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U.S. firms driving Canadian venture capital

Finally, there is some good news in venture capital in Canada. Investment in the Canadian sector jumped to $2.1-billion - a 21% increase from the $1.7-billion invested in 2006. But with upswing comes with a kicker: the increased activity is coming from record investments by U.S. venture capital firms - not by Canadian investors.

Whereas Canadian VC investment dropped last year, U.S. venture firms increased their spending in Canada by 53%. Foreign capital now represents 41% of all investment dollars across Canada and 53% of investments in Ontario, according to a statistical report released by Canada's Venture Capital and Private Equity Association and Thomson Financial.

While there is good news in the money available to start-up companies there is a serious concern in the domestic VC sector. Last year Canadian firms raised only $1.19-billion compared to $1.64-billion in 2006. This downturn reflects the continued difficulty experienced by labour-sponsored funds. Labour-sponsored fundraising declined 18% last year hitting a low of $741-million.

So while the news of VC investments is good, "we need strong Canadian investors if we want strong Canadian companies," says Rick Nathan, president, CVCA and managing director of Kensington Capital Partners.

Ontario still remains the largest market for venture capital investment in Canada, representing 46% of all activity. Last year, the province received $937-million for 124 companies, which represents a 35% jump from 2006. Quebec investment totaled $648-million, representing 8% jump from 2006. Investment in British Columbia also increased a marginal 3% to hit $310-million.

The majority of the dispursements, representing 52% of money raised, is pouring into the IT sector-particularly the Internet-based businesses which received $411-million in 2007 compared to $92-million in 2006. Pharmaceutical and life science investments also jumped 23%, which represents $633-million in new money available.

Canada has hit a new historic high for private-equity deals: and it's not all due to the mammoth BCE Inc. deal. Last year, the total value of Canadian company buyouts hit $65.5-billion, and while the $46.8-billion BCE buyout represents a sizeable chunk of the overall figure, the remaining $18.7-billion pumped into 180 deals is more than double the previous record of $8.2-billion recorded in 2006, according to a report released today Canada's Venture Capital and Private Equity Association Thomson Financial.

There's no doubt that much of the action took place in the early half of 2007-before the subprime crisis led to a severe credit crunch. But the $2.3-billion of buyout activity reported in the fourth quarter of 2007 represents a 64% increase in the fourth quarter of 2006. "The fourth quarter numbers were quite solid even though we aren't seeing the mega deals because of the tighter credit environment," says Rick Nathan, presicent of CVCA and manaign director of Kensington Capital Partners. "Although the market dropped from the first half of 2007, the numbers prove that in the mid-market range, transations remain very active in Canada," he adds.

kmazurkewich@nationalpost.com

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