Market Trends

CVCA H1 2018 Report: VC Rises While PE Slumps

Our partner, the Canadian Venture Capital and Private Equity Association (CVCA) has released the first half (H1) of its 2018 VC & PE Canadian Market Overview. The report examines all private capital investments, exits and fundraising activity relied on by government and private sector groups that drive Canadian innovation.

According to the report, private equity investment continued its downward trend in H1 2018. $7.6B was invested over 146 deals in Q2, bringing the year-to-date total to $14.5B — overall investment was bloated by two mega deals worth $10.1B. While nearly $1B was invested over 166 deals in Q2, bringing the year-to-date total venture capital investment to $1.7B, which is 7% higher than the first half of 2017.  

We sat down with Darrell Pinto, the CVCA’s Research Director, to discuss these trends in more detail. 

Private Equity

The report indicates that private equity investment in Canada continued its downward trend. Why does the CVCA think this is happening?

Darrell Pinto, CVCA's Research Director: “Yes, PE slowed across all segments. With two mega deals accounting for a lopsided share of investment (69%) in H1 2018.

From our perspective, the slow down is linked to what’s happening in the public markets. Stock markets have had an incredible run for a long-time and that’s raised company valuations. Investors don’t like that mix so they’re holding back and waiting for that correction before investing their dry powder.


CVCA H1 2018


I should add that PE in Canada has historically been tied to oil and gas. With that industry significantly slowing down PE investment has taken a hit.”

You touched on H1 2018 seeing two mega deals. What do these type of deals signal?

“To quickly recap, the two mega deals accounted for three-quarters of year-to-date PE investment in 2018. The first was a $5.1B recapitalization of GFL Environmental Incorporated by a consortium which included the Ontario Teachers’ Pension Plan, and the second was OMERS sale of its position in Husky Injection Molding Systems Limited to a U.S. firm via a $5B secondary buyout.

To see two $5B+ deals is unusual in one Canadian calendar year, so to see two over a six-month period was surprising. We believe these deals highlight corporates taking advantage of how cheap debt is right now.”

Private equity growth capital and secondary buyout deals seemed to do well in H1 2018.

“They did very well. Both growth capital and secondary buyouts have been on the upward trend over the past two years.

In the first half of 2018, growth deals accounted for $6.4B which is more than the $5.4B total of 2017. Québec is driving that growth activity, as institutional investors do a lot of their deals there. While secondary buyout deals accounted for $5.2B which is already $1.2B more than the 2017 total.

We’re interested to see what the 2018 totals will be.”

What about exits?

“The momentum in exits also shifted downward in H1 with only 41 exits ($10.5B) compared to 152 exits ($11.5B) in H1 2017. We believe that the higher company valuations are also impacting these numbers — buyers don’t want to overpay, so they’re waiting.”

 

CVCA H1 2018

 

Does the CVCA expect this downward trend across private equity to continue? What could cause it to change?

“We do. The only way we could see it changing is if company valuations started to go down, then PE investors would start spending their dry powder. Right now they are bargain hunting in a very expensive environment.

Deal flow will increase if those conditions change.”

Venture Capital

Venture capital investment in Canada continued its five year upward trajectory in the first half of 2018. Does the CVCA expect this to last?

“Almost $1B was invested over 166 deals in the Q2 this year, bringing the year-to-date total VC investment to $1.7B, which is 7% higher than the first half of last year.

This is also the third quarter where VC investment has reached $1B.

We do not expect this upward trend to slow down for two key reasons. First off, this growth has been slowly and steadily increasing over the last five years. It hasn’t had any crazy, euphoric ups and downs, so there’s less concern about a sudden correction in the market. Secondly, is the infusion of the Canadian Government’s Venture Capital Catalyst Initiative (VCCI).

Announced in Budget 2017, the government made available $400 million to increase the availability of late-stage venture capital through VCCI and we believe the program has attracted more VC investment to stimulate continued deal flow.

More specifically, there was a marked increase toward later-stage companies which received 54% ($901M) of total dollars compared to its 41% from last year.”

Where are VCs spending their money? 

“ICT companies grabbed the lion’s share with 64% of total dollars invested in H1 2018, with Life Sciences and CleanTech companies receiving an equal 12% share.

 

CVCA H1 2018

 

I believe we’re seeing an increase in CleanTech investing because investors are thinking long-term. More people are aware that this planet needs solutions beyond what we have.”

The full report is available on the CVCA website.

 

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