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Transcript of Think Canada Again Web Version FINAL[1]
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A Presentation by CVCA-Canada's Venture Capital
& Private Equity Association
October 2010
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Table of Contents
Executive Summary
Part 1: Canada is Open for Business
A Newly Recognized Economic Star
Low Taxes, Strong Financial Sector
Educated Workforce, Abundant Natural Resources, andEasy Access to Major Markets
A Public Policy Environment Strongly Supportive ofInnovation
Part 2: Canadas Private Equity and VentureCapital Market
General Overview of the Private Equity and VentureCapital Market in Canada
Canada Boasts a Thriving Buyout Sector with StellarPerformance
After 25 Years, a Maturing VC Industry Maps aPathway to Performance
Considering Canada GPs as Part of Your Private Equityand VC Allocation is a Smart Choice.
3.
5.
6.
8.
9.
10.
13.
14.
16.
20.
26.
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This report has been commissioned byCanadas Venture Capital and Private
Equity Association (CVCA) and funded inpart by the Government of Canadathrough the Department of Foreign Affairsand International Trade (DFAIT).
The report is aimed at potentialinternational investors into the Canadianprivate equity and venture capital marketfor the purpose of introducing them to
Canada as a potential investmentdestination. For those investors who arethinking about or already have a NorthAmerican private equity and venturecapital allocation, the purpose of thereport is to provide more detailedinformation about the market than hasbeen generally available.
The CVCA was founded in 1974 and is theassociation that represents Canadasventure capital and private equity industry.Its 136 member funds are firms andorganizations that manage the majority ofCanadas pools of capital designated forcommitment to venture capital and privateequity investments. The Association fostersprofessional development networking,communication, research and educationwithin the venture capital and privateequity sector and represents the industry inpublic policy matters. CVCA membershave over $75 billion in capital undermanagement, in distinct market segments.
Buyout is characterized chiefly by riskinvestment in established private orpublicly listed firms that are
undergoing a fundamental change inoperations or strategy. Buyout fundsare often called such, even if theirmandates are not exclusively buyoutrelated.
Mezzanine is characterized chiefly byuse of subordinated debt, or preferred
stock with an equity kicker, to investlargely in the same type of companiesand deals as buyout funds.
Venture Capital (VC) is characterizedgenerally by investment in early stagecompanies, mostly in technologybusinesses.
Given the different histories andcharacteristics of the two main marketsegments, this report discusses VCseparately from other segments of theprivate equity asset class.
All data is from Thomson Reuters, unlessotherwise stated. All dollar amounts are inCanadian dollars (as at 31 August 2010, 1
CAD = 0.94 USD), unless otherwise stated.
Report prepared byInternational Financial Consulting Ltd.www.i-financialconsulting.com
FOR MORE INFORMATION ABOUT
THIS REPORT, CONTACT
Richard Rmillard,Executive Director,CVCA- Canadas Venture Capital &Private Equity AssociationMaRS CentreHeritage Building101 College Street, Suite 120 JToronto, OntarioM5G 1L7
CANADA
Telephone: (416) 487-0519Facsimile: (416) 487-5899E-Mail: [email protected]: www.cvca.ca
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The Canadian economy is vibrant, hasbeen outperforming the rest of the G7 and
is ranked by the Economic Intelligence Unitas the #1 place to do business in the G7 forthe next five years. KPMG surveys findCanada leading the G7 in low businesscosts, especially taxes. The WorldEconomic Forum placed Canada at the topof the rankings for streamlining proceduresto set up a business and #1 for thesoundness of its banks since 2008.
Canada is open for business!
Canadas educated workforce (ranked #1in the OECD for college completion ratesand #3 for the quality of its managementschools), abundant natural resources, andeasy access to major markets place it in anexceptionally competitive favorableposition. The public policy environment is
strongly supportive of innovation withCanada #2 in the G7 in the generosity oftotal R&D tax incentives. In addition tofiscal support, the Government has alsoprovided support by acting as a catalyst toassist in the commercialization ofinnovation.
The Canadian venture capital and privateequity industry enjoys an enablingenvironment (in terms of regulatorypredictability, reasonable supervision,reporting standards, sophistication offinancial markets, inter alia) and corporateethos (in terms of regard for goodgovernance, accountability andtransparency) that help ensure thatinterests between LPs and GPs are aligned.Canadian-based GPs observe Institutional
Limited Partnership Association (ILPA)principles as a guide to best practices and
as a de facto industry standard to guide theindustry. The Canadian industry also
endorses the International Private EquityValuation (IPEV) guidelines that are theinternational standard for portfoliovaluation.
