Originally published in CVCA Central, November. 2017, By: Jon Jackson
In the first part of a new series on Canadian venture capital and private equity, the CVCA has engaged its members to inspect the market, from the investor’s perspective, to truly capture the expert viewpoint.
OUR FIRST CONTRIBUTORS INCLUDE Chris Arsenault, Managing Partner, iNovia Capital and Gregory Smith, President and CEO, InstarAGF. Representing venture capital, iNovia backs early-stage technology entrepreneurs and has offices in Montreal, Toronto, Waterloo, Vancouver and Calgary. InstarAGF is a private equity asset management firm focused on real assets, including infrastructure, and alternative investments and is headquartered in Toronto.
Canadian VC: Chris Arsenault, Managing Partner, iNovia Capital
CAN YOU REFLECT ON HOW THE VENTURE CAPITAL INDUSTRY HAS BEEN PERFORMING IN 2017?
The Canadian VC industry has performed well in 2017. Based on capital invested in Canadian companies in the first half of the year, the industry is on pace to exceed overall capital invested in 2016. Ontario remains a key driver of VC investment, accounting for 38% of total H1 2017 dollars invested and we expect that for H2 2017, Quebec will be the key driver due to a limited number of very large investments.
WHAT ARE SOME PARTICULARLY INTERESTING HIGHLIGHTS YOU’VE SEEN WITHIN THE LANDSCAPE THIS YEAR SO FAR?
Of particular interest, Canadian round sizes have begun to increase, although they do not yet mirror US round sizes. The old adage that Canadian companies remain undercapitalized compared to their US competitors has begun to change, as Canadian investors and founders recognize the competitive value of having a strong balance sheet. Ultimately these increasing round sizes reflect both the existing technologies and companies being built in Canada, as well as the growing recognition of Canadian startups’ potential to become category leaders at a global scale.
“THE OLD ADAGE THAT CANADIAN COMPANIES REMAIN UNDERCAPITALIZED COMPARED TO THEIR US COMPETITORS HAS BEGUN TO CHANGE.”
We continue to see foreign investors seeking out Canadian startups as investment opportunities. This foreign capital benefits startups, but also highlights the shortfall of late-stage Canadian growth capital. 55% of VC funds raised since 2007 have closed less than C$100M. As Canadian startups mature and necessitate more growth capital, we anticipate more Canadian growth funds (or institutions) will emerge to fill the funding needs of these later-stage startups. Otherwise, the US investment firms will be picking up the follow-on rounds of our hard labour.
WHERE DO YOU FORESEE THE MARKET HEADING FOR THE BALANCE OF THE YEAR?
2017 has already exceeded 2016 by 20% in terms of exit value, again demonstrating that Canada continues to build larger and more valuable businesses. M&A is still accounting for the bulk of exits; there have been only two VC-backed IPOs in 2017 (Zymeworks and Real Matters). We anticipate M&A continues to be a key exit driver, although alternative mechanisms such as ICOs present another means of both raising capital, and creating exit opportunities for existing investors. Kik presented an interesting case study, although Canadian regulatory uncertainty continues to present a challenge to companies that may wish to follow in Kik’s footsteps.
There has also been a growing emphasis on diversity, at the management, board and investor level. Individuals, the CVCA, and organizations like theBoardlist have championed the benefits of diversity, both as it improves company performance and also as a moral imperative. We expect this to remain a priority as organizations move from rhetoric to action, and begun to implement programs that meaningfully impact diversity numbers.
Canadian PE: Gregory Smith, President and CEO, InstarAGF
CAN YOU REFLECT ON HOW THE PRIVATE EQUITY INDUSTRY HAS BEEN PERFORMING IN 2017?
Private capital plays an important role in Canada’s investment ecosystem, and institutional allocations to the private equity industry and alternative real asset classes continue to grow. In fact, many investors remain below their long-term target allocation to private markets. Our experience in the infrastructure space is that there is strong investor appetite for clearly defined, differentiated investment strategies and deal-sourcing approaches. Of all the private asset classes, institutional investors are allocating to infrastructure at a greater rate than traditional private equity or real estate. Our own fundraising experience this year suggests that there is strong domestic and international interest in infrastructure assets in Canada, which reflects confidence in the robustness of the market.
WHAT ARE SOME PARTICULARLY INTERESTING HIGHLIGHTS YOU’VE SEEN WITHIN THE LANDSCAPE THIS YEAR SO FAR?
Having just completed a fundraising in 2017, I’m reminded of the value of transparency, alignment and governance in building investor confidence and partnerships. From an infrastructure perspective, there has been significant focus in the industry on how to cultivate more private investment to address our infrastructure deficit, including through entities such as the Canada Infrastructure Bank, and a continuing discussion around the merit of privatizing certain assets where long-term value can be created for Canadians.
“OF ALL THE PRIVATE ASSET CLASSES, INSTITUTIONAL INVESTORS ARE ALLOCATING TO INFRASTRUCTURE AT A GREATER RATE THAN TRADITIONAL PRIVATE EQUITY OR REAL ESTATE.”
WHERE DO YOU FORESEE THE MARKET HEADING FOR THE BALANCE OF THE YEAR?
We take the long view. Canada’s relatively stable political and regulatory framework makes it is an attractive jurisdiction for investors, and it’s important as an industry that we engage with stakeholders in the community and at all levels of government to ensure the right policies and drivers are in place to preserve and enable private capital’s contribution to the economy. Looking at infrastructure specifically, more than 63% of global institutional investors are below their target allocation to the asset class. We expect to see continuing strong appetite for energy, utilities, civil and social infrastructure assets as investors seek investment alternatives that have low correlation and volatility compared with traditional asset classes, and reliable, inflation-linked returns. 
This is part one of a new CVCA series, The Private Investor Perspective, which examines the Canadian venture capital and private equity market from the viewpoint of funders.
Read more: https://central.cvca.ca/private-investor-perspective-part-one-canadian-vc-pe-2017-beyond/2017/11/02/