Three recipients of Ottawa’s venture capital program hit halfway mark on funds

Open this photo in gallery:

Three of the five fund-of-funds managers that were chosen by the federal government to stimulate Canada’s venture-capital industry have surpassed half of their fundraising targets.

Kensington Capital Partners of Toronto said it has raised $85-million of its $150-million target for a fund called Kensington Venture Fund II, LP, drawing backing from BMO Capital Markets and the venture-capital arm of U.S. cybersecurity firm Trend Micro Inc. Toronto’s Northleaf Capital Partners also said it has surpassed the halfway mark for its $300-million Northleaf Venture Catalyst Fund II, backed by the Canada Pension Plan Investment Board, Sun Life Financial and TD Bank Group.

Neal Hill, vice-president of market development with the Business Development Bank of Canada, which oversees the federal program, said a third fund, which has not been identified, had also hit the halfway mark. “It’s a testament to the strength of the market and the strength of the managers,” he said.

In June, the government selected Kensington, Northleaf, Montreal’s Teralys Capital and U.S.-based HarbourVest Partners LLC and Hamilton Lane Advisors LLC to receive a combined $350-million for new funds that they in turn would invest in Canadian venture-capital firms. The government also committed $50-million to seven smaller, alternative venture-capital firms. The $400-million Venture Capital Catalyst Initiative (VCCI) program is a sequel to a similarly sized program by the previous government, which gave $340-million to Northleaf, HarbourVest, Teralys and Kensington, plus $50-million to a handful of smaller venture-capital firms.

In both programs, the fund-of-funds managers – which invest both in venture-capital firms and directly into companies − were mandated with raising matching funds from private investors to stimulate investing in the venture-capital industry.

The first program, launched in 2013 under the Harper government, was in response to a prolonged weak period for the industry. It generated $1.4-billion for venture-capital investing, including $900-million raised from the private sector. Since then, several Canadian VC firms have become top North American performers and Canada has become a hotbed of startup activity. Still, the domestic VC industry argued that it needed at least one more taxpayer-funded boost to help the sector mature.

The Trudeau government agreed, but imposed more stringent conditions. It provided money on condition that the funds of funds raised $2.50 for every federal dollar, up from a 2-to-1 ratio in the first program. Ottawa also mandated that recipients increase the participation of women across the male-dominated VC sector. Like the earlier program, Ottawa will only get any money out once private investors receive their full capital back plus a 7-per-cent return. Under the terms of the government program, Kensington is raising $150-million, including federal money; Hamilton Lane’s target is $275-million and Northleaf and HarbourVest are earmarked for $300-million each. Teralys, which will get provincial funding as well, is targeting $400-million.

Ottawa told the five that they had to raise at least half their funds by March 31, meaning most are ahead of schedule. “Our government is investing in Canada’s venture-capital ecosystem so that talented Canadian businesses can grow," Small Business Minister Mary Ng said. "The fact that the selected funds of funds have gotten to their first closes so quickly says that investors see the value in Canadian innovation and venture capital.”

Rick Nathan, Kensington’s managing director, said that despite a negative stock market, investors were willing to commit to a sector that has been “a very powerful force” for economic growth. “There’s never been a better time to be a [technology] investor in Canada,” he said. “What’s hard in this market is getting into the good deals.”