Money

Broken records: Canada’s 2021 venture capital and private equity investments

Record-breaking venture capital (VC) and private equity (PE) investments across Canada continued into Q4 2021 with the information, communications & technology (ICT) sector seeing the largest amount of investment. With a large population of retirees selling their VC shares and new technology and innovation startups on the rise, are these ambitious digital companies the future of VC and PE investing? The Canadian Venture Capital and Private Equity Association’s (CVCA) Q4 report is shining light on the idea.

Venture Capital

The CVCA report found that Q4 VC investment culminated at $2.9B across 184 deals. This pushed Canadian VC investments to end the year at $14.7B invested across 752 deals; more than double the record set in 2019. 2021 also saw 72 mega-deals, the highest number on record. Three significant deals stood out: Ontario’s Wealthsimple at $750M, B.C.’s Trulioo at $476M investment and Ontario-based Applyboard with CAD $375M.1 All three played a major role in the large increase in VC investment in the country.

Closer to home, Saskatchewan saw VC investment rise to $210 million. Will the province see our investment rise higher in 2022, and what do we need to do to make this happen? “While 2021 was a historic year for the Saskatchewan tech ecosystem, we’ve already hit the ground running in 2022 with 7shifts raising $100M in Q1, along with a handful of other deals into promising early-stage companies,” says Sean O’Connor, managing director of Conexus Venture Capital. “With the continued progress of Cultivator powered by Conexus and Co.Labs, a new focus towards supporting agtech, and a renewed STSI program announced we are confident that Saskatchewan is just starting to hit our stride.”

Is ICT Investing the Future?

In Q4, Canada saw the largest VC-backed exit by Québec-based Coveo Solutions at $1.1B IPO on the TSX. This was a part of the 73 VC-backed exits (valued at $9.4B) in 2021 that set another record, this time for the most IPOs at eight (valued at $3.9B). Coveo Solutions is a software-as-a-service search engine that provides “solutions for ecommerce, service, website, and workplace applications.”2 It is no surprise that investors are interested in Coveo Solutions as the mass interest in ICT is most likely due to the present need for technological advancement within Canadian startups and the increasing value of these companies.

The staggering numbers between 2019 and 2021 perhaps can be attributed to the ICT sector. It received 77 per cent of all dollars invested in 2021. VC deals peaked at $9.5B over 431 deals (doubling the previous $4.0B invested in 2019). It is interesting to question why the ICT sector accounts for more than half of the VC investments in Canada. As Canadians continue to navigate an extremely digital age of technology, the prominently innovative ICT sector seems to be a critical area for investors in both Saskatchewan and the rest of Canada and we should expect to see these numbers rise in the future.

Private equity

Following the record-breaking trend seen in 2021, Canada saw the highest private equity (PE) deal count ever. The number of deals increased by 21 per cent, breaking the previous record set in 2019 (661 deals). The mass volume of PE investments in 2021 can be attributed to small and medium-sized Canadian businesses wherein Q4-2021 $4.8B was invested across 215 deals. As PE dollars were invested, and volume figures were returned to pre-pandemic levels, the 2021 year-end total peaked at $18B across 799 deals.

According to Statistics Canada, small and medium-sized enterprises (SMEs) “support over 85 per cent of all new jobs across the country”, and for this reason, SMEs are a driving factor in the Canadian economy.

Saskatchewan saw 16 PE deals in 2021, hitting $37M. Two were buyout or add-on deals totalling $8M, and eight more were growth deals for a total of $9M. Regina’s PFM Capital made the list of most-active PE investors with 13 deals for $58M throughout Western Canada.

“After a very challenging 2020, the private equity markets in Canada were very active in 2021,” says Jeff Linner, chief investment officer of PFM Capital Inc., Saskatchewan’s largest private equity manager. “The combination of a backlog of transactions from 2020 as well as optimism around future economic growth resulted in a significant deal flow increase. At PFM we evaluated and executed on a number of very interesting opportunities across Western Canada and within Saskatchewan in a number of different sectors.”

Although the amount invested in PE returned to pre-pandemic levels in 2021, this transitional period is also owed to the vast number of retirees. Kim Furlong, CEO at CVCA stated “focusing on the mid-market segment with three-quarters of PE investment going to SMEs, this deal activity can in part be attributed to the transition of baby boomers towards retirement. Almost 60 per cent of Canadian SME owners are at or heading towards retirement. In a 2019 study conducted by CVCA and BDC, 49 per cent of SME owners had planned to exit their businesses over the following five years and a significant portion intended to sell to non-family members.”3

Like VC, the ICT sector also led PE investments in 2021, which accounted for 21 percent of all PE dollars invested. 2021 saw 88 PE exits totalling $6.4B, including the highest number of IPOs on record with the second-lowest amount raised on record ($1.9B across 6 IPOs). The largest increase in investment was seen was in financial services (a whopping 1412 per cent increase). According to the report, the pandemic employed the need for “modern, agile, scalable, secure, resilient technology infrastructures”4. The major economic distress that resulted from the pandemic meant that companies had to redefine and adapt essentially overnight to navigate the increasingly uncertain waters. Lastly, financial services saw a large increase due to the pandemic’s push to create more digital ways of receiving these services efficiently and safety.

Overall, 2021 saw most sectors’ investments increase compared to 2020 and 2019. What 2022 will bring remains to be seen, however Q1 is already showing significant promise for the year.

References

1Canadian VC and PE Market Overview, Canadian Venture Capital and Private Equity Association, 2021, https://www.cvca.ca/research-insight/market-reports/year-end-2021-canadian-vc-pe-market-overview.
2This Is Coveo, Coveo, https://www.coveo.com/en/company/about-us.
3 Canadian VC and PE Market Overview, Canadian Venture Capital and Private Equity Association.
46 Trends That Will Shape The Financial Services Industry In 2021, Forbes, 2021, https://www.forbes.com/sites/googlecloud/2021/02/05/6-trends-that-will-shape-the-financial-servicesindustry-
in-2021/?sh=4ae851a942b6