Contact: Lynn Cook
Deloitte
Manager, Public Relations
(416) 874-3654

Toronto, February 21, 2005 — Leading Canadian venture capitalists (VCs) and private equity investors (PEs) expect the economic and investment climate to stabilize over the first half of 2005, leading to a significant increase in IPO activity as an exit opportunity for their investments. According to the 12th Canadian Private Equity Outlook Survey, released today by Deloitte, over 12 percent of VCs and PEs surveyed in Q4 2004 expect to exit their investments through IPOs, up from only three percent in Q4 2003. The quarterly survey provides a comprehensive snapshot of venture capital and private equity investors’ outlook in Canada for the next six months and acts as an indicator of changing confidence levels and expectations of economic and market climate, deal activity, and investment focus.

While the expected increase in IPOs reflects recent market activity, particularly in the computer software industry, mergers and acquisitions (M&As) are still expected to dominate, as nearly 84 percent of respondents indicated they expect to cash out through M&As. Four percent said they expect an equal number of M&As and IPOs.

“There is improved confidence in the marketplace as a whole, and the IPO market is again being viewed as a viable exit option by a growing number of VCs and PEs,” said Michael Badham, Partner, Deloitte. “As a result, we will undoubtedly see more public offerings over the course of the next six months, and the TSX Composite index should break the 9,400 mark by mid-2005.” 

The majority of survey respondents (62 percent) expect exit valuations to stay flat over the first half of 2005. This is in stark contrast to one year ago, when 66 percent felt exit valuations would rise. While valuations are not expected to rise, over 81 percent of those surveyed expect the valuations (relative to cost) of their investment portfolio of companies to increase. This continues an upward trend that has emerged over the past several quarters.

The investment landscape continues to be highly competitive, with the majority of respondents (62 percent) saying they feel competition for new investment opportunities is increasing, while only 29 percent feel competition is static. This is a significant increase from the previous quarter, when nearly half of the respondents (47 percent) felt competition for new deals was stagnant, and only 45 percent felt it was increasing.

While competition for quality deals intensifies, VCs are confident in their ability to find appropriate opportunities for investments, with more than half (54 percent) expecting to invest their current funds within less than two years. Capital growth deals continue to be the focus for the majority of respondents (71 percent), up slightly from the previous period (68 percent), followed by buyout deals (23 percent) and restructuring (2 percent), signalling that the VC and PE industry remains committed to fast-growing sectors of the economy.

“The increased optimism regarding exits and the steady rate of venture capital investment indicates a relatively health environment for venture capital investment in Canada,” said Dr. Robin Louis, President of the Canadian Venture Capital Association and President of Venture West.  “Although both the venture capital and the later-stage private equity parts of the industry are seeing some pricing pressure, the expectations of a good exit environment and of increased valuations for portfolio companies should result in a good pace of investment across all sectors of the industry in 2005.”

The shift away from manufacturing as an investment target towards communications and computer software continues. Approximately 19 percent of survey respondents said they are currently looking at deals in each of these two sectors, followed by biotechnology (12 percent). Manufacturing slipped to just 11 percent, from 14 percent in the previous quarter.

Survey participants indicated that Canadian institutions are currently the most popular source of capital funding (listed by 65 percent of respondents). This is followed by high-net-worth individuals (27 percent), labour sponsored funds (19 percent), others (16 percent), U.S. institutions (14 percent), and European institutions and corporations (9.5 percent each).

Over 500 professionals in venture capital and private equity firms across Canada were surveyed in the 12th edition of the quarterly Canadian Venture Capital and Private Equity Survey. Questionnaires were sent to different investment professionals within the same firm.

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