Private equity, venture capital slow down on NAFTA uncertainty

Despite hesitation among regional investors, some tailwinds still exist

Private equity, venture capital slow down on NAFTA uncertainty
According to a new report from private-market research firm PitchBook, investment in the Canadian private financial markets started slow in 2017, with both private equity (PE) and venture capital (VC) seeing year-on-year declines in deal volume and value.

Reacting to US plans to renegotiate or withdraw from the North American Free Trade Agreement, Canadian private investors have adopted a wait-and-see position. The resulting slowdown was offset by foreign capital, brought by investors who see Canada as an ideal haven for startups because of its pro-immigration policy and proximity to the US.

Canadian VC deals have amounted to $490 million across 90 completed transactions as of April 30. At this pace, 2017 deal volumes and values will fall far below 2016’s full-year record of $2.11 billion acquired over 397 deals. VC activity was concentrated in the software sector, which composed 42% of deals and was mainly observed in cities like Vancouver, Toronto, and Montreal.

A lack of access to large funds has forced many fast-growth companies to rely on foreign capital for late-stage funding, with 62% of late-stage deals involving foreign investors. The Canadian government recently set up a $400-million Venture Capital Catalyst Initiative program for entrepreneurs, with $125 million earmarked for research and development in AI.

Exit activity has accelerated in venture capital; 18 exit deals worth a total of $1 billion have occurred as of April 30 this year, compared to 54 deals totalling $610 million for the entirety of 2016. Acquisitions have accounted for no less than 76% of all VC-backed exits of Canadian companies every year since 2008, and only 26 companies have completed an IPO since 2010.

The private-equity industry has also been driven by foreign investment, which has figured in 52 out of 73 PE deals completed as of April 30. In comparison, regional investors have mustered just $990 million, a far cry from the nearly $3.4 billion they amassed at the same time last year. The total capital raised from PE deals as of April 30 was $15.9 billion.

PE investors are shying away from the country’s struggling energy sector, turning their attention to the emerging technology space. The tech sector has accounted for 26% of all PE deals this year — a significant leap from 12% last year.

Exit activity in the PE space has stagnated, managing only $750 million in value from strategic acquisitions compared to $26.8 billion in 2016. In total, only 27 PE-backed exits worth a total of $3.51 billion have been completed as of April 30; at this pace, Canada’s PE industry will see a 76% year-on-year decrease in the amount of capital exited, and a 39% year-on-year decrease in the number of exits. More than half (59%) of PE-backed exits have been secondary buyouts.

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