CANADIAN PE SEES SLOW START, VC INVESTMENT BOOMS

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1 2016: I CANADIAN PE SEES SLOW START, VC INVESTMENT BOOMS 4,8» ADD-ONS HIT 68% OF ALL 1Q BUYOUT ACTIVITY PAGE 5» MEDIAN SERIES A SIZE SLUMPS TO C$5.9M PAGE 9» LEAGUE TABLES PAGE 12»

2 Credits & Contact PitchBook Data, Inc. JOHN GABBERT Founder, CEO ADLEY BOWDEN Vice President, Market Development & Analysis Content GARRETT JAMES BLACK Senior Analyst NIZAR TARHUNI Senior Analyst BRIAN LEE Senior Analyst JENNIFER SAM Senior Graphic Designer Contents Contact PitchBook pitchbook.com RESEARCH Introduction 3 Private Equity Overview 4 5 PE Deals by Sector & Size 6 EDITORIAL editorial@pitchbook.com SALES sales@pitchbook.com PE-backed Exits 7 Venture Capital Overview 8-9 VC Rounds by Size & Sector 10 VC-backed Exits 11 League Tables 12 COPYRIGHT 2016 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an offer to sell, or a solicitation of an offer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment. Table of contents photo credit: Tobias Alt, Wikimedia Commons 2

3 How has Canadian PE & VC activity fared in the slowdown? Introduction On the private equity front, yearly activity has continued to move higher in Canada. Last year saw a record amount of activity and capital invested, and while value has subsided a bit recently, the country remains poised to house a rather significant portion of supplemental add-on transactions. Further, while flexible lenders remain willing to fill the void, traditional banks have been forced to pare back in the U.S. On the other hand, major bank players in Canada remain more than willing to help back sponsors, and consequently, deal flow across the Canadian middle market has performed quite well in recent years. Looking at venture capital activity, from to total venture investment in Canadian startups increased by close to 31 in terms of completed rounds, rising from 156 to 483. Since then, completed financings have diminished in number somewhat, but last year saw no less than C$2.2 billion invested in total, far and away the greatest annual tally recorded in the decade. What has transpired in the Canadian venture scene since, amid a global slowdown in venture capital activity, is explored in the following pages. The analysis within this report is based on PitchBook datasets as well as insights gathered from our professional network abroad; we hope that it helps inform your decision-making process in the coming quarters. As always, if you have any questions or comments, feel free to reach out to us at reports@pitchbook.com. YOUR JOURNEY TO STRONGER RETURNS STARTS HERE The PitchBook Platform for private equity Strengthen your LP relationships Build a better portfolio Exit efficiently and successfully Elevate your firm with award-winning technology With data on: Companies Investors Deals M&A Limited partners Funds Financials Advisors People Request a free trial GARRETT JAMES BLACK Senior Analyst demo@pitchbook.com US UK +44 (0) pitchbook.com 3

4 Shifting lower Private equity overview With just shy of C$49 billion invested last year across 283 completed deals, the Canadian private equity market experienced a record in terms of both deal value and volume. Zooming in to quarterly activity, however, aggregate deal value declined in 2H, with volume moving significantly lower last quarter. We ve seen a similar 1Q drop-off in activity across the global PE landscape and to reiterate what we have touched on previously, we view this as a natural progression of the PE cycle within the Canadian market as well not a signal of any fundamental shifts in the PE dynamic. Another contributor to the declining 1Q activity experienced stems from an issue we saw impact U.S. managers this year as well. Many transactions expected to close in 4Q found themselves subject to extended negotiating periods, and as those deals remained live through the New Year, many managers were forced to remain focused on getting those processes closed before moving on to sourcing and executing new transactions, especially in an environment where many dealmakers will tread more cautiously. Last year was an all-time high in both value and volume Canadian PE activity 130 C$ is off to a slow start, with activity down by nearly 33% and total deal value by close to 16%, both QoQ Canadian PE activity C$43 Deal value (C$B) # of deals closed C$ C$ C$27 C$ C$34 C$46 C$ Deal value (C$B) # of deals closed C$3 C$3 C$5 C$6 C$8 C$5 C$6 C$9 C$10 C$12 C$6 C$9 C$12 C$11 C$13 C$10 C$14 C$14 C$13 C$8 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

