Canada’s Venture Capital & Private Equity Association, which represents more than 1,500 private equity firms in the country, has called on the federal government to support programmes and initiatives to strengthen the venture capital sector and spur much-needed investment in emerging technology-based companies.
The CVCA recommends setting up third-party managed fund of funds to help fuel private sector growth and increasing government procurements to encourage investment in venture capital funds. The group also called for incentives for large Canadian corporations to invest in venture capital funds, such as the kind of tax breaks currently available for in-house research and development.
“Canada’s investment in innovation is dramatically below what is required for Canada to compete on the international economic stage,” CVCA president Gregory Smith said in a statement. The CVCA represents firms with more than C$75 billion (€51 billion;$70 billion) in capital under management, with a focus on buyout funds, mezzanine debt and venture capital.
Venture capital investment in early stage Canadian companies dropped 42 percent between 2002 and 2007, with firms in the life sciences, high-tech, biotech and cleantech sectors among the hardest hit. The trend has continued in 2008, as activity in the venture capital market was down 31 percent in the second quarter from a year earlier, marking its lowest recorded level in three years.
The number of Canadian firms receiving venture funding also fell during the quarter to 105 from 142 in 2007.
The government has begun stepping in to help the situation. The Ontario government recently launched the $205 million Ontario Venture Capital Fund, managed by Canadian fund of funds manager TD Capital Private Equity Investors, to help counter the lack of early stage investment in its region.
The government contributed $90 million to the fund, with other investors including Canadian financial services company Manulife Financial, Business Development Bank of Canada and OMERS Capital Partners, the private equity investment arm of the Ontario Municipal Employees Retirement System. A second close is being eyed for late 2008, with more than 75 percent of the capital to be invested in venture capital and growth funds.
Despite the slowdown in the country's venture capital sector, the private equity buyout industry has remained strong with C$718 million raised in the first half of 2008. Venture capital firm Covington Capital and private equity firm Clairvest were both recently recognized by the CVCA for successful investments.
Covington, one of Canada’s largest providers of venture capital funds with over C$400 million in managed assets, exited its investment in virtualization-technology firm PlateSpin this year with an internal rate of return of 117 percent. Mid-market investor Clairvest’s 2000 investment in Canada’s Gateway Casinos has generated a 50 percent internal rate of return.