The Canadian Venture Capital & Private Equity Association (CVCA) has released its Canadian market overviews for Q1 2020, which are based on data voluntarily submitted by a selection of venture capital and private equity firms. Access the overviews available for venture capital (PDF) and for private equity (PDF). Our key takeaways were as follows:

Venture Capital (VC) Canadian Market Overview

- Total Q1 investment was $831 million, spread over 117 deals. This is 7% lower than the same period in 2019, which suggests a notable (though not material) decrease in VC investment activity. However, it does evidence a 45% quarter-over-quarter decline in activity from Q4 2019 to Q1 2020, representing the most pronounced drop in VC investment activity in this period in the last five years. The breakdown of those VC investments is as follows:

  • Three major deals of $50 million + accounted for 30% of the total dollars invested. Almost two-thirds of the deal flow (75 out of 117) was made up of small deals of less than $5 million.
  • The substantial majority of investment went to Ontario companies (61%), followed by companies based in British Columbia (20%) and Quebec (12%).
  • In terms of activity sector, the biggest winner was information and communication technologies companies (which accounted for 54% of VC investments), followed by life sciences companies (at 21%). Half of the capital invested went to early stage companies.
  • The most active firms in terms of amount of financing rounds were Desjardins Capital and BDC Capital, while the most active firms in terms of amount invested were TELUS Ventures and iNovia Capital.

-The pace of VC-backed exit momentum also slowed substantially in Q1, with only three undisclosed M&A transactions (compared to the quarterly average of ten).

- Looking at the big picture of amounts invested and number of deals in Q1 compared to individual quarters over the past four years, the figures are not as dire as one might expect. However, as the CVCA notes, the relatively strong Q1 numbers are at least partially reflective of a pre-COVID economic reality. Further decline in VC investment is expected in Q2, and potentially in Q3, as investors are likely to reserve additional funding for existing portfolio companies, and the realities of social distancing will make due diligence on new investments challenging.

Private Equity (PE) Canadian Market Overview

- As a preliminary note, the data analysed only covers deals submitted up to March 2020, and therefore unlike the VC market overview, this study does not take into account the effects of COVID-19.

- Total Q1 investment was $4.7 billion, spread over 146 deals. This is the highest first quarter investment since 2018. Looking at a four-year average, deal flow for Q1 was slightly above average (140), though dollars invested was 9% below the average of $5.2 billion. The breakdown of those PE investments is as follows:

  • 85% of the deal flow (95 out of 112 deals with disclosed deal values) were small to medium sized deals with a value of less than $25 million.
  • Quebec and Ontario were the two "hot spots" for PE activity in Q1. While Ontario was the leader in buy-out and add on deals, Quebec was number one in terms of PE growth deals by a significant margin. Overall, Quebec came out on top, with 82 PE deals totalling $3.6 billion. Montreal was the single largest administrative deal centre, accounting for the vast majority of that Quebec deal flow. Ontario had less than half the amount of deals (40) and significantly lower value ($220 million). In third place was Alberta, which saw only seven deals, but which accounted for $766 million of total PE investment.
  • The oil, gas and power sector represented the most significant sector of investment (over $1.6 billion of total PE investment), but only accounted for four transactions. Other big winners were the industrial and manufacturing sector companies (accounting for about 25% of deals and representing over $1 billion of total PE investment) and information and communication technologies companies (accounting for about 14% of deals and representing about $50 million of total PE investment).
  • The most active PE investor in terms of amount of financing rounds was Desjardins Capital with 47 deals, while the most active PE investor in terms of amount invested was the Caisse de dépôt et placements du Québec (CDPQ), with over $2.6 billion invested.

- While the pace of PE exits slowed, there were some notable transactions, including three major exits to private M&A buyers, and one initial public offering (IPO).

- While COVID-19 could certainly result in a downturn over the next couple of quarters, the CVCA suggests that there might actually be some good news for PE firms and the companies that they choose to invest in. In times of economic hardship, the support of a PE partner may bring additional liquidity, operational and network support and expertise to companies, and thus minimize the impacts of COVID-19.

Originally published June 8, 2020.

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