Planting the Seeds: Quebec Sows a Fertile PE Investment Landscape

Planting the Seeds: Quebec Sows a Fertile PE Investment Landscape
September 07
15:49 2016

By the Canadian Venture Capital and Private Equity Association

It’s a strategy that’s worked well for Quebec’s culture sector. For many years, the province has been a major booster of its homegrown arts and entertainment scene. It poured significant resources into building its talent, broadcaster and distribution bases. And given the international and local accolades, it’s clear that this strategy paid off.

From the looks of things, this seems to be the same approach Quebec is taking with private equity investment.

In the first half of 2016, Quebec captured nearly a third of the country’s PE financings. That’s an increase from 2015 (24 per cent) and 2014 (14 per cent). The province now rivals Ontario (32 per cent) for most-active province on the PE front.

Province Records 88 PE Deals

Since January 2016, Quebec recorded 88 PE deals, which puts it on track to exceed the number of deals brokered in 2015. Seven out of the top 10 PE investors are either government entities or institutional investors managing government funds, with average deal sizes ranging from $3M to $20M. The other three entities in the top 10 had average deal sizes between $15M to $30M.

Jack Chadirdjian, President and CEO of Réseau Capital — Quebec’s venture capital and private equity association — says the province’s investment ecosystem is quite unique insofar that there is mix of private and institutional investors that together have created a synergy to provide important growth opportunities to Quebec entrepreneurs.

He says the pattern of PE sector investments in Quebec indicates that government investors are authoring a distinct PE sector strategy that mirrors the practice of venture capital “seed” investing.

In addition, over a decade ago — following the Rapport Brunet — the Government of Quebec and private financial institutions started working together in a concerted effort to build a stronger Quebec-based financial ecosystem. Didier Leconte, Senior Director, Investments-Life Sciences, at the Fonds de solidarité FTQ, says we’re seeing the effects of these efforts today, illustrated through the active and mature PE market in the province.

Focus on Newer Sectors

Newer sectors such as agri-forestry, cleantech and ICT have all been targets for provincial government investment in Quebec. And with the exception of one mega deal in cleantech in the first half of 2016 — $800 million invested in Services Matrec — investments in the province have been directed through smaller deals in newer sectors.

Life sciences is another sector of deep interest for Quebec investors. For example, Quebec-based fund-of-funds Teralys Capital, with $1.6B in assets under management and backed by both the provincial and federal governments, has partners with direct investing experience in life sciences and a medical background. In addition, we also see increases in direct investments—particularly the average VC deal size, which has increased by 167 per cent from 2013 to $11.7 million in H1 2016.

The $128 million VC investment in DalCor Pharmaceuticals earlier this year, a CVCA life sciences record, is a good example of Quebec’s commitment to the life sciences vertical. Leconte says rounds of this size in financing is not common – particularly in biotechnology – but was made possible by the joint efforts and the determination of a visionary leaders in the province.

“It still amazes me that, according to the company, 50 per cent of the financing came from Quebec individuals, institutions and funds,” says Leconte. “Namely because of the strength of its financial ecosystem, Quebec is able to attract such investments.”

The Fonds de solidarité FTQ is one of a handful of investors that has taken pride in supporting DalCor, a rapidly-expanding company focused on precision medicine.

Will Quebec Overtake Ontario as the Country’s Leader in PE Investment?

This may be a possibility, but it’s hard to predict at this point. The high level of investment in smaller deals indicates that there is a focus on providing stimulus to smaller companies. In three to five years, some of these may reach a stage that requires larger rounds involving other institutional PE investors.

“The Province of Quebec has given itself a goal to be a leader in innovation,” says Chadirdjian. “We’re bustling with entrepreneurs who are on the cusp of success and the government’s innovation strategy will be a major boost in helping these businesses become leaders in their sector of activity.”

Starting and growing Quebec companies is certainly one way of moving forward. But the province realizes too that it has unique expertise that can help strengthen Canadian companies outside of Quebec, too.

BC-based biotech company Zymeworks Inc. is a perfect example. The Fonds FTQ invested in this company back in December 2014 based solely on the fact that the company relies on some parts of their developments of compounds on groups established in Quebec, particularly a group within the National Research Council of Canada.

“It’s great to see this expertise recognized. The company is doing great and going big,” adds Leconte.

Zymeworks made headlines in January with a US$61.5 million mezzanine round, with one-of-a-kind support from multiple Canadian investors, such as angels, BDC Capital, CTI Life Sciences, Fonds de solidarité FTQ and Lumira Capital. It was also announced in May 2016 that the company signed a US$4.4 billion partnership agreement with multiple pharmaceutical companies.

“Innovation is also about how you do things,” says Leconte, “and I think Quebec is taking the lead on this in the innovation economy.”

Click here to read the VC & PE Quebec Market Overview // H1 2016 report

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