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CVCA and Réseau Capital – Q3 2022 Market Overview

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Capital Markets and Mergers & Acquisitions Bulletin

The Canadian Venture Capital & Private Equity Association (“CVCA”) has released its Canadian market overviews for Q3 2022, which are based on data voluntarily submitted by a selection of venture capital[1] and private equity firms[2]. In conjunction, Le Réseau capital d’investissement au Québec (“Réseau Capital”) published its overview of the Québec venture capital and private equity markets for Q3 2022[3].

CVCA Venture Capital (VC) Canadian Market Overview

  • Total Q3 investment was $896 million, spread over 144 deals, bringing the 2022 YTD total to $7.2 billion, spread over 520 deals. These numbers reveal a quarter-over-quarter drop of 50% in terms of dollars invested and a 25% drop in deal count, but ultimately represent a normalization from the highly anomalous 2021 and a return to pre-pandemic levels. According to the CVCA, this decline is primarily attributable to macroeconomic factors, as investors remain concerned by inflation and a tightening monetary environment, and founders are opting to raise smaller amounts to preserve equity until market conditions improve.
    • The decline in VC investment is observable in both early and later stage investments, though early and seed stage companies have demonstrated the most resilience. Combined, investment into early and seed stage companies represent nearly 88% of VC dollars invested this quarter.
    • The average disclosed VC deal size in 2022 YTD was $13.76 million, surpassing the 5-year average by 26%. The vast majority (83%) of these deals were valued below $20 million, with approximately one third of all disclosed deals falling between $5 million and $20 million.
    • VC funds invested in 2022 YTD have been concentrated, unsurprisingly, in Ontario (48%), Québec (28%), and British Columbia (13%), though it is worth noting that Alberta has had an exceptionally strong year, particularly in terms of number of deals recorded. The CVCA also noted a marked rise in investment in Atlantic Canada, in particular, Nova Scotia and New Brunswick.
    • Cleantech and agribusiness stand out as two sectors in which growth is continuing despite downward trends elsewhere in the market. While the information, communications and technology (ICT) sector continues to outpace pre-pandemic levels, 2022 nevertheless will not replicate the outstanding figures observed in 2021 in this sector.
  • Venture debt activity historically bears a close relationship with uncertainty in public markets. As of Q3, venture debt is on pace to hit a new record in 2022, as founders are using different tools at their disposal to raise non-dilutive capital. For 2022 YTD, venture debt deals (which are not included in the figures for overall Canadian VC activity), have reached $543 million, invested over 91 deals. The majority of these venture debt deals took place in Ontario, British Columbia, and Alberta, with it being seemingly much less popular in Québec.
  • VC exit activity has slowed this year, and there have been no IPOs on record to date. That said, as of Q3, M&A exit activity for 2022 still looks on pace to match 2020 pre-pandemic levels.
  • As the economic outlook remains uncertain, with both inflation and interest rates on the rise, VC investors will be closely monitoring market conditions in anticipation of an inflection point, while founders are attempting to hold off on fundraising at decreased valuations. In this uncertain climate, venture debt is on pace to hit a new record, and traditionally VC-backed companies might be looking at alternate methods to go public, such as listing via a special purpose acquisition company (SPAC).

CVCA Private Equity (PE) Canadian Market Overview

  • Total Q3 investment was $2.4 billion, spread over 199 deals, bringing the 2022 YTD total to $6.5 billion, spread over 622 deals. These numbers generally represent a return to pre-pandemic levels after a highly anomalous 2021. In light of macroeconomic factors and general market uncertainty, probably the most significant finding is that while deal count is actually up a bit compared to Q3 2021, there is a notable decline in overall PE deal value in 2022.
    • A quarter-over-quarter analysis and historical review demonstrate that while the 2022 YTD deal count is up 35% vis-à-vis the five-year average, total investment value is substantially down. The most notable rise in Q3 2022 is the number of PE investments in buyout and add-on deal types of smaller sizes, with investors prioritizing deals that are easier to finance and less subject to valuation adjustments. Also notable is a continued and steady stream of minority investments being made by PE firms, which account for about a quarter (26%) of all PE activity for 2022 YTD.
    • In terms of deal size, there has been only a single deal valued at over $500 million, while deals under $25 million have comprised the vast majority (86%) of all disclosed PE transactions for 2022 YTD. Average deal size continues to decrease steadily, having reached an all-time annual low in Q3. That said, these figures underscore the continued importance of small and medium-sized businesses, which have always represented the largest percentage of Canadian PE investment activity.
    • PE funds invested in 2022 YTD have been concentrated, unsurprisingly, in Quebec (56%) and Ontario (30%). British Columbia and Alberta also saw significant investment.
    • The industrial and manufacturing sector continues to lead investment activity in 2022, with the other top sectors being information, communications and technology (ICT), life sciences, and business products and services.
  • PE exit activity via M&A is outpacing the five-year average in terms of number of transactions, but trailing behind in total value by a substantial margin (48%) as exit values faced downward pressure. Drops in liquidity markets, valuation adjustments, and global economic uncertainty have all contributed to the lowered value in portfolio exits. There have been no IPOs so far in 2022.
  • As the economic outlook remains uncertain, with both inflation and interest rates on the rise, PE investors will be closely monitoring market conditions while favoring add-on acquisitions and smaller deals, which are easier to finance and less subject to price adjustments and general market volatility. They will also continue to provide much needed capital to small and medium enterprises, which, according to CVCA figures, have long been the most important sector for PE investment and the engine of job creation in Canada.

Réseau Capital Overview of the Québec VC and PE Markets

  • As is the case elsewhere in Canada (and in the United States), inflation, rising interest rates and supply chain issues are creating uncertainty that is impacting the business environment in Québec.
  • In Q3 2022, Québec saw nearly $1.74 billion invested across 141 deals in venture capital and private equity investments. These numbers show a slowdown in both VC and PE activity. While the deal count is holding relatively steady compared to the first two quarters, investment value has dropped not only compared to Q1 and Q2, but also compared to previous years.
  • In terms of VC activity, for 2022 YTD, Québec has accounted for 19% of deals and 28% of investments. While Ontario remains by far the most active player, Québec came in well ahead of British Columbia and the other provinces. As highlighted by the CVCA overview, early-stage deals were the mainstay of venture capital activity in Q3. That said, after only three quarters, late-stage investments in 2022 ($1.19 billion) have surpassed the entirety of 2021 late-stage investments ($1.12 billion), setting a new record in Québec.
  • In terms of PE activity, for 2022 YTD, Québec has accounted for 55% of deals, coming in substantially ahead of both Ontario (23%) and British Columbia (14%). Québec also led the field in terms of deal value. As highlighted by the CVCA overview, investments in the industrial and manufacturing sector, as well as in the business products and services sector are dominating, while deal values in other sectors are experiencing a notable decline, particularly in terms of deal value.

[1] YTD Q3 2022 Canadian Venture Capital Market Overview

[2] YTD Q3 2022 Canadian Private Equity Market Overview

[3] Québec Venture Capital and Private Equity Markets (en français seulement)

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