Canada: Continued Robust VC Investment And PE Mega-Deals Take The Spotlight In A Review Of The 2018 VC & PE Canadian Market

A recent report released by the Canadian Venture Capital Private Equity Association (CVCA) entitled "VC & PE Canadian Market Overview 2018" (the Report) reviews the current strength of Canadian venture capital (VC) investment and very recent mega-deal trend in Canadian private equity (PE).

Highlights of the Report

  • Total VC investment remains remarkably high: a total of CAD $3.7B in VC over 610 deals was invested in Canadian companies in 2018, representing only a 2% decline from 2017. Comparatively, an average of CAD $2.5B over 506 deals was invested each year between 2014 and 2016.
  • VC sector investments align with past trends: information communication technology (ICT) continued to attract significantly more VC funding compared to the life sciences and Cleantech sectors. In 2018, more than two-thirds (CAD $2.6B over 386 deals) of the total amount of VC invested in Canadian companies went to those in the ICT space.
  • VC investment in later-stage companies continues to increase: the percentage of VC dollars invested in later-stage companies increased by 8% from 2017 to 49% (CAD $1.8B).
  • PE investment remains variable: CAD $22.3B PE invested in 2018 represents a 15% decrease from the CAD $26.4B invested in 2017, but is 62% higher than the CAD $13.8B invested in 2016.
  • Mega-deals power Q4 and year-end totals: two mega-deals (CAD $1B+) in Q4 brought the 2018 year-end tally to four deals worth CAD $14.4B; 65% of total PE investment.

Overview of Canadian VC investment activity

In a previous post, we highlighted the increasing trends in Canadian VC investment in the first half (H1) of 2018, which saw 7% more VC funding in H1 2018 compared to H1 2017. Ultimately, VC funding in Q4 2018 saw CAD $1.3B invested over 165 deals, bringing the year end Canadian VC investment total to CAD $3.7B over 610 deals — a 2% decline from the previous year. This total represents an average deal size of CAD $6.1M, marking a 3% decrease from 2017, but a 16% increase compared to the average deal size in the five years between 2013-2017 (CAD $5.3M). Indeed, 7 out of every 10 deals were under CAD $5M. Fifteen mega-deals (CAD $50M+) accounted for 30% of the total VC dollars invested — down from the 39% share in 2017. The largest disclosed VC mega-deal was the CAD $161M raised by Assent Compliance through an equity infusion from Warburg Pincus.

Territorially, Ontario continues to be the hub of the VC landscape: Ontario-based companies received 51% of VC investment (CAD $1.9B over 252 deals), up significantly from 39% in 2017. Quebec-based companies followed with 29% (CAD $1.1B over 172 deals) and BC-based companies rounded out the top three with a 12% (CAD $441M over 84 deals) share. Toronto-based companies received 41% (CAD $1.5B over 197 deals) of the total VC investment in 2018. Once again, the ICT sector dominated the VC investment environment, grabbing over two-thirds of the total funding in 2018 (70%; CAD $2.6B over 386 deals). This was followed by the life sciences (17%; CAD $630M over 101 deals) and Cleantech (7%; $264M over 47 deals) sectors. Finally, while the number of M&A exits in 2018 paralleled 2017 (34 compared to 35 last year), the average exit value dropped by a third to CAD $24.4M.

Overview of Canadian PE investment activity

Canadian PE investment in Q4 tripled from the previous quarter to CAD $6B, resulting in a year-end total of CAD $22.3B over 543 deals. Two mega-deals (CAD $1B+) in Q4 lifted the 2018 total of such deals to four, amounting to 65% (CAD $14.4B) of all Canadian PE investment. Indeed, the aggregate value of all 2018 mega-deals was greater than the sum of all other PE deals, a phenomenon that had not occurred in the Canadian market since 2014. The largest disclosed mega-deal was the CAD $5.1B recapitalization of GFL Environmental Inc. by a syndicate that included Ontario Teachers' Pension Plan. Smaller sized deals (less than CAD $25M) accounted for 68% of all PE deals, a noticeable increase from 2017 (60%).

Montreal-based companies were involved in a higher number of PE deals (98 deals representing 26% compared to 78 deals representing 20%), while Toronto-based companies received a significantly greater share of PE funding (CAD $11B compared to CAD $2.6B). Across the various sectors, PE investment displayed a more balanced distribution as compared to VC funding: slightly more than one-fifth of the PE deals in 2018 were in the industrial and manufacturing sector (22%; 118 deals), which was followed by the ICT (16%; 88 deals), consumer & retail (11%; 59 deals) and business products & services (10%; 7 deals) sectors. Most notably, PE exists slowed significantly this past year with only 82 exits (CAD $11.1B), including four IPO exits, compared to the 149 exits (CAD $11.6B) in 2017.

Looking ahead to the Canadian VC and PE landscape in 2019

Following the release of this report, Kim Furlong (CEO of the CVCA) provided her assessment of the VC climate in Canada: "2017 was just like a home run, so 2018 is a continuation of that growth trajectory." This level of VC investment, particularly in new and later-stage companies, points to a robust Canadian start-up environment and shows the trust investors have in the system. In 2019, it will be interesting to see if Canadian VC investment can sustain the tremendous growth it has experienced over the past couple of years.

On the other hand, Canadian PE investment remains variable and has now failed to post back-to-back years of growth over the past five years. One item to follow will be whether the mega-deal trend — which Canada has not witnessed since 2014 — will continue or whether there will be a shift back to the more conservative sized deals seen over the past few years. As private investors continue to favour innovative ventures that are focused on R&D, only time will tell if Canadian PE investment can maintain a pattern of consistent growth.

The author would like to thank Neil Rosen, articling student, for his assistance in preparing this legal update.

About Norton Rose Fulbright Canada LLP

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