The Canadian Venture Capital & Private Equity Association (CVCA) has released its Canadian market overviews for YTD Q3 2023, which are based on data voluntarily submitted by a selection of venture capital and private equity firms. Overviews can be accessed by visiting the YTD Q3 2023 Canadian Venture Capital Market Overview and the YTD Q3 2023 Canadian Private Equity Overview. Our key takeaways were as follows:

Venture Capital (VC) Canadian Market Overview

  • In terms of VC deal activity, the third quarter of 2023 saw $1.2 billion invested across 134 deals, resulting in a YTD total of $5.4 billion raised across 494 deals. As compared to the previous quarter, there was a 26% decrease in deal count and a 60% decrease in investment amount. This marked slowdown is explained by a decline in mega deals ($50M+) in the third quarter, with only 7 mega deals closing in Q3. Average deal size has thus also dropped significantly, from $16.6 million in Q2 to $8.9 million in Q3. These figures are not looking any brighter in the United States, where Q3 saw the lowest quarterly dollar investment since 2018 and the lowest quarterly deal count since 2016.
  • Looking at where the money is being invested, VC investors have seemingly been willing to support new founders and innovative ideas. Contrary to the declining investment in later-stage companies, pre-seed and seed stage investments are actually on track to reach (or perhaps exceed?) the record highs set in 2022. This trend is particularly strong in the Cleantech and Agribusiness sectors, where government initiatives have proven highly successful in incentivizing VC investors.
  • Also on the rise is exit activity. Following a very slow 2022 and H1 2023, exit activity has improved in Q3, with a total YTD exit value of $6.8 billion across 28 VC exits. M&A accounted for an overwhelming majority (93%) of these exits. Additionally, Q3 saw the first VC-backed Initial Public Offering (IPO) in 18 months, with Turnstone Biologics Inc. going public on the NASDAQ.
  • The "hot spots" of Canadian VC investment were, once again, heavily concentrated in Ontario (211 deals), Quebec (101 deals) and British Columbia (72 deals). Ontario in particular accounts for nearly 50% of all dollars invested YTD, with $2.5 billion raised by 200 companies in the province, mainly in Toronto. Also on the map is Nova Scotia, which is experiencing a record-breaking year and has already surpassed its 2022 numbers.
  • The financing climate continues to pose a challenge in the VC market. Founders continue to leverage smaller cash infusions and search for creative alternatives to traditional equity and debt financing sources. Non-dilutive financing is expected to have a huge record year, with 317 deals in the first three quarters of 2023, already surpassing the 2022 total. In particular, Scientific Research and Experimental Development (SR&ED) backed-financing accounts for 88% of all deals in 2023 YTD, while venture debt accounts for the remaining 12%.

Continued economic uncertainty has resulted in VC investment activity trailing behind levels seen in 2022, and certainly far behind the "Covid boom" of 2021. The most notable trends are the predominance of investments in pre-seed and seed ventures, as well as an increase in exit activity by VC investors.

Private Equity (PE) Canadian Market Overview

  • In terms of PE deal activity, the third quarter of 2023 saw $5.8 billion invested across 481 deals. As compared to the previous quarter, dollars invested increased by 33%, with $2.2 billion invested across 158 deals. Despite a 4% decrease in the number of deals as compared to Q2, there was nevertheless a 38% rise in average deal size, which reached $13.86 million. Despite this increase, 2023 is continuing a downward trend vis-à-vis the 2021 and 2022 numbers, and is on track to become the lowest investment year on record for Canadian PEs.
  • Within the context of this overall downward trend, particularly noticeable is the decline in average deal size, which has reached an all-time low of $12.07 million for 2023 YTD (representing a decline of 24% from the average deal size for the same period in 2022). In fact, a whopping 86% of deals in 2023 had disclosed deal values below $25 million, with only 16 deals disclosed at above $100 million. Average deal size declined 26% to $19.4 million, as compared to $263 million in 2022. Deals under $25 million therefore continue to dominate PE activity, emphasizing the significant role that Canadian PE investors play in Small and Medium-Sized Businesses (SMEs) and, in turn, the significant role that these SMEs play in the Canadian economy.
  • PE interest in Canadian tech companies remains strong, with Information and Communications Technology (ICT) making up 20% of all investment in 2023 YTD. Also of continued interest to PE investors is the Industrial & Manufacturing sector, which recorded the highest deal count (106) and has attracted $936 million in PE investment in 2023 YTD. Mirroring trends in the VC landscape, Cleantech continues to thrive with investments far exceeding previous years.
  • While VC exists experienced an uptick in Q3, no similar trend is observable in the PE space. In 2023 YTD, there have been 72 exits totalling $232 million, with no PE-backed IPOs. These figures evidence a notable decrease compared to 2022, as investors are choosing to prolong their investments in anticipation of more favorable exit conditions. Of those exits, 85% were done through an M&A transaction, with the remaining 15% attributed to the secondary buyout market.
  • Consistent with Q2, Quebec was the most active province in the PE space, accounting for 57% of total deal flow and 53% of total dollars invested. Specifically, $3.1 billion was invested across 274 deals, including $666 million and 69 deals based out of Montreal. Ontario ranked second in terms of investment activity, with $1.6 billion across 119 deals, followed by British Columbia with $249 million raised across 50 deals.

While continued market uncertainty has led to a notable absence of large deals and an overall lag in investment pace as compared to previous years, PE investment has bounced back somewhat in Q3. Deal count remains on par with the previous quarter, and average deal size has experienced substantial growth vis-à-vis the past two quarters. As 2023 comes to a close, increasing momentum in the ICT and Cleantech sectors reaffirm mid-market vitality and a general resurgence of the Canadian PE landscape.

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