Even before the market collapse of 2008, the Canadian venture capital and buyout industry was lagging. “Contrary to the situation in the US where venture capital is now a relatively mature industry with broadly publicized successes, the Canadian venture capital industry is much younger and, like most other venture capital industries around the world, has not yet reached maturity,”Gilles Duruflé wrote last year on behalf of the Canadian Venture Capital and Private Equity Association (CVCA).
There’s certainly no want of companies searching for capital. Whether they are sound investments, of course, is another matter. Is there a capital shortage? That’s a more difficult judgement. Private equity investors – and their institutional partners – are still recovering from the seller’s market that preceded the meltdown. Not that there was much of a seller’s market in Canada. From 2003 to 2007, Duruflé reports:
• Venture capital investment in the US has increased by 17%, from 0.18% to 0.21% of GDP
• Venture capital investment in Canada has decreased by 35%, from 0.13% to 0.085% of GDP
• And investment by Canadian funds in Canada has decreased from 0.10% to 0.060% of GDP, a 40% drop.
Now CVCA is proclaiming that Canada is open for investment. In a study released this month, “Think Again Canada,” the CVCA notes that most of the money – $76 billion under management – is invested in buyouts ($53.2 billion) and mezzanine investments ($7.6 billion). Not much left for venture capital. But buyouts could be the wave of the future, as family-owned businesses sell out to fund their retirements.
As a percentage of GDP, private equity investments in Canada roughly approximate those in India. “In Canada, the simple story is that there has been too little money devoted to this asset class, compared to the U.S., where it is aruged that there has been too much money chasing too few deals.”
Despite the failure of Ontario Teachers’ bid to take over BCE, the report notes that buyout investments in Canada have produced superior returns to those in the U.S. and Europe. That said, Canadian private equity funds prefer to put money elsewhere, with 60% of their money offshore.
Foreign investors are following suit. There was a time when foreign dollars accounted for 54% of Canadian buyout/mezzanine deals. That percentage has fallen to 31%. Domestic pension plans – which once accounted for a quarter of the total – have also fallen off, while the government share of investing has increased.
It probably doesn’t help that Canada’s odd retail labour fund sector is facing increasing pressure, as the prospect of reduced tax credits dries up liquidity taps – that and dismal five and ten-year track records, except, of course, for the first-quartile funds.
But everyone is a first-quartile investor – or aspires to be. Getting there is hard, but perhaps Canada is now a contrarian play.