2007 banner year for buying Canada

Despite growing problems in the credit markets in 2007, companies found the capital to invest in Canada. Both private equity deals and venture capital investments were up last year, according to the Canadian Venture Capital and Private Equity Association (CVCA).

Using data compiled by Thomson Financial, the CVCA says the total value of announced buyouts of Canadian companies by private equity firms amounted to $65.5 billion, setting a new record for Canada.

That total is skewed by the massive $46.8 billion buyout of BCE Inc., but the remaining $18.7 billion in other transactions was still double the previous record of $8.2 billon in 2006. The CVCA says a total of 181 Canadian buyouts were reported in 2007, demolishing a previous record of 105 transactions, reported in 2006.

It wasn’t until August that the credit squeeze tightened, but the CVCA shows buyouts remained strong in the fourth quarter of 2007. There were $2.3 billion in private equity buyouts in Q4, up 64% from $1.4 billion in Q4 of 2006.

Whether that strength will carry over into 2008 is unclear. The CVCA noted many of the deals in Q4 were deal finalizations of transactions that had been announced in previous quarters. Nevertheless, Rick Nathan, CVCA president and managing director of Kensington Capital Partners Ltd., says the Q4 results point toward continuing strength in the private equity market.

“Following the credit crunch in mid-summer and the retreat within the very large mega-deal segment, many industry observers had expressed concern. Our fourth-quarter activity levels clearly demonstrate the continuing health of the Canadian mid-market for private equity investment,” Nathan says.

Excluding the BCE deal, buyouts of Canadian companies were roughly balanced between Canadian and U.S. investors through the year. A total of $8.0 billion in buyouts of Canadian companies were led by Canadian investors during 2007, compared to $7.8 billion by U.S. investors and $2.9 billion by other international firms.

“We need strong Canadian investors for strong Canadian companies,” Nathan says. “As Canadian companies continue to require capital from the private markets, the strength of our domestic private equity sector remains vitally important to the growth and development of our economy.”

Canadians were not shy about buying foreign companies either. Buyouts of foreign firms by Canadian private equity investors totalled $11.2 billion in 2007, up from the $7.5 billion recorded in 2006.

Venture capital investment across Canada in 2007 amounted to $2.1 billion, up 21% from the $1.7 billion invested in 2006, according to Thomson Financial. Investment held steady in Q4 at $500 million, which was roughly equal to Q3 2007 ($513 million) and to Q4 2006 ($504 million).

Nathan says the numbers don’t acknowledge the lacklustre fundraising from Canadian companies. The increase came primarily from U.S. investors, while Canadian investment was flat. U.S. venture capitalist firms invested $836 million in Canada in 2007, up 53% from the 2006 total of $548 million.

“A closer look at the data reveals continuing weakness in our Canadian venture capital sector. Virtually all of the growth in our markets has been driven by the increased investments made by U.S. venture firms extending their reach into Canada,” Nathan says. “This is particularly evident in Ontario, where U.S. investors now represent a majority of all venture investment dollars — a historic high and roughly double their traditional market share.”

Nathan is concerned by this trend, particularly by the failure of Canadian start-ups to raise money from Canadian investors.

“In contrast to the growth in investments made, Canadian VC firms saw a continued decline in their own fundraising — the amount of new capital raised for their own new investments — the fifth such decline in the past six years,” Nathan says. “A shortage of domestic capital may continue to drive the growth of our most innovative emerging companies away from home and into the U.S., where venture capital is more readily available.”

The CVCA says information technology sectors continue to drive investment in 2007, accounting for $1.1 billion in financing to 194 companies, or 52% of all disbursements. Within the IT sector, Internet-based businesses received $411 million, followed by software firms, with $266 million, communications and networking companies, with $240 million, and electronics and semiconductors, at $126 million.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(02/12/08)

Mark Noble