Canadian venture capitalists are poised to engage in greater deal activity, buoyed by the prospects of increased technology spending.
Nearly half (47 per cent) of the venture capitalists (VCs) anticipate an improvement in the economic climate in the coming months, says the Q4, 2002 Canadian Venture Capital Confidence Survey.
This signals a return to early 2002 levels after a low of 29 per cent in Q3 of 2002. It is in stark contrast to the U.S, where less than 20 per cent of VCs expect an improvement in the economy.
According to the VCs surveyed, the most important factor in recoveries in investment levels is an increase in technology spending (51 per cent), versus a recovery of the public market (38 per cent). This finding is a switch from the prior survey when the comparative responses were 31 per cent and 53 per cent, respectively.
Nearly three-quarters (72 per cent) of respondents expect that a recovery in IT spending will contribute significantly to the recovery of VC markets in the short term, compared to 54 per cent in Q3, 2002.
However, technology-related sectors such as communications, Internet and semi-conductors, continue to lag behind manufacturing (48 per cent) and consumer business (41 per cent) as VCs see growth in these sectors for investments in the short run.
The quarterly survey, jointly released by professional services firm Deloitte & Touche and the Canadian Venture Capital Association (CVCA), provides a snapshot of VC investor outlook 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.
The survey says 28 per cent and 44 per cent of respondents expect exit and portfolio valuations to increase, compared to nine per cent and 32 per cent, respectively, in the previous quarter. The improved outlook suggests that venture capital valuations have bottomed out.
“With confidence soaring and higher valuations in sight, we expect a revival in VCs’ interest in pursuing new investment opportunities and fund-raising,” said Michael Badham, partner, Deloitte & Touche. “This optimistic sentiment is one indicator of the market’s resiliency and also signals that increased deal activity is on the horizon.”
More than half (53 per cent) of respondents expect to completely invest current funds in less than two years. The number of VCs looking into raising new funds nearly tripled (21 per cent), up from the low of eight per cent in the third quarter of 2002.
However, fewer indicate plans to earmark funds for follow-on investments. Nearly two-thirds (65 per cent) of VCs responded that less than half their funds are available, compared to 53 per cent the previous quarter.
“This renewed optimism confirms the stabilization of our industry,” said Brad Ashley, president of CVAC. “As macro conditions continue to improve, VCs will continue to shift their focus, from dealing with issues in their portfolio to funding investments in new businesses.”
The fifth edition of the quarterly survey was conducted from Dec. 4 to 30 and surveyed more than 800 professionals from venture capital and private equity firms across Canada.
The CVCA is a trade association consisting of funds, companies, and individuals who manage pools of risk-equity capital for investment in small and medium-sized growth businesses in Canada.
HIGHLIGHTS:
* Almost half (47 per cent) of Canadian VCs expect the economic climate to improve, an increase from 29 per cent in the previous quarter and in starkcontrast to less than 20 per cent south of the border.
* The number of VCs looking into raising new funds nearly tripled to 21 per cent from a low of eight per cent in the previous quarter.
* More than half (53 per cent) of VCs expect to completely invest current funds in less than two years (compared to 41 per cent in the previous quarter.)
* Increase in technology spending (51 per cent) is a more important factor than public market recovery (38 per cent) in recoveries of investment levels – a switch from the previous survey.
