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People walk past office and condo towers in downtown Montreal, on April 8, 2021.Christinne Muschi/The Globe and Mail

Business Development Bank of Canada has launched its second $250-million growth equity fund to fill what it says is a gap in domestic funding sources for expanding small and medium-sized Canadian business that don’t want to sell out.

The federal Crown corporation’s private capital arm, BDC Capital, launched its first $250-million fund in 2017 aimed at funding companies with $10-million or more in revenue and between 100 and 499 employees. So far it has invested $175-million in 18 Canadian companies, including drugstore operator Neighbourly Pharmacy Inc., last-mile e-commerce delivery network operator Intelcom Courier Canada Inc., LiveBarn Inc., an on-demand broadcaster of amateur sports, and forestry equipment supplier BID Group Holdings Inc.

“We’re quite happy with the results so far,” said Claude Miron, managing partner of growth equity with BDC Capital, adding that the companies backed by BDC more than doubled in size as a whole over four years. With the rest of the first fund’s capital committed for follow-on investments in its portfolio companies, it was time for a second fund, he said.

The second fund has already made its first investment, in Pliteq Inc., an Ontario maker of sound-control building products. The fund aims to buy minority stakes in companies, making investments ranging from $3-million to $35-million

BDC Capital typically targets investing in undercapitalized, emerging sectors of the Canadian economy. Earlier this month it launched a $200-million venture fund to back underfunded “deep tech” Canadian startups in technologically complex sectors such as photonics and semiconductors, and in recent years it has launched focused funds for women-led technology companies and startups innovating in legacy sectors such as resource extraction. BDC has also spun off two funds specializing in information technology and biotechnology companies after those sectors began to flourish in Canada.

With its first growth fund, BDC aimed to fill a gap between venture capital – which provides minority financing for fledgling, fast-growing startups with high potential – and private equity, which typically buys control of larger, established, cash-generating companies. Growth-equity investors typically invest in companies that have established product-market fit, are generating revenue, need substantial capital to grow but aren’t always ready to sell control.

“When we came in with our first fund, there were not many” Canadian growth equity providers, Mr. Miron said. “You could count them on one hand,” namely Toronto’s Georgian Partners. Most companies seeking growth equity financing typically landed investment from U.S. financiers.

Since then, however, several Canadian firms have launched growth equity-focused investing vehicles, including pension giant OMERS, venture capital firms Inovia Capital and Round 13 Capital and Maverix Private Equity, led by former OMERS Ventures chief John Ruffolo.

In addition, 13 Canadian financial institutions funded the $545-million Canadian Business Growth Fund, which launched three years ago and has backed such emerging Canadian companies as Vendasta Technologies Inc. and SMARTeacher Inc., better known as Prodigy. Former OMERS private capital president Lisa Melchior last month announced the inaugural investment from her Vertu Capital’s first growth equity fund, leading the purchase of a $60-million stake in Waterloo, Ont., communications connectivity technology provider Dejero Labs.

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