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

Venture Capital (VC) Canadian Market Overview

  • While looming recession fears and high interest rates resulted in a year-over-year slowdown in VC investment activity, 2023 still saw $6.9B raised across 660 deals, with $1.4B invested across 142 deals in the fourth quarter alone. These figures for Q4 represent a quarter-over-quarter increase of 12% in dollars invested despite a 3% drop in deal count, resulting in an average deal size of $9.5M - a 16% increase compared to Q3's average deal size of $8.2M. These results are more promising than US VC activity, where Q4 saw the least dollars invested since Q4 2019 and the lowest deal count since Q4 2017.
  • "Mega-deals", defined in the study as deals with a value of over $50M, accounted for a significant portion of 2023's overall VC activity. 2023 saw 35 mega deals (7 of which closed in Q4) which collectively accounted for 52% of all VC dollars invested in 2023.
  • Ontario, Quebec, and British Columbia maintaining their positions as the top provinces for VC investments in 2023, representing 86% of total VC investments in Canada. Ontario accounted for nearly 50% of all dollars invested in 2023, with $3.3B raised across 275 deals (the vast majority of which were raised by Toronto-based companies). Despite downward trends nearly across the board as compared to 2022, Nova Scotia actually experienced a record-breaking year, seeing its first mega deal (at over $100M) and surpassing its previous record for dollars invested by 10%.
  • While downward trends in VC investment were observable nearly across the board in 2023, pre-seed and seed stage investments remained relatively resilient, collectively raising $969M across 372 deals, and demonstrating that investors are continuing to back young companies with innovative ideas. In contrast, investments in later-stage companies experienced a significant downturn, with total dollars invested in 2023 plunging by 47% to just $2.3B across 52 deals, evidencing a clear aversion on the part of investors to allocate large sums to these later-stage companies.
  • In terms of sector activity, last year's trends and projections held true. The cleantech sector continued to attract significant interest, matching 2022's record highs with a total of $1.1B VC dollars invested in 2023. In particular, investments in thermal and geothermal technologies accounted for nearly $250M of overall cleantech investment. The agribusiness sector recorded $273M over 50 deals, outperforming 2022 numbers by 4% and 16%, respectively. While the information, communications and technology (ICT) sector is nowhere near the levels achieved in recent years, it still accounts for nearly half of all deals and 58% of all funding.
  • Exit activity is on the rise as compared to 2022, especially picking up in the second half of the year. Overall, 2023 saw 41 exits with a total exit value of $8B. It is worth noting that two major exits accounted for $6.2B of the total $8B, both of which were in the life sciences/biotech sector (Chinook Therapeutics in BC and Inversago Pharma in Quebec). Furthermore, biotech company Turnstone Biologics Inc. went public on the NASDAQ at a market cap of $337M, representing the first VC-backed initial public offering (IPO) since 2021.
  • Non-dilutive financing continues to be a popular choice for VC investors, with investors favouring smaller cash infusions. And one form of non-dilutive financing in particular is stealing the show. Of the 482 deals recorded as non-dilutive VC financing transactions, 90% of those were scientific research and experimental development (SR&ED) financings. This trend is less popular in Quebec than in other key provinces.

Private Equity (PE) Canadian Market Overview

  • 2023 was far from a banner year for PE, as investors seem to be playing a (very) long waiting game amid market correction, primarily due to high interest rates. 2023 saw a total of 625 PE deals, with $9.7B invested. These are the lowest PE investment levels on record, and evidence a decline of 35% compared to 2022. Q4 in particular was the lowest fourth quarter investment in history, as deal volume fell by 10% and deal value declined by 9% year-over-year.
  • Deals valued at under $25M continue to dominate current Canadian PE activity, highlighting the ever-crucial role of PE in supporting small and medium-sized enterprises (SMEs). In 2023, 84% of all deals had disclosed deal values below $25M and 10% had disclosed deal values between $25M -$100M. 2023 saw only 24 mega deals above the $100M mark, including one deal above $1B. On the whole, deal size continues to steadily decrease, and reached an all-time low of $15.5M in 2023, representing a decline of 5% from the average deal size in 2022.
  • Quebec was the most active province in 2023, accounting for 55% of total deal flow and 41% of total dollars invested (being $4B invested across 344 deals). While Ontario only accounted for 26% of total deal flow, it accounted for 43% of total dollars invested (being $4.2B invested across 163 deals). BC was the third most active province in terms of deal volume (67 deals with a total value of $458M), but Alberta ranked third in terms of dollars invested ($840M invested across 38 deals).
  • Despite an overall drop in PE investments in 2023, interest in Canadian tech companies remained strong. The information and communications technology (ICT) sector surpassed 2022 investments, securing $3.5B across 130 deals, representing 36% of all dollars invested. Cleantech concluded the year on a strong note with $1.2B raised across 28 deals, surpassing the combined total investment in cleantech for the past two years, totaling $1B. Other noteworthy sectors include industrial & manufacturing, ($1.5B invested in 145 deals) and business products & services ($882M invested across 63 deals), further driving diversification of the Canadian investment landscape.
  • There were 68 PE exits totalling $581M in 2023, including the first PE-backed IPO since 2021. 72% of these exits were via M&A transactions, and secondary buyouts accounted for 26% of exits.
  • Given the high cost of capital and market volatility, PE investors are gravitating toward deals that are easier to finance, notably those with fewer valuation adjustments. Buyout and add-on investments accounted for 28% of all deals closed in 2023 and 44% of all PE dollars invested. We note however, that, while Q4 saw an increase in buyout and add-on investment activity ($741M was raised across 41 deals), 2023 as a whole saw the lowest annual investment on record for this activity.

Conclusion

Despite ongoing market uncertainties and continued financial fallout in the era of the post-pandemic boom, our overarching takeaway is that the CVCA deal studies provide a basis for cautious optimism in both the VC and PE spaces.

The Canadian VC market continued to thrive in certain key sectors, including major investments and exits in the AI, cleantech and life sciences spaces. Notably, ongoing investor support of pre-seed and seed stage companies evidenced that VCs are continuing to offer support and drive innovation. The increased use of non-dilutive sources of financing indicate a willingness on the part of investors and industries to get creative when traditional sources of financing are less appealing.

Despite record lows in terms of PE investment and deal activity in the Canadian PE market, SMEs continue to prove themselves to be the backbone of the national economy. While some sectors struggled, major and consistent growth in the ICT and cleantech sectors evidence a resilience on the part of these industries regardless of difficulties in the market. As the year trended towards PE-backed privatizations and longer holding periods for existing investments, it will be interesting to see in the coming quarters and years whether and how these strategies will bear fruit.

Stay tuned for more insights and key takeaways as we head into 2024!

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