Canada boasts a thriving buyout sectorwith stellar returns that have outperformedthe US and Europe by any measure.Canadas low penetration rate measured by
disbursements to GDP suggests the markethas been underserved and demand is high.The venture capital market in Canada,which has had numerous technologysuccesses and has experienced returnscomparable to the US, has beenundergoing significant transformation. Anew breed of domain-specific managers ispoised to deliver enhanced performance.
Think about including Canada in yourinvestment plans. Canadas private equityand venture capital market is rich withopportunities.
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Executive Summary
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Part 1:
Canada is Open for Business
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What a difference to perceptions a globalfinancial crisis can make. In the case of
Canada, perception has finally caught upwith reality. That reality has been reflectedin Canadas acceptance into the top ten ofthe World Economic ForumsCompetitiveness ranking where it hasremained since graduating from 13th placein 2007/08 (The Global CompetitivenessReport)1.
This ranking is echoed in a similar surveycarried out by internationally renownedSwiss business school, IMD, which recentlyannounced that Canada had moved upfrom 8th position in 2009 to 7th in 2010.Canada has also enjoyed a Triple Ainternational credit rating from Moodyssince 2002.
Praised by the IMF for a track record ofsound macroeconomic policies, for aproactive response to the crisis and formaintaining and preserving financialstability (IMF 2009), Canada has been wellpositioned to weather the economic stormand resume expansion. It is indeedenjoying a Goldilocks recovery(Economist, 06 May 2010). This goodnews story is based on a track recordstemming from a remarkable turnaroundin the mid-1990s, following a 1995editorial in the Wall Street Journalinfamously dubbed Canada an honorarymember of the Third World due toout-of-control spending resulting in publicdebt approaching 70% of GDP and anunhealthy economy.
Todays Canadian economy is vibrant andhas outperformed the rest of the G7, with
a 1.7% growth rate over the decade from2000 to 2009. The most recently revisedIMF forecast calls for GDP growth to reach3.6% in 2010, well above the forecastaverage of 2.3% for advanced economiesand above the forecast for all othermembers of the G7 (IMF World EconomicOutlook Update 07 July 2010). By 2009,Canadas economy, at US $1.3 trillion, was
the worlds 10th largest on a GDP basis,while on a GDP per capita basis, Canadaranks 4th amongst its peers (developedcountries with populations over 10 million)(Institute of Competitiveness andProsperity, 2010).
On the fiscal side, Canada enjoyed elevenconsecutive years of fiscal surpluses
following deficit reduction effortsimplemented in the mid-1990s; theseended only in 2007/08 with stimulusprograms introduced in response to theglobal financial crisis. Notwithstanding,Canadas debt to GDP ratio of 35% is thelowest amongst leading industrialeconomies (Financial Times, 25 June 2010),a big improvement over the mid-1990swhen it was second highest in the G7.
The Economist Intelligence Unit has rankedCanada the #1 place to do business in theG7 for the next five years. This is supportedby 2010 surveys by KPMG that find Canadaleading the G7 in low business costs. TheWorld Economic Forum and World Bankhave both placed Canada at the top of the
6
A Newly Recognized Economic Star (The Economist, 06 May 2010)
1 The ranking is based on a survey of 133 nations, analyzing 12 factors that are designed to capture the medium- tolong-term productivity and growth prospects. Canada ranked 10th in 2008/09, 9th in 2009/10 and 10th in 2010/11.
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rankings for streamlining procedures to setup a business. In its Doing Business in 2010
report, the World Bank ranks Canada #2worldwide for ease in starting a business(behind only New Zealand), measured onthe basis of procedures, time, cost andpaid-in minimum capital to open a newbusiness, while the World EconomicForums 2010/11 Global CompetitivenessIndex ranks Canada #1 for the number ofprocedures required to start up a business.
The message has not been lost oninvestors: accumulated FDI inflows intoCanada between 2000 and 2008 totaledUS $363.2 billion, the 6th largest inflows inthe world. As a share of 2008 GDP, theseinflows placed Canada in 4th place in theworld.
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With the aim of ensuring that Canada cancompete as a low-cost place to do
business, the federal government hasembarked on a number of recentinitiatives.
In the 2010 federal budget, tariffs on allmanufacturing inputs are to be reduced tozero by 2015, with most cuts beingimplemented in 2010, making Canada aneffective national free trade zone for
investors. These cuts, coupled with a 50%straight-line depreciation method formanufacturing and processing equipment,provide real cost incentives for capitalinvestment.
