Canadian venture fundraising turns a corner with help from VCAP

Canadian venture fundraising reversed two years of decline with appreciable growth in the first half of 2015, owing in part to the increased influence of Ottawa’s Venture Capital Action Plan (VCAP).

Venture funds raked in $878 million in committed capital between January and June, up 21 percent from the year before, according to a report released this week by Thomson Reuters. It was the most active fundraising in a six-month span since 2012.

The solid start to the year follows an extended dry season. Thomson Reuters data show Canadian VC fundraising fell 15 percent last year and 18 percent in 2013.

Another new report from the Canadian Venture Capital & Private Equity Association (CVCA) tells a similar story. The CVCA said VC funds collected $910 million in the first half, which is already over three-quarters of the $1.2 billion raised in all of 2014.

What’s driving these numbers? In a word: VCAP.

VCAP was launched by the federal government in 2013 to bolster VC supply and direct more resources to cash-starved startups. It does this by backing funds of funds with $1 for every $2 they raise from private sources. The strategy has spawned four funds: Northleaf Venture Catalyst Fund (NVCF), Teralys Capital Innovation Fund, Kensington Venture Fund and HarbourVest Canada Growth Fund.

VCAP funds played a key role in fundraising in the first half. The two largest partnerships closed, Georgian Partners Growth Fund II and Whitecap III, both received commitments from them.

Georgian Partners’ Fund II wrapped up at an oversubscribed $200 million in April. Significantly, the lead LP was NVCF, which is managed by Canadian private markets investor Northleaf Capital Partners.

Anchoring VC partnerships with lead commitments, and then helping them leverage additional LP capital, is a top priority of VCAP funds, Northleaf Managing Director Jeff Pentland told peHUB Canada.

“We think the best way to support best-in-class venture and growth equity funds is to be there early,” he said. “Northleaf Venture Catalyst Fund tries to act as a lead investor whenever possible, leveraging experience from our global programs and utilizing our networks to attract more investors.”

Since early 2014, Northleaf has been busy capitalizing NVCF. It succeeded in pulling in commitments from a diverse group of LPs, including BDC Capital, the Canada Pension Plan Investment Board, Ontario Pension Board, Open Text, Sun Life Financial and Canada’s six largest banks. Last week the fund closed at its hard-cap target of $300 million.

Northleaf found time while fundraising to meet with VC firms and pledge commitments to new offerings. At its close, NVCF had already committed 50 percent of its capital to partnerships and direct investments.

Pentland said the other three VCAP funds have been doing the same thing. They are, as a result, gaining collective influence in fundraising trends.

“Early in 2014, Northleaf Venture Catalyst Fund was the only fund of funds that was fully active in the market,” he said. “We encountered a lot of pent-up demand. I think we’re now beginning to see the impact of all of the VCAP funds coming on stream.”

Pentland believes the VCAP initiative is “smart public policy” because it relies on a market solution to create “a profitable, globally competitive and self-sustaining venture industry” in Canada. As many of its benefits will not be seen for years, he applauded the “political courage” of Ottawa and its provincial partners.

“What we’re doing is not about quick wins,” he said. “We are trying to build a truly attractive ecosystem and that requires a long-term investment.”

Ottawa’s $400 million VCAP seeks to bring about $1 billion of private sector commitments into the Canadian venture industry. To meet this objective, the VCAP funds have focused on signing up corporate and institutional investors new to the asset class or that have been away from the market for some time.

Taken together, NVCF and the other VCAP funds have so far raised close to $940 million, peHUB Canada estimates. Of that total, more than $620 million reflects commitments from private sources.

Northleaf Capital Partners manages about $6.9 billion in capital from its headquarters in Toronto. It also has offices in London and Menlo Park, Calif.

Photo of green shoot and coins courtesy of Shutterstock

Photo of Jeff Pentland courtesy of Northleaf Capital Partners

This story first appeared in affiliate magazine Venture Capital Journal, which is published by Buyouts Insider. Subscribers can read the full story by clicking here. To subscribe to VCJ, click here for the Marketplace.