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U.S. President Donald Trump is seen in this file photo.

Kevin Lamarque/REUTERS

Mounting trade tension and corporate tax-rate disparity with the United States threaten to crimp a boom in private-equity deal-making in Canada, the head of the industry's umbrella group says.

A strong Canadian economy attracted record amounts of private capital in 2017, with the biggest deals in financial technology, security services and gold mining, the Canadian Venture Capital and Private Equity Association (CVCA) said in its annual market overview.

However, the increasingly troubled trade relationship with the United States is fraying investor nerves, said Mike Woollatt, chief executive officer of the association.

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Trade friction intensified on Monday when U.S. President Donald Trump threatened to hit Canada and Mexico with hefty tariffs on steel and aluminum until the two countries agree to a renegotiated North American free-trade agreement.

"What happens to NAFTA is something that the private equity industry writ large is watching very closely," Mr. Woollatt said in an interview. That is especially a worry for investors in industrials, manufacturers and consumer retail companies that have large proportions of customers in the United States.

Secondly, the CVCA has heard from members that the recent cut in U.S. corporate taxes under the Trump administration has raised questions about Canada's ability to compete for capital, he said.

As a result, some mid-market private equity firms "are more in sell mode" in a global environment in which more than $1-trillion of capital from private-equity firms and pension funds is in the hunt for assets, Mr. Woollatt said.

Last year, investor confidence shone bright, which played out in record private-equity deal flow. According to CVCA, $26.3-billion in private capital was invested in an unprecedented 603 separate deals. The dollar value was almost double the total in 2016.

The largest deals included the $4.8-billion privatization of financial tech player DH Corp. by Vista Equity Partners; $2.2-billion acquisition of Garda World Security Corp. by Apax Partners LLP and Rhone Group LLC; and $1.1-billion funding for Osisko Gold Royalties Ltd. from Caisse de dépôt et placement du Québec and Fonds de solitarité FTQ.

Activity was also brisk in the small- to mid-market segments with deal value between $25-million and $100-million – 66 transactions with a total value of $3.9-billion. Canada is well known in the private capital world for opportunities in such segments, market players say.

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One big change in recent years has been a pullback in private equity from Canadian oil and gas deals as the downturn in crude prices and a shortage of export pipeline capacity made it difficult to exit investments.

"It's a bit of a sea change. What used to drive a lot of the growth was oil and gas, in both activity and dollars," Mr. Woollatt said. "What we're seeing now is the industrial and manufacturing driving activity. And information and computer technology [ICT] is a big player in the private equity side now."

In 2017, there were 117 deals in industrial and manufacturing, 98 in ICT and 78 in consumer and retail, the report showed.

Exits of investments included six initial public offerings, 134 merger and acquisition deals and eight secondary buyouts. All are increases from 2016.

Venture capital has also picked up steam. VC investment increased by 11 per cent in 2017, totalling $3.5-billion in 592 transactions, the association said. The average deal size was nearly $6-million, unchanged from last year.

Quebec tech firms dominated fundraising for early and late-stage capital. Lightspeed POS Inc. raised $207-million, Element AI Inc. $141-million and Leddartech Inc. $128-million.

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"On the venture side, we're having a tech and a health-and-life-science moment in terms of innovation, and it's driving growth," Mr. Woollat said.

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