Canada already has the lowest payrolltaxes amongst the G7. Furthermore, aspart of an aggressive corporate tax reform
initiative, the federal corporate income taxrate will decline from 18% in 2010 to 15%in 2012, less than half the top US federalmarginal corporate income tax rate. Theobjective is to achieve the lowest statutorycorporate tax rate in the G7, acommitment made in the 2010 budget.
In fact, according to a 2010 KPMG survey,Canada already offers the lowest effectivecorporate income tax rate amongst the G7(based on a ten-year average of combinedfederal and provincial effective corporatetax rates).
The resilience displayed by Canadasbanking sector during the recent crisis has
been widely recognized: no banks failed,none required injections of public capitaland interbank money markets continued tofunction. The resilience was particularlystriking given the close economic andfinancial links between Canada and theUnited States (IMF Country Report:Selected Issues, May 2009).
This strong performance has been creditedto a variety of factors including: strongregulation and supervision by a singleregulator, high capital requirements, and acap on leverage. Belying past complaintsthat the Canadian banking sector was tooconservative, it is now a source of envy forsome and a source of lessons for others. Infact, the World Economic Forum has
ranked Canada #1 for the soundness of itsbanks since 2008, and in 2009 promotedCanada to #3 for the sophistication of itsfinancial market, a jump of three places.
Four of Canadas banks rank amongstNorth Americas top ten by assets, and twoof these (Royal Bank of Canada and TDBank) are amongst only half a dozen banksworldwide that still have a Moodys Triple Acredit rating (Financial Times, 25 June2010).
As to access to finance, Canada leads heretoo: for the second year in a row Canadaleads the Milken Institute Capital AccessIndex, an annual ranking of entrepreneurialaccess to capital around the world.
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Low Taxes, Strong Financial Sector
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While the traditional inputs to economicgrowth have been labour and capital,knowledge is now widely recognized forthe critical role that it plays. Canadasworkforce is well-educated, ranking #1 inthe OECD for college completion rates(23.7% of working age Canadian havegraduated from college) and #7 foruniversity completion rates (24.6% ofCanadians have university degrees). Andthe quality of that education is very good:in 2010 the World Economic Forum rankedCanada #3 for the quality of itsmanagement schools and #5 for thequality of its educational system overall.
In this globalized world Canada enjoys afurther advantage. As a multi-culturalnation, one in five of Canadas 34 millionpopulation has a mother tongue otherthan English or French, the two nationalofficial languages.
Canada has a strong democratic traditionand a stable political landscape; in 2006The Economist ranked it the 3rd mostdemocratic country in the world, ahead ofevery nation more populous than itself and
first in the Americas.
Canada is the second largest country in theworld by area, borders three oceans and isrichly endowed with natural resourcesincluding:
Oil: 7th largest producer of crude oil inthe world and second only to Saudi
Arabia in terms of reserves
Gas: 3rd largest producer of natural gas
Forestry: largest area of certified forestin the world, and the largest exporterof forest products
Minerals: reserves of over 60 mineralresources, and within top 5 inproduction of nickel, zinc, platinumgroup elements, gold, molybdenum,copper, cobalt, lead and cadmium.
This rich natural resources base anddiversity of regional economies are factorsin the resilience of Canadas economy.
Through the three-way North AmericanFree Trade Agreement (NAFTA), the largestfree trade area in the world, Canada is partof the most lucrative market in the world,providing access to 452 million consumersand a combined GDP of US $17 trillion.The US and Canada are each others largesttrading partners with two-way trade ingoods and services amounting to $740billion in 2008, or about $1.4million/minute, a trade facilitated by abusiness-friendly Smart Border Accord.
With 17 of Canadas 20 cities within a 1.5
hours drive of the US border and within a 2hour flight from major US cities, Canadasproduction hubs are close to US marketsand in many cases closer than USproduction hubs. In addition, NAFTAprovides access to Latin American marketsvia Mexico, the third partner in NAFTA.
Canada is also in a strategic location at the
crossroads of North America and Asia, aposition it is enhancing through invest-ments in port and rail in order to createeven stronger infrastructure links with itsNAFTA partners and the Asia-Pacific.
9
Educated Workforce, Abundant Natural Resources, andEasy Access to Major Markets
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According to the OECD, total federal andprovincial government support to businessR&D in Canada, as a percentage of GDP,ranks above that of the United States, UKand Japan amongst others. The center-piece of this support, available tocompanies in all industrial sectors, is theScientific Research and ExperimentalDevelopment (SR&ED) tax incentive;applied to income taxes payable, itprovides income tax deductions forallowable expenditures, as well asinvestment tax credits, generally at a 20%rate. Small firms qualify for additionalbenefits including an investment tax creditat a rate of up to 35% that is partially orfully refundable. Provincial incentives arealso available, making Canada #2 in the G7in the generosity of total R&D taxincentives.
