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Canada's Private Financial Market Activity Stalls in Early 2017 as Investors Await Outcome of U.S. Opposition to NAFTA

June 08, 2017

SEATTLE — June 8, 2017 —New data from PitchBook uncovered Canadian private financial market investors have adopted a wait-and-see approach during the first half of 2017 in response to U.S. plans to renegotiate or withdraw from NAFTA, a move that could cause major disruption to Canada’s economy. On a quarterly basis, both VC and PE dealmakers saw declines in deal volume and value. While regional investors hold out for signs of economic stability, foreign capital has swooped in to drive investment activity, having participated in more than half of all VC and PE deals completed this year. Amid political and economic uncertainty, Canada has established itself as a startup safe-haven for its pro-immigration policy, which is creating a burgeoning startup ecosystem and healthy business environment that is expected to attract investment.
 
“Canadian venture and private equity industries are both still in their infancy but have shown steady signs of growth, despite the recent slowdown,” said Nico Cordeiro, analyst at PitchBook. “Private market investors have found a new source of deals in the country’s growing technology sector, and when combined with the support from its government, both from an economic policy and financial perspective, a continuation of growth is likely. However, further development hinges on NAFTA negotiations. If the U.S. administration is unable to renegotiate a new trade deal or withdraws altogether, Canada’s private financial markets will face consequences.”
 
Canada’s VC Industry Shows Promise, But Still in its Development Phase
On the heels of a record 2016, venture capital investment experienced a slow start in 2017, with deal value reaching just C$490 million across 90 completed transactions. This puts 2017 on pace to fall well short of the C$2.11 billion invested last year. The lion share of this year’s VC activity came from the region’s software sector – making up 42 percent of deals – and primarily segregated to cities like Vancouver, Toronto and Montreal.
 
Aside from economic uncertainty, Canada’s greatest challenge in growing its venture industry is supporting late-stage venture capital. With a shortage of large funds to finance fast-growth companies, many are forced to seek foreign investment – 62 percent of late-stage deals include foreign investors. To help boost venture industry growth, the Canadian Government recently established a C$400 million Venture Capital Catalyst Initiative program to fund entrepreneurship, with C$125 million said to be reserved for AI research and development.
 
Exit activity in Canada has picked up momentum, already surpassing last year in exit value – from C$610 million in 2016 to C$1 billion already this year. If this activity level continues, exit count could surpass 2016, which saw 58 exits, primarily made up of corporate acquisitions.
 
Foreign Investors Drive Canada’s PE Industry
Much like the region’s VC industry, Canada’s PE activity is driven by foreign investment, with 52 transactions, or 70 percent of all deals completed in early 2017 involving foreign capital. Regional investors have raised just C$990 million so far in 2017, down from almost C$3.4 billion at the same time last year, causing a corresponding slide in deal volume. Just 73 transactions were completed with a total value of C$15.9 billion. Shifting focus from the country’s struggling energy sector, PE investors are finding an emerging source of deals in the technology sector, which have made up 26 percent of all deals so far this year, up from 12 percent last year.
 
Acquisition activity has virtually dried up with only C$750M worth of exit value in strategic acquisitions, compared to C$26.8 billion in 2016. Still, more than half (59 percent) of PE-backed exits in Canada are secondary buyouts.
 
Download the full report here.
 
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