5 The current Canadian market can be defined by volume much more than value, and activity remained strong through the end of. Over C$8 billion was invested by PE managers in 4Q, which represents a quarter-over-quarter (QoQ) decline of over 35%, yet deal counts remained flat during that period. As smaller transactions continue to emerge in the country, Canada has seen itself subject to a rather hefty amount of add-on activity. Businesses need to be resilient at this stage of the business cycle and general partners have been able to take advantage of smaller and lower multiple deals to help underpin their current assets. Thus far into Smaller transactions translate into greater add-on percentages Canadian add-on activity Through the end of 1Q, U.S. and Canadian firms are more evenly matched Unique PE investor count by location of headquarters % Add-on Non add-on Add-on % of buyout 68% 62% 61% 61% 54% 58% 56% 53% 44% Canada United States Other , Canadian PE-backed bolt-ons accounted for 68% of all PE activity, relative to 61% in all of, 56% in, and even less in. With many sellers exiting at attractive market prices over the last couple of years, assets that have changed hands into PE portfolios are still relatively fresh, so it will take some time before those assets have been groomed enough to come to market. Thus, we likely won t see an uptick in Canadian deal flow, yet we shouldn t see a significant decline either as we settle into a new medium-term normal. On a positive note, the debt concerns that have impacted U.S. dealmakers at the high end don t necessarily come in to play in Canada. Banks in the country remain very well capitalized and have continued to move aggressively to back sponsors as they still represent the bulk of all deal lenders. Plus, the majority of Canadian transaction values are typically lower than what we see in the U.S., so the sheer amount of capital that lenders are on the hook for is simply less. On a sector basis, the activity around energy, or lack thereof, has been interesting. As we saw oil prices deteriorate last year, many U.S. fund managers closed on rather outsized energy-focused vehicles and we expected to see an uptick in distressed opportunities in the U.S. that would also make their way into the Canadian market. However, both E&P and service companies have relied on heavy slashes to capex and headcount to help clean up their balance sheets, and now that we ve seen crude oil prices rise to the mid-$40 range this year, many businesses are finding themselves able to stay afloat and stop the bleeding to an extent. PE funds may be looking for another leg lower in prices to subsequently acquire assets at what they deem the bottom of the oil price cycle, but the reality is, as prices have inched higher this year, energy activity has been and will probably remain silent. 5

6 PE deals by sector & size Canadian PE deals (#) by deal size C$2.5B+ C$1B-C$2.5B C$500M-C$1B More than two-thirds of all 1Q deals were valued at less than C$250M, signifying PE firms focus on smaller transactions. C$100M- C$500M C$25M- C$100M Canadian PE deals (C$B) by deal size C$2.5B+ 1 Under C$25M C$1B-C$2.5B C$500M-C$1B IT and consumer deals both saw increases in their percentage of 1Q deals relative to previous years. 1 C$100M- C$500M C$25M- C$100M Under C$25M Canadian PE activity (#) by sector Canadian PE activity (C$B) by sector B2B B2B B2C B2C Energy Energy Financial Services Healthcare Financial Services Healthcare IT IT 1 Materials & Resources 1 Materials & Resources 6

7 PE-backed exits Canadian exit activity was rather resilient in, with more than C$18 billion worth of PE-backed sales closing across 95 exits. On a yearly basis, that reflects a year-over-year jump of near 4% in terms of total value and a jump in volume. While the Canadian PE market has historically been driven in large part by manufacturing, recently we ve seen a trend upward in B2B and technology deals, and last quarter, we experienced a heavy B2C push. C$3.8 billion of Canada s 1Q PE-backed exits were consumer deals, which equates to more than half of all PE-backed consumer exit value and more than all of and combined. B2C exits were also responsible for the bulk share of all Canadian PE sales in 1Q. With a volatile yet weaker Canadian dollar, consumer companies with cost structures in Canada, but selling abroad, can serve as a fairly attractive opportunity for foreign investors. Further, as PE sponsors and strategics Canadian PE-backed exits 31 C$5 43 C$10 Exit value (C$B) 34 C$16 38 C$4 62 C$13 look to adjust their businesses to withstand changing consumer spending habits, the need to grow acquisitively remains present, and thus managers holding quality brands and concepts have found success either selling to strategics or serving as attractive add-on opportunities for PEbacked portfolio companies. In terms of exit strategies, the same avenues that have dominated the global PE market applied to Canada, with 76% of all PE sales moving to strategics and the remainder moving in secondary buyouts. 67 C$14 # of exits 63 C$26 74 C$13 79 C$18 95 C$18 17 Canadian PE-backed exits (#) by type 1 Canadian PE-backed exits (C$B) by type 1 Corporate Acquisition IPO Secondary Buyout Corporate Acquisition IPO Secondary Buyout 7

