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Venture capital and private equity investments in Canada are showing signs of stabilization after financing levels plunged for much of the past year, but the outlook for deal-making in the current year remains challenging.

The Canadian Venture Capital & Private Equity Association, or CVCA, says in a pair of new reports set to be published Wednesday that 2022 closed with a surprising turnaround following three consecutive quarters of decline. However, the industry group attributed much of that increase to deals carried over from 2021 that were finalized late last year. In 2021, market valuations had been outsized across the board and venture-capital fundraising saw some of the highest levels in decades.

“We should be incredibly cautious before celebrating any of these numbers today,” Christiane Wherry, the CVCA’s vice-president of research and product, said in an interview ahead of the reports’ release.

“Sure, we might have closed 2022 strong, but 2023 is looking to be a tough year. We can’t expect Canada to defy gravity when the rest of the globe is below sea level in terms of its business activity.”

Venture capital funding for startups and other young businesses declined year-over-year in 2022, according to the CVCA. Still, the average size of deals increased for companies at different points of their growth, from pre-seed to late-stage investments.

Initial public offerings largely disappeared in Canada as financial uncertainties affected companies seeking capital through public markets in 2022.

A total of 706 venture capital deals worth $10-billion were signed in 2022, CVCA said. That’s compared with $14.7-billion across 752 deals in 2021.

Meanwhile, private equity investors contributed $10-billion across 890 deals in 2022, which the CVCA said is a record-high for deal count but a year-over-year decline in total investment value.

The CVCA believes private equity investors are looking to make smaller deals in 2023 because of macroeconomic pressures, such as rising interest rates and tightening monetary policies. Deals under $25-million accounted for 85 per cent of all disclosed private-equity transactions in 2022, the industry group reported.

“Investors are being very careful with deploying any capital,” said Ms. Wherry, who expects a slower pace of deal-making in 2023. While strong figures for job creation and hiring in the Canadian labour market have been a “nice surprise,” she said “massive layoffs and all the other concerns plaguing tech companies are a canary in the coal mine.”

E-commerce, financial technology and logistics businesses are experiencing the sharpest declines in capital fundraising, which Ms. Wherry said is largely because of the loss of consumer confidence and inflationary pressures hitting those sectors the hardest.

Still, there is an abundance of so-called dry powder in the space, Ms. Wherry said.

“At the end of the day there’s a lot of capital – nearly US$3.6-trillion, per estimates – waiting to be deployed. And so, while raising funds may remain challenging for businesses, this normalization is actually a positive thing for the Canadian ecosystem,” she added.

“Because businesses with strong fundamentals will survive and continue to thrive.”