The Canadian Venture Capital & Private Equity Association (CVCA) has released its Canadian market overviews for H1 2023, which are based on data voluntarily submitted by a selection of venture capital and private equity firms. Overviews can be accessed by visiting the H1 2023 Canadian Venture Capital Market Overview and H1 2023 Canadian Private Equity Overview . Our key takeaways were as follows:

Venture Capital (VC) Canadian Market Overview

  • In terms of VC deal activity, Q2 2023 saw $2.8B invested across 170 deals, with a total of nearly $4B raised across 335 deals, representing a 140% rise in dollars invested as compared with Q1. This represented a substantial rebound from a slower Q1, landing H1 2023 just shy of the record-breaking first halves observed in 2021 and 2022. This is an interesting contrast to the US, which has seen deal activity consistently dropping since Q1 resulting in the lowest Q2 on record since Q2 2020. US investor participation in Canadian VC deals has likewise seen a corresponding drop.
  • Pre-seed, seed, and early seed stage companies continue to make up the majority of transactions in Canada, accounting for 86% of all transactions closed in the first half of 2023. In particular, early-stage companies in the generative Artificial Intelligence (AI) space have driven much of this growth. While average year-over-year deal size increased across the board as compared to five year averages, market uncertainty has resulted in a notable absence of investment in growth-stage companies in 2023. That said, there have been a handful of “mega-deals”, the most significant of which were invested in later-stage companies.
  • Driven by current market conditions, there was a notable rise in non-dilutive financing, with founders leveraging smaller investment amounts through the issuance of non-dilutive capital. At the close of H1 2023 (126 deals), the number of non-dilutive financings already exceeded the totals for 2022 (124 deals). However, it is important to note that the dollar amounts invested declined 70% on a year-over-year basis and 33% on a quarter-over-quarter basis.
  • As always, the “hot spots” of Canadian VC investment in H1 2023 were concentrated in Ontario (133 deals), Quebec (67 deals) and British Columbia (58 deals), with Alberta not far behind (40 deals).
  • Market uncertainties have resulted in a total absence of IPOs thus far in 2023, as well as a decline in VC exit activity as compared to previous years. VCs appear to be exercising caution and patience in evaluating exit routes until market conditions settle.

Despite current economic uncertainties, Canadian VC performance remains strong. While we may not quite hit the 2021 and 2022 numbers fueled by the “Covid bump” and its aftermath, H1 2023 figures are strong and on pace to match or exceed those recorded in 2020. The most notable “trends” are the predominance of investments in early-stage ventures (particularly in the AI and ICT spaces), smaller investments being made in the form of non-dilutive capital, and a longer period from investment to exit for the majority of Canadian VC investors.

Private Equity (PE) Canadian Market Overview

  • In terms of PE deal activity, H1 2023 recorded 316 deals with a total investment of $3.6B. This is a notable year-over-year decline in terms of both deal count and investment values, making Q2 2023 (at $1.6B invested over 161 deals) the lowest quarter for PE investment since Q3 2020 in terms of dollar value invested. Market uncertainty and continued interest rate hikes has certainly affected Canadian PEs.
  • The statistics for H1 2023 reveal a notable absence of large deals, with PEs increasingly focused on small deals (transactions below $25M made up 87% of disclosed PE deals, with an average deal size of $9.96M in Q2) and add-on transactions. However, the importance of these investments should not be understated, as PEs continue to provide much needed capital to SMEs, which are vital to Canadian economic growth and support over 85% of new jobs across the country.
  • While PE buyouts and add-ons in H1 2023 saw a significant surge in deal count as compared to H1 2022, 2023 is set to record the lowest annual investment in these categories to date. Following a strong Q1, buyout and add-on deal activity slowed to $435M in Q2, representing a decline of 50% in total dollars invested. PE minority investments are likewise down (49% year-over-year in total value and 41% year-over-year in deal count). While total dollars invested in minority deals have decreased from $865M in Q1 to $647M in Q2, the good news is that deal activity has remained consistent at 37 deals.
  • Quebec was the most active province in the PE space in H1, with 58% of total deal flow (184 deals) and 50% of the national total dollars invested (1.88B). Ontario ranked second (75 deals and a total of $1.2B invested) and British Columbia ranked third (34 deals and a total of $166M invested). Interestingly, Quebec ranked behind both Ontario and British Columbia in terms of buyout and add-on deals.
  • In terms of industry sectors, Information and Communication Technologies (ICT) and CleanTech were leaders in terms of dollar amounts invested, with industrial and manufacturing continuing to play an important role (though primarily in terms of deal activity rather than investment dollars per deal).
  • As is the case in the VC space, the participation of US investors in Canadian PE deals reached 15%, a low not seen since 2015.
  • While M&A exit activity is increasing year-over-year, PE investors are facing decreasing exit values and increasingly looking to exits via secondary buyouts to find creative alternatives to traditional M&A exits. Unsurprisingly, there have been no PE-backed IPOs so far in 2023, as companies are increasingly remaining private in light of the current volatility in public markets – a trend which is expected to continue in H2 2023.

It is clear that current market conditions have had an adverse impact on the PE market in Canada. H1 2023 saw a reduction of both number and size of PE investments, with Q2 numbers coming in even lower than Q1 numbers. Nevertheless, PEs remain active and continue to support the Canadian economy through the provision of much needed capital to Small and Medium-sized Enterprises (SMEs). The reduction of activity is likely reflective of major PE investors exercising caution by making smaller and more targeted investments, and more strategically planning their exits.

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