8 Somewhat unscathed? Venture capital overview Canadian startups enjoyed a remarkably strong run of venture funding to kick off 2016, with a bevy of large raises pushing total capital invested to a decade high of C$880.7 million across 103 rounds. Even though the volume of funding was below previous quarterly highs, it decreased less than what has been observed in many other VC markets is unlikely to see levels of financing similar to or, but its strong start speaks to some of the key differentiators of the Canadian venture scene, which include geographic fragmentation, access to capital, proximity to the U.S., recently increased government focus and a broader economy that is trying to reshift from being overly dependent on commodities. Not so much of a slowdown in VC for Canada Canadian VC activity 139 C$0.9 Deal value (C$B) # of deals closed C$1.1 C$ C$ C$ C$ C$ C$ C$ C$ C$0.9 1Q 2016 was the strongest quarter on record for total capital invested in Canada Canadian VC activity C$1,000 C$900 C$ C$600 C$500 C$400 C$300 C$200 C$100 C$0 Deal value (C$M) # of deals closed Angel/Seed Early VC Late VC 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q

9 Canada did see a surge even at the early stage, but it has swiftly shifted Median Canadian seed & Series A financing size (C$M) C$9 C$8 C$6 C$5 C$4 C$3 C$2 C$1 C$0 Access to U.S. capital remains crucial Canadian VC activity with U.S.-based investor participation 104 $0.8 Seed Series A C$8.0 C$0.8 C$5.9 C$1.7 $0.8 Deal value (C$B) # of deals closed $ $ $ $0.9 U.S. VCs help push up round sizes Median Canadian VC deal size (C$M) with U.S.-based investor participation $16 $14 $12 $10 $8 $6 $4 243 $ $1.2 Seed/Angel Early Stage Later Stage 279 $1.6 C$ $1.6 C$ $0.6 C$14.2 All of those are intertwined to some degree. As the Canadian government focuses on lessening its economy s reliance on exporting commodities, it has sought to encourage venture capitalists. The C$375 million HarbourVest Canada Growth Fund closed recently, the last of four Canada-focused funds-of-funds developed in partnership with the Canadian government. C$400 million of the total C$1.35 billion raised among the four aforementioned vehicles came from the Canadian government. That sum will help resolve one of the perennial problems facing Canadian VCs and entrepreneurs: access to capital. U.S. VC investment remains highly important to the domestic venture scene when it comes to significant scaling, and even though overall accessibility to funds has grown easier judging by funding totals, there is still a ways to go. Fragmentation in the Canadian startup scene also contributed to the scaling problem, rendering deal sourcing more difficult for prospective investors. Relative to the current U.S. market, Canadian startups may well appear more fairly valued to both domestic and U.S. investors, which should keep activity stable going forward. The potential advantage of a weaker Canadian dollar for businesses that focus on the U.S. market may be frustrated by how expensive talent still is, but beyond that, the relatively stronger U.S. economy will also encourage Canadian startups to court business in their southern neighbor. All in all, prospects for Canadian VC activity appear relatively promising, although the sluggish economy and general risk aversion exhibited by venture firms worldwide will prevent funding activity from reaching the heights observed in and, even if value remains healthy, bolstered by late-stage investment. $2 $- C$1.00 $1.8 9

10 A concentration of capital in late-stage financings VC rounds by sector & size Blockbuster financings such as the C$100 million financing of real estate technology platform Real Matters helped push capital invested in rounds of C$25 million or more to a record proportion of of all capital invested in 1Q We ve identified such concentration of capital in latestage financings as a flight to quality, with VC firms still looking to deploy money in relatively safer opportunities. On top of that, timing is certainly a factor, in both financing and startup lifecycles. Canada s startup scene may be fragmented, but it is maturing, as evidenced by its production of companies such as Real Matters, or even exits of companies such as ProNAi Therapeutics, which went public last summer, backed by Adams Street Partners, Frazier Healthcare and others. As local incubators help produce ever-more fledgling startups, the ability to secure bridging capital will become more important, leading to potentially higher rates of failure for those unable to prove viability but also more successes. The role of programs such as BDC s Advantage, which seeks to provide management support to high-growth companies, will also become even more key. Mature companies still garnered plenty of capital Canadian VC activity (#) by size of all dollars invested was in C$25M+ rounds Canadian VC activity (C$M) by size C$25M+ C$25M+ C$10M- C$25M C$10M- C$25M C$5M-C$10M C$5M-C$10M C$1M-C$5M C$1M-C$5M C$500K-C$1M C$500K-C$1M 1 Under C$500K 1 Under C$500K Even by software s standards, 1Q outperformed Canadian VC activity (#) by sector Commercial services made a strong showing Canadian VC activity (C$M) by sector Commercial Services Consumer Goods & Recreation Energy Healthcare Svcs/Suppl./Syst. IT Hardware Commercial Services Consumer Goods & Recreation Energy Healthcare Svcs/Suppl./Syst. IT Hardware Media Media 1 Other Pharma & Biotech 1 Other Pharma & Biotech Software Software 10