Canadas record of university-basedresearch activity is particularly strong andranks among the best of the OECDcountries. According to the most recentWorld Economic Forum survey, Canadaranked #9 in terms of business/universitycollaboration on R&D. Indeed, in 2007
Canadian university expenditure on R&D,expressed as a percentage of GDP, rankedsecond in the OECD, behind only Sweden.
In addition to fiscal support, the federalgovernment has also provided support byacting as a catalyst to assist in thecommercialization of innovation. This hastaken a number of forms including
public-private partnerships, procurementwhile innovation is still at the early stages,as well as facilities and programs orientedto specific sectors.
That is not all. The federal government haspledged to invest an additional $5.1 billion
in science and technology as part of itsEconomic Action Plan. This investment willbe targeted at four priority areas identifiedin the 2007 Science and TechnologyStrategy: health and related life sciencesand technologies; information andcommunications technologies; environ-mental science and technologies; andnatural resources and energy. Support isbeing delivered through a range ofinitiatives including an ongoing programmeto fund Research Chairs for 187 renownedinternational experts at 44 universitiesacross the country, coupled with funding forresearch infrastructure. In 2008 the federalgovernment funded 20% of all R&Dresearch in Canada, either through directR&D research carried out by governmentagencies or through R&D grants touniversities and other institutions.
The federal governments premier R&Dagency, the National Research Council(NRC), is focusing its industrial R&D effortsin eight key sectors: Aerospace, Agriculture,Automotive, Construction, Information andCommunication Technologies, Manufac-turing and Materials, Medical Devices and
Biopharmaceuticals. Over the past decadethe federal government has invested over$550 million to catalyze 11 technologyclusters, each dedicated to particular areasof research, bringing together NRC researchfacilities, universities and business in across-fertilizing innovation eco-system.
From low taxes and a strong financial sector;
to an educated workforce, abundant naturalresources and easy access to major markets;and a public policy environment supportiveof innovation, Canada offers the rightenvironment for Canadian private equityand venture capital funds to enjoy success.
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A Public Policy Environment Strongly Supportive ofInnovation
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Some Canadian Innovators
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Part 2:
Canadas Private Equity andVenture Capital Market
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The Canadian private equity and venturecapital market is relatively young comparedto the industry in the US and has had a verydifferent history. The performance of theCanadian industry is comparable to that ofEuropean countries and the gap with theUS has narrowed now that the 10-year USnumbers no longer include the huge gainsfrom 1999-2000.
Based on Thomson Reuters statistics, thetotal estimated size of Canadas privateequity and venture capital (VC) resourcesunder management was $76 billion at theend of 2009, up 3% from 2008. TheBuyout sector in Canada had about $53.2billion under management at the end of2009, while the mezzanine sector hadanother $7.6 billion; together these twosegments accounted for 80% of totalfunds under management. The VCsegment managed about $14.9 billion atthe end of 2009, or 20% of the total pool.
Private independent funds accounted for59% of total funds under management in2009 or $44.6 billion, while institutionalcaptive funds accounted for $20 billion
and corporate captives $2.3 billion. Retailfunds were $7.6 billion and government-owned and -directed funds that target theVC segment of the market amounted to$1.8 billion.
An Underserved Market
Canadas penetration levels (expressed in
terms of private equity and VCdisbursements relative to GDP) haveremained low and in 2009 ranked at thesame level as India, while beingsignificantly below the US and the UK. This
low penetration signals an underservedmarket offering significant opportunitiesfor investment in both market segments,especially relative to the US and UK. InCanada, the simple story is that there hasbeen too little money devoted to this assetclass, compared to the US where it isargued that there has been too muchmoney chasing too few deals. Moreover,the level in 2009 is about a third of itspre-financial crisis level when disburse-ments were running at about 0.9% of GDP,albeit significantly less than the US levels ofnearly 3.2% at that time.
With the extensive R&D dollars,government support for innovation andcommercialization potential in Canada, the
demand for private equity and VC issubstantial and the market remainsconsiderably underserved.
