Venture capital activity lagging behind 2002

(November 10, 2003) While 2003 has seen strong returns on the stock markets, the year is not likely to top 2002 for the venture capital industry.

According to the Canadian Venture Capital Association (CVCA), investment capital rose to $361 million in the third quarter of 2003, up from $238 million disbursed in Q2. This level still pales in comparison to Q3 of 2002, when the industry invested $563 million.

“Investment activity in 2003 continues to be low compared to last year, as measured by the total amount invested and also as measured by the average deal size,” said Dr. Robin Louis, president of the CVCA. “However, an optimistic view of the investment activity for the past three quarters is that the decline has slowed or stopped and this may indicate that we are at or near the trough of investment activity.”

There were 191 financing deals made in Q3, but there were fewer large financings made compared to 2002. Last year the value of deals over $20 million was $128 million. This year it was only $28 million.

With the value of financing deals standing at $1.3 billion with just one quarter left in the year, it is doubtful the total for 2003 will come anywhere close to last year’s $3.2 billion.

On a positive note for small firms, merger activity is starting to heat up. Mergers and acquisitions are one of the primary methods venture capitalists use to realize a return on their investment, so a turnaround in this market could augur well for the venture capital industry.

While big-name takeovers, such as the Manulife bid for John Hancock Financial Services, make up a large portion of the $34.1 billion value for merger and acquisition activity in the quarter, there were 194 deals in total, according to merchant banking firm, Crosbie & Co.

In the second quarter the total value was only $12.8 billion for 219 takeovers, which represents a lower average deal value even after factoring out the Manulife deal and Alcan’s takeover of Pechiney. The average for the second quarter was roughly $58 million, but that rose in the third quarter to around $67 million.

Filed by Steven Lamb, Advisor.ca, slamb@advisor.ca

(11/10/03)