As the venture capital landscape in Canada experiences robust growth, the evolution of the country’s limited partner (LP) resources remains an ongoing process. Large institutional investors, such as public pension funds, typically keep their venture capital investments minimal due to the inherent risks. As mergers and acquisitions (M&A) and initial public offerings (IPOs) become less frequent, the resulting lackluster distributions have led to a waning interest in this asset class among some LPs.
Nevertheless, this has opened doors for international LPs to step in to fill the void, paralleling the increase in foreign investments in Canadian enterprises. According to the Business Development Bank of Canada’s May 2023 report, for the first time in nearly two decades, more than half of Canadian venture transactions have been driven by foreign investors.
While investment levels from United States venture capitalists have remained steady, there has been a noticeable 6 percent rise in involvement from investors in Asia, Europe, and other non-North American regions. First-time fund managers and those concentrating on early-stage companies have felt the brunt of the local capital shortfall, with most institutional investors expressing a preference for later-stage ventures that demonstrate more stable revenue streams and market strategies.
In response to the dearth of early-stage funding, some domestic entities like the BDC have increased their commitments. The BDC announced an additional $50 million injection into its Seed Venture Fund, which has supported over 190 Canadian startups since its inception, leading to a collective $1 billion in subsequent fundraising.
The BDC also plans to enhance its collaboration with incubators, accelerators, innovation hubs, angel investors, and early-stage investment partners throughout Canada. Chris Arsenault of Inovia Capital, which garnered $325 million for its latest fund in June 2022, points out the limited capital availability from Canadian LPs, despite the heightened interest in Canada’s venture capital market. Inovia Capital has been proactive in engaging with funds of funds, pension funds, family offices, and individual investors to foster recognition of homegrown potential.
Despite a burgeoning talent pool and the ambition to build major domestic companies, Arsenault acknowledges that the capital essential for these endeavors surpasses the capacity of Canadian LP backers. His preference for Canadian over foreign LPs is rooted in the belief that local investment helps reinforce a pattern of success that can be replicated across the investment ecosystem.
Inovia’s funds boast prominent Canadian investors, such as BDC, CDPQ, BCI, Alberta Enterprise, British Columbia Renaissance Capital Fund, and Teralys Capital, as well as significant US LPs like BlackRock, Hollyport Capital, and HarbourVest. The firm has also been extending its reach to European institutional investors after initially connecting with high-net-worth individuals and family offices.
According to the CVCA’s February report, early-stage deals, from pre-seed through Series B, made up 84 percent of venture deals in Canada in 2023. This suggests a shift towards more VC funds investing earlier in company lifecycles. However, Canadian LPs, particularly pension funds, continue to favor later-stage companies, often beginning with Series C investments.
John Birch of CDPQ echoes the sentiment that Canada would benefit from more VC funds with less than $100 million in management to support seed-stage ventures. Teachers Venture Growth (TVG), part of the Ontario Teachers’ Pension Plan, is one LP that targets seed and Series A funds, though its $7.7 billion asset base is primarily directed towards direct company investments.
TVG’s investment strategy, while global, includes exposure to Canadian startups through its venture funds. The focus has narrowed to certain sectors like enterprise software, fintech, healthcare services, supply chain logistics, and climate tech. With team members dedicated to each sector, TVG stays abreast of industry developments, a practice that led them to meet with 2,000 companies in 2023 to identify potential category leaders.
John Ruffolo of Maverix Private Equity anticipates fundraising challenges for Canadian fund managers and entrepreneurs over the next couple of years due to the limited pool of LP capital. He warns that the balance between Canadian and foreign capital warrants attention, particularly as US investors refocus on domestic opportunities amidst their fundraising hurdles.
Despite these challenges and the slow exit market impacting LP distributions in Canada, similar to the US, there remains an interest in the venture capital asset class. LPs are expected to be selective with their re-investments, focusing on funds with impressive performance or promising prospects.
