Bank towers are shown from Bay Street in Toronto's financial district.Adrien Veczan/The Canadian Press
Driven by foreign-funded megadeals, private-equity investment in Canada saw a comeback in the first six months of 2017, with more capital invested in the first two quarters than in all of 2016.
The first half of the year saw 277 private-equity deals worth a total of $13.9-billion, according to a report from the Canadian Venture Capital and Private Equity Association (CVCA), which will be published on Wednesday. That's more than the $13.8-billion invested over the course of 2016.
Much of the growth came from two U.S.-financed deals worth much more than $1-billion each. In March, Texas-based Vista Equity Partners LLC took Toronto-based fintech firm DH Corp. private for $4.8-billion. In May, New York-based Rhone Capital acquired Montreal-based private security company GardaWorld Security Corp. for $2.2-billion. Together the deals accounted for more than 50 per cent of the value of all private-equity investments in the first two quarters.
"The return of those mega deals, the $1-billion-plus deals, that's heartening to see again," said Darrell Pinto, CVCA's research director and author of the report. Large-scale foreign private equity investors have shied away from Canada over the past several years, owing to the energy-market slump caused by low oil prices, he said.
Oil and gas deals made up only 9 per cent of the total number of private-equity deals in the first half of 2017, compared with 19 per cent in 2013. At the same time, information and communications sector deals made up 17 per cent of all private-equity deals in 2017, up from 10 per cent in 2013, and manufacturing sector deals made up 22 per cent of all deals, up from 14 per cent in 2013.
"Now what we're seeing is other non-traditional private-quity sectors like [information and communications technologies] receiving a larger share of dollars than they did four or five years ago. It's really the innovation that's being forced on the private-equity players as a result of depressed oil prices," Mr. Pinto said. "They're not investing to the same scale of deals as they would with an oil and gas deal, but to me, it is still an interesting foray into non-traditional sectors."
Another trend of note from the first half of the year is the increasing number of exits – when a private-equity firm closes its position in a company, through an initial public offering for instance. The CVCA recorded 80 exits in the first six months of 2017, which is more than the total number of exits in each of the past four full years.
"Valuations over the past few years have been climbing higher, which is great if you're trying to sell a company, not great if you're trying to buy a company," Mr. Pinto said. "They seem to have settled down to a point this year where we're seeing more M&A activity and, to some degree, IPOs."
The first half of the year also saw strong activity on the venture-capital side, with 260 deals involving Canadian startups and early-stage companies, worth a total of $1.6-billion. Venture capital investment in the first quarter was down year-over-year, compared with a record first quarter in 2016. But the second quarter saw strong year-over-year growth of 28 per cent, buoyed by the enormous $141-million raised by Montreal-based artificial intelligence company Element AI.
Over all, the strong numbers posted in the first half of 2017 suggest continued growth in venture-capital interest in Canadian companies, Mr. Pinto said. "Since the recession, we've seen it steadily increasing year over year, both in terms of dollars as well as the number of deals."
That trend is likely to continue, with the increasing success of startup clusters in major cities such as Toronto, Vancouver and Montreal, Mr. Pinto said. "They're doing these amazing jobs in creating this environment where startups get to thrive and eventually mature and receive later rounds [of funding]. That's really kicking in now."