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Horizons: Family Office & Investor Magazine

Spotlight: VC & PE boom in Canada expected to continue

Monday, September 16, 2019

Mike Woollatt is Principal - Fund Investments and Co-Investments at Hamilton Lane and leads the firm’s office in Toronto. He has more than 20 years of professional experience, including as the CEO of the Canadian Venture Capital and Private Equity Association (CVCA) from 2014 to 2018. Most recently, he was the Director of Strategic Partnerships at OMERS.

VC & PE boom in Canada expected to continue

Mike Woollatt: Hamilton Lane has been investing in Canada for some time now, though historically more so on the private equity side. However, over the last decade or more, we’ve become much more active in the venture capital and growth equity space, having invested several billion dollars in the last decade alone. And while most of that is in the US, we have been seeing more and more strong opportunities outside the US.

We have seen a lot of opportunity in the venture and growth equity market in Canada. For some time now we’ve heard that Canada is “having a moment,” but the moment has been going on for long enough that at this point, it’s more adequately labeled as a fundamental shift. Canadian VC and growth equity has seen a substantial ramp-up in dollars invested – growing rapidly over the past five years.

There are a number of factors that could make Canada quite attractive from a venture and growth equity perspective. It has one of the highest educated populations in the world; it’s a relatively cheap place to start and build a company; has large tech job growth; leads the G7 in economic growth; has preferential access through trade agreements to several countries; and is a diverse and inclusive population. As well, it’s proximity to the US market can be a big advantage as well. In terms of sectors, it has gained a substantial reputation in the fields of AI, biotech and fintech, amongst others - all of which have drawn a good deal of interest and capital.

Another factor why Canada may be attractive is that despite all this attention that this market is now getting, it is still slightly less competitive on the investment side. As a result, there are still pockets of value-based opportunities in Canada in a world of higher and higher valuations.

When you look at the dollars invested in Canada, roughly half is from US venture funds, which we think demonstrates that the ecosystem in Canada is robust and may attract top caliber investors. It’s also due to the fact that Canada tends to be dominated by smaller-sized funds than in the US, leading them to fill the later rounds, writing the larger checks. Some of the strongest Canadian funds work this proactively and are partnering routinely with the same US funds with the aim of getting their companies to scale.

Matthias Knab: Canada also has world-class pension funds which are recognized for their investment acumen. Have they gone into the venture side as well or are they thinking about it?

Mike Woollatt: We are blessed with world-class pensions for sure. And yes, a few of them are now quite active in the venture space. In fact, some have been there for a quite a while albeit mostly on the global stage as they have largely been outsized for the opportunities in the Canadian market until recently. As I mentioned, the Canadian venture funds have tended to be smaller than US funds, creating a size mismatch with some of the globally large Canadian pension plans – but this appears to be changing.

Matthias Knab: Let’s look at the other side of the equation – the exit from a VC investment. What has Canada going there, is the country standing out somehow?

Mike Woollatt: Canada, like virtually everywhere else, is seeing longer hold periods for sure. That said, the number of quality exits is increasing, similar to what we are seeing the US of late. Companies like Shopify, which went through their IPO in 2015 may be seen by some as the shining beacon of Canadian exits – perhaps even globally given what has happened to its market cap since then. But there are a number of other recent Canadian company IPOs including Zymeworks, Clementia and Lightspeed and M&A exits such as SkiptheDishes, Bitstew and Luxury Retreats amongst many others that demonstrates Canada’s strong exit environment. It is this robust M&A environment, along with world- class artificial intelligence research, amongst other sectors, that have caused companies like Google, Cisco, Amazon, Microsoft, Uber, Samsung to all open offices and tech hubs up here, while also looking for buying opportunities. This has helped improve the liquidity in the Canadian ecosystem.

To us, Canada feels like the Israeli venture and growth equity market did say 10 years ago or so. There is a real opportunity from that perspective for the Canadian market to grow, but most importantly has the potential to provide positive returns for investors. Here is an interesting slide from a CBRE report that also backs up what I have been saying on Canada and tech talent - look at the standouts of Vancouver and Toronto particularly. On this graph, bottom right is the best place to be: low cost, highly skilled labour.

 
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