14
General Overview of the Private Equity and VentureCapital Market in Canada
Canada
US
UK
Europe
India
China
0.30%
0.70%
0.57%
0.18%
0.30%0.20%
2009Disbursementsto GDP
Source: World Bank for GDP data
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Government Support for theVenture Capital Industry is Strong
There are numerous indications thatCanadian federal and provincialgovernments understand both the needsand the importance of Canadas privateequity and venture capital industry. Theextent of that support for the industry in
setting a helpful policy framework includesan exemption from registrationrequirements with the securities authoritieson behalf of venture capital and privateequity funds as the industry argued thatactive management of portfolio holdingsconstitutes appropriate diligence. Also in2009, the federal government overhauledSection 116 of the tax code that hadhistorically reduced the attractiveness ofinvesting in Canada. As a result, there hasbeen a dramatic decrease in reportingregulations for foreign investors.
Committed to Best Practices andSetting Industry Standards
Canadian-based GPs observe Institutional
Limited Partnership Association (ILPA)principles as a guide to best practices andas a de facto industry standard to guide theindustry. The Canadian industry alsoendorses the International Private EquityValuation (IPEV) guidelines that are theinternational standard for portfoliovaluation. A distinguishing feature ofCanadian GPs is their commitment to fulland comprehensive reporting, timelydisclosure, and close ties with LPs.
The Canadian enabling environment (interms of regulatory predictability, reason-able supervision, reporting standards,sophistication of financial markets, interalia) and corporate ethos (in terms ofregard for good governance, accountabilityand transparency) help ensure that interestsbetween LPs and GPs are aligned and are akey competitive advantage.
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As a young industry, nearly half ofCanadian buyout funds were establishedafter 2000, and over 80% after 1990.
During the 1990s, the number of newpartnerships started rising exponentially,leading to significant growth in capitalmanaged by Canadian buyout/ mezzaninefunds over the past decade (rising from$10 billion in 2000, to $60 billion in 2010).Today a number of well-known names areoperating in the market and on to their 2ndor 3rd fund over a 10-year track, withreturns that are world class.
Stellar Returns by any Measure
The Canadian buyout industry has verysignificantly outperformed all of its
benchmarks in the 10-year horizon. This isalso true for the 3-year and 5-year horizonreturns.
Canadas private equity market hasoutperformed the US Buyout as well asboth the Canadian and US public markets.
Canada similarly exceeded Europes privateequity performance which achieved a netreturn for a 10-year horizon of 11.9%(compared to 14.2% in Canada) and 5 yearof 8.3% (compared to 16.8% in Canada).(Source: EVCA/Thomson Reuters)
Low Penetration Rate and anUnderserved Market
Over the past 5 years buyout disburse-ments have averaged 0.6% of GDP versus1.7% in US. Industries of interest toinvestors in Canada include: oil and gas,mining, manufacturing and services.
Historically, Canadian funds have investedconsiderable amounts abroad. Between
2004 and 2009, the amount invested ininternational companies ranged between50 and 60% of the dollar disbursements ofCanadas buyout, mezzanine and otherfunds. In terms of the number of dealsdone, 8% of 308 deals were internationalin 2009 compared to 22% of 563 deals in2008.
Foreign LPs are Starting toRediscover Canada
Although fundraising for the buyout andmezzanine segment in Canada is now at of its peak 2006 level, this is in line with therest of the world that has seen a severeretrenchment during the economic andfinancial crisis of 2008-09. Prior to this
period, the Canadian private equity markethad experienced significant influx offoreign capital. In 2008, foreign LPsaccounted for 54% of buyout/ mezzaninefundraising, declining to 31% in 2009.
16
Canada Boasts a Thriving Buyout Sector with StellarPerformance
Before 1980
1980-1989
1990-1999
After 2000
With active
portfolios in 2010
6
13
35
52
106
Date ofEstablishment
Numberof Firms
Source: Canadian Buyouts, Spring 2010
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17
Net Horizon Returns 2009
CANADA
UNITED STATES
All buyout / mezzanine funds
TSX benchmark
Small buyouts (USD 0-250 mm)
Medium buyouts (USD 250-500 mm)
Large buyouts (USD 500-1000 mm)
Mega buyouts (USD >1 bn)
All buyouts
Mezzanine
NASDAQS&P 500
10 Years
14.2%
3.9%
3.4%
4.1%
4.9%
4.7%
4.6%
2.9%
-5.6%-2.7%
5 Years
16.8%
4.1%
4.2%
8.7%
6.7%
4.8%
5.3%
2.8%
0.8%-1.6%
3 Years
7.2%
-2.5%
0.1%
3.6%
2.7%
-1.0%
-0.3%
0.7%
-2.7%-8.1%
Note 1: net horizon returns calculated as at 31 December 2009Note 2: TSX benchmarks compare the returns for the LPs would have been had those investors invested in the TSXinstead of private equity funds.Source: CVCA data (with assistance from Thomson Reuters) and the US VC industry (Thomson Reuters data) andstock exchange benchmarks.
