CANADA Q1: Buyout Deal-Making Steady, Venture Capital Investment Slows

In the first quarter of 2012, Canadian buyout and private equity (PE) market activity maintained a steady course, with moderate year-over-year growth in deal-making, while Canadian venture capital (VC) investment began the year at a much slower pace. These were among the findings of statistical reports released today by CVCA- Canada’s Venture Capital & Private Equity Association and research partner Thomson Reuters.

BUYOUT & PRIVATE EQUITY

According to the report, buyout and other PE transactions in Canada totaled 68 in the first three months of 2012, up 11% from the same time last year. Disclosed disbursements rose even more considerably, totaling just over $2.0 billion between January and March, or 37% more than the amount reported in Q1 2011.

“Private equity investment appears to be holding onto the solid impetus developed in 2011 and, in so doing, is playing a key role in priming Canada’s economic engine,” said Gregory Smith, President of the CVCA and Managing Partner of Brookfield Financial. “Importantly, deal sponsors and investors are focusing on the economy’s sizeable population of mid-market firms, and especially those that are seeking to expand operations and undertake M&A strategies, and those that are emerging as spinouts from large corporations,” he added.

Resource extraction sectors captured 40% of deals done in the first quarter, followed by manufacturing and processing, which took 13% of the total number. The oil and gas sector alone accounted for 57% of disclosed values in this period, while financial services accounted for a 21% share.

While Canadian deal-making was steady in Q1 2012, the report found significant momentum in locally-based exit activity. Buyout-PE fund realizations of portfolio assets in Canada totaled 21 in the first three months, which reflects 36% of completed exits during the whole of 2011. Strategic sales were largely behind this trend, accounting for over three-quarters of the total.

“The substantial number of liquidity events at this early point of the year is welcome news,” said Mr. Smith. “This is especially so in light of recent economic concerns, and concerns about an “exit bottleneck” that has the potential to depress private equity investment and fund-raising activity in some segments of the global market.” He added: “Additional portfolio realizations also reinforce the continuing strong returns performance of Canadian private equity fund managers.”

The report found Canadian buyout and other PE funds also remained active on the international stage in the first quarter, leading or participating in 15 deals with disclosed values totaling $3.2 billion. Both indicators are up from the year before.

Canadian buyout, mezzanine and other PE fund-raising activity, totaling just over $1.0 billion between January and March, appeared to tracking, or moderately improving on, trends reported in 2011. Last year, levels of new capital commitments going to domestic funds, totaling $3.6 billion, were up slightly from 2010.

VENTURE CAPITAL

According to the report, VC deal-making in Canada slowed in the first three months of 2012, with a total of $263 million invested, down 34% from the year before. In addition, the number of innovative Canadian companies financed with VC, totaling 113 in this period, decreased 10% year over year.

VC deal sizes were reduced commensurately with the drop in dollar flows. The report found amounts invested per company averaged $2.3 million in Q1 2012, down from $3.2 million in Q1 2011. Consequently, innovative firms in Canada garnered only 31% of the dollars going to counterpart firms located in the United States between January and March.

“Perhaps the biggest single obstacle facing high-growth Canadian technology firms is difficulty accessing adequate value-added risk financing, in general and relative to competitors in the global economy”, said Mr. Smith. “Even in 2011, when disbursements in the domestic market grew 37%, we did not see the needle move appreciably with respect to deal capitalization levels,” he observed. “The disappointing results of the first quarter of 2012 underscore the importance of taking steps to address this formidable challenge.”

VC investment between January and March was led in IT sectors, which absorbed $115 million, or 44% of the total, though down 31% from the year before. Dollars going to life sciences sectors fell 8% over the same period, while clean technology sectors saw less than one-quarter of amounts invested in Q1 2011.

In contrast with deal-making, Canadian VC fund-raising showed particular year-over-year growth in the first quarter of 2012. Led by an array of major VC partnership closings, new capital committed to domestic funds totaled $742 million this time around, which is more than twice the amount committed to funds at the same time in 2011.

“The successful partnership closings of several leading fund managers is to be congratulated,” said Mr. Smith, “as they represent months and years of hard work and determination in a tough environment.” He further noted: “The fund-raising environment is especially tough in Canada, as there are far too few pools of limited partner capital available to new offerings. In the interest of increasing technology investment, we must ensure that the 30+ Canadian venture capital fund managers currently raising one or more new partnerships are able to meet their targets, and meet them more expeditiously.”

The report found that VC fund exits from Canadian-based portfolio assets continued at a steady, post-slowdown rate in the first quarter. Driven by strategic sales, the number of liquidity events totaled nine in this period, up from the six events counted at the same time last year.

CVCA

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 1800 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.

Thomson Reuters

Thomson Reuters is the world’s leading source of intelligent information for businesses and professionals. They combine industry expertise with innovative technology to deliver critical information to leading decision makers in the financial, legal, tax and accounting, scientific, healthcare and media markets, powered by the world’s most trusted news organization. With headquarters in New York and major operations in London and Eagan, Minnesota, Thomson Reuters employs more than 50,000 people in 93 countries. www.thomsonreuters.com .

To arrange an interview with Gregory Smith, President of the CVCA and Managing Partner, Brookfield Financial, contact Lauren Linton, Director of Marketing, 416 487-4299 llinton@cvca.ca .