Canadian PE thrives, VC dives

As Canada’s venture capital investments suffered a 12 percent year-over decline in the second quarter, private equity deals surged to a record C$55.6 billion, well outperforming last year’s total deal volume of C$11.6 billion.

Canadian buyouts hit a record C$55.6 billion ($52 billion) in the second quarter, far surpassing last year’s total of C$11.6 billion, according to Canada’s Venture Capital & Private Equity Association.

“It’s dramatic,” said Rick Nathan, CVCA President and managing director at fund of funds manager Kensington Capital Partners.

He said the numbers are just as striking even without June’s BCE deal, in which Ontario Teachers’ Pension Plan, Providence Equity Partners, and Madison Dearborn Partners agreed to a transaction worth C$51.7 billion, including C$16.9 billion of debt.

“If you take Bell Canada away, we’re already at C$13 billion [for the second quarter], compared to last year’s full year of C$11 billion,” Nathan said. “So we’re already at more than double the pace of last year, which was a record year.”

The growth in the Canadian buyout sector has been phenomenal, but “not at the same level of the US or Europe,” Nathan said. “Now with the Bell Canada deal, it essentially marks the arrival of megadeals into our market.”

Though credit markets have changed since this data was collected, Nathan said the viability of the country’ private equity market isn’t likely to be as affected as other countries, considering the bulk of deals done in Canada are in the C$200 million and lower range.

The same sort of stellar growth is not being seen, however, in Canadian venture capital. Investments last quarter totaled C$426 million, down 12 percent from the same period in 2006.

“On the venture side, the Canadian market is pretty soft and has never really recovered from the dotcom, telecom meltdown,” Nathan said. “There are some real challenges here. Fundamentally, there’s just not enough capital.”

Buyout funds are attracting more LP capital than venture funds based upon strong performance in the past few years, he said.

“The venture guys effectively are competing with the buyout guys for this capital, and the buyout guys just have way better numbers,” Nathan said. “There are obviously some Canadian venture funds that have good numbers, but we’ve previously released performance data for our buyout sector that shows 5-year [and] 10-year performance data in the range of 20 percent, as an average for the industry.”

Those numbers are chart-topping, he said. “When you look at our venture data, the averages are basically what you’d earn in T-bills. So if you’re a big pension fund, you’re going to pick buyout.”