Foreign sources
Corporates
Individuals
Pension Plans (domestic)Governments
Other institutions
TOTAL ($bn)
Foreign sources
Corporates
Individuals
Pension Plans (domestic)
Governments
Other institutions
TOTAL ($bn)
31%
20%
18%
14%
12%
5%
$2.1bn
54%
12%
7%
25%
--
2%
$5.6bn
Source of fundraising 2009 % offundraising
2008 % offundraising
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On the basis of a survey of its membersconducted by CVCA, the average number
of LPs attracted by the private equityindustry was 12. Amongst the privateequity respondents, one-third claimed tohave attracted international LPs and theaverage number of international LPs thatinvested in these Canadian private equityfunds was 9.
Assuming this number to be representative
of the entire Canadian industry, itdemonstrates that international LPs havealready begun finding their way toCanada.
Based on the CVCA survey population, thegeographical distribution of internationalLPs invested in Canadian buyout funds wasas follows, with the US and Europe having
the largest (and virtually equal) shares.
If one outlier (a single capital commitmentfor $400 million) is eliminated from thesurvey results, the average capitalcommitment per LP amounted to $12million (while the value of the averageinvestment by international LPs was nearlydouble, at $22 million). According to thesurvey, 75% of the international LPsinvested in successor funds.
The active presence of international LPs inCanadas buyout and mezzanine funds,
together with the substantial internationalinvestment presence of Canadian funds, istestament to the ability of the Canadianindustry to successfully conduct businessacross national borders and still deliver solidreturns performance.
Opportunities for Purchase andExit Opportunities Abound
In Canada there were around 2,000 M&Atransactions conducted in 2008representing 7.7% of the total number ofCanadian companies, versus the US at4.1%. But according to Thomson Reuters,only 3% of Canadian target buyouts weresold via a buyout deal in 2009 versus 8.3%in the US. Canada has a well-developed
M&A culture but there is considerably moremarket potential to unlock these values viaPrivate Equity.
In the coming years, there is aninter-generational change of somemagnitude coming - one that presentshuge opportunities in terms ofmanagement succession, management
buyouts and the like. It is estimated thatover 80% of Canadian businesses arefamily-owned. These firms range from thesmallest enterprises to major corporationswith an international reach and togetherthey generate over half of Canadas GDP.
In addition, as of 31 July 2010 there are1,488 companies listed on the TorontoStock Exchange and another 2,348 on theToronto Venture Exchange which also couldpresent important opportunities for thebuyout sector.
18
Other13%
AsiaPacific12%
Europe37%
NorthAmerica
37%
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19
2004
2005
2006
2007
2008
2009
40
27
40
71
40
41
7.6
2.8
9.1
16.7
8.6
2.5
190
104
267
235
215
61
13%
3%
6%
8%
10%
3%
Year ofTransaction* Number
Volume(US$ billion)
Average
deal size(US$ million)
PE Buyoutshare of
total M&Atransactions
*Disclosed TransactionsSource: Canadian Buyout PE Activity in 2009 Thomson Reuters- page 5
Year INVESTEE Multiple of Capital IRR
2010 Building Products 8.5x 127%
Resources 2.3x 90%
2009 Shepell Fgi 6.6x 108%
Energy 6.4x 131%
2008 Gateway Casinos 9.0x 50%
Waste Management 4.1x 196%
2007 Encore Group 10.0x 231%
Inventory Services 8.0x 72%
2006 Healthcare Products 4.0x 116%
Staffing Provider 3.0x 86%
Some Buyout Success Stories
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Canadas venture capital industry is alsorelatively young, especially compared withthat of the US, and while its performancehas been less strong than the Private Equityside, Canadas top performers have stillgenerally outperformed most benchmarks.
In fact, net returns for the first quartile ofCanadian VC firms have exceeded the TSX,NASDAQ and S&P 500, in addition to allstages of VC in the US, over the 3-, 5- and
10-year time horizons. There are indica-tions that 10-year Canada returns for VCare not out of line with emerging 10-yearreturns from other jurisdictions, forinstance, numbers to March 31 2010released in the United States indicate the10-year total number for VC returns was-3.9%.
