Q1 Capital Partners

Q-News

Round-up of October VC and M&A activity

Posted in Mike's Commentary

During the month 17 Canadian technology companies reported receiving a total of $115 million in new capital.  The big deal of the month was Shopify which raised $15 million from three US VCs, Bessemer Venture Partners, First Mark Capital and Felicis Ventures and Canadian VC, Georgian Partners.   Importantly, US venture firms played a very active role with 13 different US VCs participating in 9 of the 17 deals.  We are seeing the continuation of strong US VC participation into November with “Beyond the Rack” which garnered US$36.6 million in new capital from Panorama Capital, Tandem Expansion Fund, Rho Canada, Inovia Capital, Highland Capital Partners and BDC Venture Capital.

Interestingly, October represented the fourth time in 2011 that we have had more than 14 deals reported in a month which compares very favorably to the fact that during 2010 and 2009 there was not one month where fourteen deals were publicly reported by Canadian technology companies.

Third quarter results were published by the CVCA reporting that there has been a distinct year-over-year uptick in capital raised by Canadian venture capital funds.  For the first nine months of the year VC fundraising of $739 million was just below the $741 million raised in all of 2010.  The third quarter was particularly strong with $365 million raised compared to the $47 million raised in Q3 2010.  While these numbers are positive they continue to be well below the levels necessary to sustain a healthy and vibrant venture capital sector. 

Certainly we have seen improving activity in the VC sector with more companies being financed and a greater role being played by our neighbours to the south.  During the third quarter a total of $388 million was invested in Canadian technology companies, a number that represents a 51% increase over the comparable period in 2010.

The top two sectors that received capital during the quarter were IT related companies receiving $177 million or 31% more than Q3 2100 and Life science companies who saw $106 million invested representing a year-over-year comparable period increase of 83%.

Important news on the fund front included the fact that OMERS Ventures has significantly strengthened its team with the addition of well experienced and respected Howard Gwin and Derek Smyth as Managing Directors.  OMERS Ventures is well positioned to be an important force in the industry after establishing a $200 million fund looking to cut cheques ranging from $500,000 to $30 million and signaling to the sector that it will be a long-term investor, looking to remain invested in its portfolio companies for “at least 15 years” before seeking an exit. 

From the perspective of “more bad news”, another LSIF, Growthworks Canadian Fund Ltd. announced that it was implementing a redemption management plan whereby it will close its weekly Class A share redemptions and would move to process redemptions on a semi-annual basis in amounts determined by the Board of Directors.  The Board has set the annual redemption value for first year redemptions at $20 million with $10 million designated for redemption on the first semi-annual redemption date. 

This announcement follows on the heal’s of Growthworks’ failure to win its bid for the Vengrowth Investment Fund, another LSIF that had suspended timely redemptions and moved to annual distributions of any excess cash.  One doesn’t have to look further than the performance of Growthworks and Vengrowth to see evidence of the failure of the once highly touted LSIF program with a long list of burned investors, dismal annual performance and resultant zombie companies.  Its personally tough to point out the shortcomings of these funds since I have friends at GrowthWorks but maybe it’s just time for the managers to consider reducing their management fees to share in the pain of the frozen out retail investors.

(GrowthWorks Canadian performance as of November 15, 2011 (source: The Globe & Mail)

M&A Activity in Canada

PWC published their Capital Markets Flash quarterly report  for the third quarter of 2011 reporting that mega deals represented only 0.94% of Canadian transaction volume but fully 59% of aggregate deal values.  During the quarter 756 Canadian M&A transactions were reported worth about $51 billion.  While deal volumes and aggregate value were up year-over year for the comparable 2010 period by 8% and 1%, respectively, on a quarterly sequential basis volumes and values were down significantly 10% and 12%, respectively.  PWC reported that a small number of large Canadian pension fund transactions masked the fact that the broader market turned down with the value of M&A transactions for smaller deals being 25% lower than Q2.

PWC analysis went on to state the Canada’s middle market ($100 - $500 million) saw the number of deals in Q3 decline by 23% while the value of deals fell by 29%.  This was the fourth quarterly value decline since Q4 2010.  Key market areas hit include energy which was down 30% by volume and consumer discretionary which experienced a 50% decline in volume.  Middle market industrials increased by 7% over the previous quarter but the report went on to note that many of the industrial deals were in resource vertical sub-sectors rather than automotive and related industrial sub-sectors.

Transactions with values less than $100 million or those with undisclosed values represented 92% of all M&A volume in the quarter.

The Canadian Innovation Exchange (“CIX”) is scheduled for December 1^st at MaRS in Toronto.  This annual event has become one of the highlights of the Canadian technology calendar and is a must attend event.