reputation of cities such as Toronto as hubs of entreprenurial activity. Of course, given a cool-down in the U.S. venture climate, as investors begin to question the viability of sky-high valuations and round sizes, there could be a temporary slowing of funding on the part of U.S. VCs. It remains to be seen how long that persists, however.

Private Equity

Canadian private equity activity has remained heightened three quarters into 2015, driven by activity in the main hubs of Ontario and British Columbia. Through 3Q 2015, 238 transactions worth $37.3 billion have been completed. Compared to the same period in 2014, this translates into a slight 2% drop in completed deal counts, but a bump in total value. If activity continues to  keep the same pace through year end, we’re set to see aggregate value come in at around C$50 billion, matching the mammoth total seen last year.

The majority of Canadian transactions occur in the sub-C$25 million size bucket, and thus, the noticeable jump in add-on deals comes as no surprise as firms look support existing portfolio companies and protect future exit values—this notion has been playing out in the global PE landscape for some time now. 44% of all Canadian PE deals last quarter were add-ons, compared to just 39% in 2Q and 38% during the same period last year. Buyout deals declined significantly in 3Q on both a YoY and QoQ basis, representing just 19.5% of deals in 3Q, a stark decline compared to 29% we saw buyouts account for in 2Q and in 3Q 2014.

Canadian PE And VC Deal Value

Canadian PE And VC Deal Value

Looking at the sector level, B2B deals have dampened a bit in previous years in terms of both capital invested and deal counts, yet the relative plunge in the Canadian currency could help bring activity in the space back to a certain extent—especially as many Canadian manufacturers are selling products across their southern border into a stronger currency, looking to boost profitability from exports. The declining relative currency has also opened the door for U.S. investors looking for returns outside of a U.S. market that appears to be nearly fully valued—if the latter is not there already. Capital flows have cascaded into the U.S. in substantial streams moving past 2007, and as central bankers in other global regions such as Europe have embarked on significant easing measures, those currencies weakened to the U.S. dollar. Subsequently, U.S. PE firms were incentivized to source more deals across the European Union; the exact same mechanism is encouraging increased U.S. PE activity in Canada. The friendly cross-border tax climate, when it comes to outside private investment, only further helps. The distressed commodity and energy sectors appear clear targets for large sums of U.S. money to help provide emergency funding, yet U.S. capital is flowing beyond just these two sectors. So far into 2015, U.S. investors have accounted for 48% of all PE deals in Canada compared to just 38% on the part of Canadian PE firms. With U.S. investment looking set to continue at a substantial pace, Canada will likely see plenty of activity going forward.

Canadian PE And VC Deal Value

Venture Capital

Canadian PE And VC Deal Value

After an elevated period of venture financing activity, the third quarter of 2015 recorded an even steeper plunge in the total number of completed deals than seen from 1Q to 2Q. The 61 deals completed were just 66% of the amount from 2Q (92) and 51% of the number that were completed in 1Q (119). Canada’s VC scene has been quite strong on a yearly basis up until now—and capital invested totals have yet to slump—though some question whether Canadian VC firms have the resources to support continued growth of the ecosystem without the help of outside, typically U.S. investment. If a capital crunch comes into being for the country’s startup ecosystem, the cause may be rooted primarily in a global downturn in VC activity, although static Canadian VC fundraising won’t help either. Furthermore, at least some of the recent drop can be attributed to the fall in the number of active U.S. investors.

Canadian PE And VC Deal Value

Canadian PE And VC Deal Value

Until 2012, Canadian firms held supreme in their own country, even outnumbering their U.S. competitors by 40 in 2010. Increased competition in the U.S., as well as a burgeoning startup scene in Canada, however, saw the number of active U.S. firms in Canada overtake domestic firms three years ago. While the number of active Canadian firms fluctuated only between 136 and 156 from 2011 to last year, the number of active U.S. counterparts grew each year during that time. The rise in U.S. investment that began in 2009 also coincides with a climb in overall VC activity that culminated last year. Compared to the 209 distinct U.S. VC firms active last year, only 136—or 65% of that number—have deployed venture capital in their northerly neighbor in 2015, opting instead to partake in fewer deals either because of rising median deal values or a lack of quality targets. In what may be a high-water mark for some time, consequently, capital invested in Canada during 3Q exceeded C$850 million, reflecting the rise in deal amounts across all stages that has been seen globally. The median round amounts at the Series A and B stages are each at decade highs, which has likely contributed to the recent quarterly slide in early stage financing counts. Because of the significant drops in deal count the past two quarters, yearly deal flow may end up looking more like 2012 than the past couple years. Even though overall value and round sizes are still lofty, there is likely to be a slump as more data rolls in to close off the year, partially attributable to less U.S.-based activity but also the relatively small pool of Canadian startups capable of raising such sums. 2015 may set a record for the value of VC invested yet, but the climate is cooling.

Canadian PE And VC Deal Value



Leave a Comment

Signup to ValueWalk!

Get the latest posts on what's happening in the hedge fund and investing world sent straight to your inbox! 
This is information you won't get anywhere else!