20
After 25 years, a Maturing VC Industry Maps a Pathwayto Performance
CANADA
Net Horizon Returns 2009
UNITED STATES
First Quartile VC
All VCTSX benchmark
Early /Seed VC
Balanced VC
Later stage VC
All VC
NASDAQ
S&P 500
10 Years
5.1%
-1.4%*4.4%
-0.3%
2.3%
1.7%
1.1%
-5.6%
-2.7%
5 Years
8.1%
-1.2%4.2%
0.9%
6.8%
7.6%
4.3%
0.8%
-1.6%
3 Years
10.5%
-3.3%-2.9%
-1.0%
0.9%
5.6%
0.9%
-2.7%
-8.1%
Note 1: net horizon returns calculated as at 31 December 2009Note 2: TSX benchmarks compare the returns for the LPs would have been had those investors invested in theTSX instead of private equity funds
Source: CVCA data (with assistance from Thomson Reuters) and the US VC industry (Thomson Reuters data) andstock exchange benchmarks.
* Refers to Evergreen Funds which are the single largest component of the industry.
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21
IT
Communication
Software
Semiconductors
Pharmaceuticals &other life sciences
Energy & environment
technology sectors
Non technologysectors
Total
489
180
142
39
215
102
135
941
129
18
47
11
57
21
116
323
655
139
177
82
365
189
190
1399
Venture Capital SectorDisbursements
2009($ million)
Number oftransactions
Disbursements2008
($ million)
There have been NumerousTechnology Successes
Investments made by VC firms in Canadahave focused primarily in three areas ofstrength for Canada: IT, biotechnology andclean tech, with IT alone accounting for53% of disbursements in 2009 and 47% in2008.
Canadian venture capital investing hasbeen focused mostly within Canada: of the
408 deals done in 2009, 88% were inCanadian companies, representing 86% ofthe dollar amounts invested. Early stageinvestments have accounted for around50% of total disbursements between 2004and 2009. The average investment per dealfor domestic funds has been $1.04 million(compared with $3.76 million per deal forforeign funds).
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The exits of Canadian VC portfolio companies have been primarily through M&A, and to
a lesser extent IPOs.
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Biggest Canadian Tech IPO in a Decade
Shares of Smart Technologies Inc. SMA-T began trading in New York and TorontoThursday morning in a $660-million offering that ranks as the biggest Canadiantech IPO in a decade. The Calgary-based company makes electronic whiteboardsthat combine characteristics of a traditional whiteboard display with a computer.By touching the surface of the product, a user can control computer applications,access the Internet, write in digital ink and save and share work. The company wasfounded 1987 and for the fiscal year ended March 31, Smart Technologies posteda profit of $142-million on sales of $648-million. It has traditionally boasted anannual growth rate of between 20 and 30 per cent. Last year sales rose by 38.4percent.
Globe and Mail, Published Thursday, Jul. 15, 2010
2003
2004
2005
2006
2007
2008
2009
2
14
9
7
12
1
1
Number ofIPO exits
24
39
45
29
37
21
23
Number ofM&A exits
$40
$38
$67
$20
$61
$33
$29
Average IPOsize $ million
$39
$90
$52
$78
$104
$64
$120
Average M&Asize $ million
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bulk of this R&D is funded by universitiesand governments, although in terms of the
pharmaceutical industry specifically,Canada placed #7 globally for its share ofbusiness expenditure on R&D2. Canadawas ranked #3 for innovation in biotech in2010 by Scientific American.
Canada also has one of the most favorableR&D tax incentive programs in the world,allowing companies to receive rebates of
up to 35% of eligible R&D expenditures.Government funding for research hasincreased threefold over the last twodecades and no other sector has benefitedfrom this level of public sector R&Dsupport. The sector has also been singledout as one of four priority areas under thefederal governments Science andTechnology strategy and Canada hasrecently enjoyed recognition as one of thetop five countries for biotech innovation,coming third to only the US and Singapore.
Canada now ranks as the worlds eighthlargest world market in terms ofpharmaceutical sales and is in fact thefourth fastest growing pharmaceuticalmarket after China, Mexico and Spain.Some of the specific innovations in themaking include:
cancer-fighting therapies, includingcancer vaccines
vaccines to combat bacterial infections
The venture capital market isundergoing significant
transformation and a new breedof domain-specific managers ispoised to deliver enhancedperformance.
Canadian venture capital managers areevolving from generalists with a regionalfocus willing to tackle any type ofprospective investment opportunity, to
specialists with a North American andglobal focus targeting specific sectors ordomains for their funds. Firms themselvesare consolidating and specializing, and theyare seeking broader and deeper sources ofventure capital with which to work.
A new breed of domain-specific managersis poised to deliver enhanced performance.
These VC firms are now beginning toattract international LP attention and areable to source deals globally. Using Canadaas a beachhead for a number of focusedsectors has been a compelling story , giventhe national development strategies aroundand expertise within these sectors inaddition to Canadas proximity to major UScenters. Three leading examples are
discussed below.