11 Only M&A for VC sellers VC-backed exits In a market environment where the U.S. didn t see a single tech IPO in the entirety of 1Q 2016, a corresponding lack of VC-backed Canadian IPOs is expected. Consequently, only M&A A down quarter, although VC-backed exits in Canada fluctuate highly Canadian VC-backed exits 28 $ $1.6 Exit value (C$B) 30 $ $ $ $1.1 accounted for venture-backed exits in Canada in the first quarter of the year, with notable deals including the Pozen and Tribute Pharmaceuticals merger and Snapchat s acquisition of Bitstrips $2.1 # of exits $ $ $ $0.1 Both exemplify the maturation of the Canadian VC scene as well as overall venture industry trends. Unicorns such as Snapchat are seeking to bolster their own offerings and accelerate their continued growth through M&A of talent and new tech. Accordingly, smaller venture-backed startups may well find their larger counterparts to be sources of liquidity. As the crop of startups in Canada is relatively smaller than in the U.S., such M&A will be less frequent but still ongoing. Meanwhile, one of the more reliable sources for continued M&A, even if numbers remain subdued going forward, will be in the pharma & biotech sector. The pressures facing pharma giants that have driven mega-deals and highly lucrative exits for VCs remain in place, ranging from shoring up patent portfolios to developing innovative new therapies to tackle new niches. Only M&A served as a route to liquidity in 1Q Canadian VC-backed exits (#) by type Exit activity is set to be weighted to the center Canadian VC-backed exits (#) by size Acquisition IPO Buyout C$1B+ C$500M-C$1B C$100M- C$500M C$50M- C$100M 20 C$25M- C$50M 10 1 Under C$25M 0 11

12 League tables 1Q 2016 Most active PE investors by deal count Highbridge Principal Strategies Growth Equity Caisse de dépôt et placement du Québec Fonds de solidarité FTQ 3 Hawthorn Equity Partners 3 Macquarie Asset Management 3 ABRY Partners 2 Audax Group 2 Investeco Capital 2 Ironbridge Equity Partners 2 Kohlberg Kravis Roberts 2 Thoma Bravo 2 National Bank Financial 2 Marlin & Associates 2 CCC Investment Banking 2 Canaccord Genuity 2 PricewaterhouseCoopers 2 Wells Fargo Advisors 1 Robert W. Baird & Co Most active PE advisors by deal count Most active PE law firms by deal count Stikeman Elliott 9 Blake Cassels & Graydon 6 Fasken Martineau 2 Kirkland & Ellis 2 Jones Day 2 Norton Rose Fulbright 1 Morris Manning & Martin 1 Davies Ward Phillips and Vineberg Choate Hall & Stewart 1 Cassels Brock & Blackwell 1 Bennett Jones 1 1 Most active VC investors by deal count inovia Capital 5 MaRS Investment Accelerator Fund Business Development Bank of Canada Real Ventures 4 Innovacorp 3 Yaletown Partners 3 CrossPacific Capital Partners 3 Anges Québec 3 OMERS Ventures 3 Georgian Partners 3 First Round Capital 2 Hedgewood 2 Leaders Fund 2 Adam Felesky 2 Avrio Capital 2 Battery Ventures 2 Build Ventures 2 Extreme Venture Partners 2 Wesley Clover Raymond James Financial 1 Progress Partners 1 Osprey Capital Partners 1 Origin Merchant Partners 1 GMP Securities 1 Deutsche Bank 1 12

13 Contact PitchBook pitchbook.com RESEARCH EDITORIAL SALES