Health and life sciences
Health and life sciences (comprisingpharmaceuticals and biotechnology) is themost R&D intensive sector of the Canadianeconomy. In 2009, health-related R&D wasestimated at almost a quarter of Canadas
total R&D expenditure of $24 billion. The
2 Innovation And Business Strategy, Council Of Canadian Academies, 2009
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communication: for example, through apublic-private partnership, Telesat,
launched the worlds first commercialdomestic communication satellite ingeostationary orbit, while a number ofsuccessful companies resulted fromactivities in space-based communications,including the former Spar Aerospace whichdeveloped the famous Canadarm usedextensively aboard the Space Shuttle andthe Space Station.
Clean Technology
Clean technology is an emerging industryin Canada, with a broad base across thecountry.3 The majority of Canadian cleantechnology companies were established tocommercialize a founders invention, whileless than 10% were based on
commercialization of technology developedby an academic institution. The averageage of these companies is 15 years andmost are actively engaged incommercialization of their products, withexports accounting for about half of totalsales. Despite the recent financial crisis andeconomic slowdown, the sector grew 47%annually, and that growth rate is expected
to more than double between 2010 and2012.
The industry spans nine different sectors,with five of these sectors accounting formore than three-quarters of companies(with more than 50 companies each):
Water and wastewater
Process efficiency and abatement
medical devices such as implantablebio-materials, surgical robotics, and
bio-sensors
a virtual reality neurosurgical simulator
a robotic arm for brain surgery, guidedby an imagining system and surgeon ata computer
Information and communications
technology
The information and communicationstechnology (ICT) sector in Canada matches,and in some cases exceeds, the UnitedStates in terms of R&D intensity (measuredas the ratio between R&D and sector GDP).Canada enjoys a strong base of R&D inuniversities and also in established
companies like IBM and RIM, locatedmainly in technology clusters such asWaterloo, Ottawa and Moncton/Fredericton. As one of the four science andtechnology priority areas, ICT benefits froma number of specialized governmentlaboratories and programmes in addition toother tax incentives.
Canadas greatest strength to date hasbeen in communications equipment, withRIM, inventor of the Blackberry, being onlyone of the most recent success stories.Canadas geography and the need tocommunicate across vast distances led tothe development of other mobilecommunication technologies withcompanies such as Nortel and SierraWireless. Of note is the major contributionto global communications is the Canadianinventions in satellite and microwave
3Sustainable Development Technology Canada's 2010 SDTC Cleantech Growth and Go-To-Market Report.
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Power generation
Recycling and waste
Energy efficiency
The other four sectors are: transportation,biofuels and biotechnology, remediationand energy and infrastructure.
Year INVESTEE Multiple of Capital IRR
2010 Software Healthcare 13.3x 39%
Social Media Analytics 9.2x 307%
2009 ViroChem Pharmaceuticals 5.4x 68%
Communications 3.5x 40%2008 Plate Spin Ltd. 18.0x 117%
Solar energy 2.6x 33%
2007 Galleon Energy 7.6x 134%
Network Equipment 6.0x 48%
2006 Aspreva Pharmaceuticals 23.4x 272%
Software/Networks 5.8x 100%
Some Recent VC Success Stories
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Canadas governmental, economic andfinancial structure is one of the most stableand soundest in the world and promisescontinued strength into the future. Thereare significant opportunities in Canada toreap rewards from a diversified, healthyand growing economic base that iswell-integrated into the global economy.
The venture capital and private equityindustry enjoys a supportive environment,in the form of favorable regulatory and taxsystems, and a cooperative approach withfederal and provincial governments whichallows the industry the freedom tomaximize opportunities and growthpotential.
The basic building blocks are in place forfurther cultivation of innovation andcommercialization and these opportunitiesare being developed by a new generationof venture capital fund managers withdomain-specific expertise and aninternational focus.
The generational changes taking place infamily-owned business and the thousandsof publicly-listed companies meansdemand for private equity will continue tobe strong. But, private equitydisbursements to GDP remain lowcompared to other developed countries.This suggests the market remainsunderserved and will create unprecedentedopportunities to capitalize on Canadas pastrecord of success in delivering exceptionalvalue to investors.
Think about including Canada in yourinvestment plans. Canadas private equityand venture capital market is rich withopportunities.
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Considering Canada GPs as Part of Your Private Equityand VC allocation is a Smart Choice.
For a complete list of CVCA members who are Canadian VentureCapital, Mezzanine and Buyout funds and fund managers and
services providers to the industry, visit our web site
www.CVCA.ca
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Notes
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A Presentation by CVCA- Canadas VentureCapital & Private Equity Association