Co-Venturing In Technology: Caisse de depot et placement du Quebec’s venture capital approach offers an interesting study in private equity partnerships. –

It’s no secret that venture capital investment in the technology sector has changed dramatically since the high-flying days of the late 90s. Gone are the excesses of the period. Today’s venture capitalists are less proprietary about their deals and, in a reflection of the industry’s maturation, are showing greater willingness to co-invest in companies-directly or indirectly through funds.

With fund-raising in the United States and Canada soaring to record heights, co-investing has in recent years become a common way for institutional investors to facilitate acquisitions or share risk-where smaller investment sizes make it challenging to gain exposure to certain private equity opportunities efficiently.

In an investment environment that’s increasingly “core”-focused, partnering with an expert who knows how to build, buy and efficiently manage a particular private equity investment vehicle in a specific sector within a certain region better than the competition makes sense. Clearly, some of the larger private equity firms have the expertise and organizational breadth to drive higher returns for themselves and their partners. As more institutional investors are discovering, portfolio manager Caisse de depot et placement du Quebec (the Caisse) is at the leading edge in this respect.

A Seasoned Investor

Today’s investors take much more time to evaluate markets and talk to other players in the industry before considering an investment.

It could be one of the reasons many institutional investors turn to the Caisse when it comes to enhancing their ability to identify and respond to market opportunities.

The Caisse today ranks not only among North America’s largest portfolio managers, but is also Canada’s leading private equity investor. As of Dec. 31, 2004, the Caisse has CA$10.7 billion in total private equity assets under management allocated to company and fund holdings worldwide-with about 10% of the portfolio exposed to venture capital investments.

Over the past two decades, the Caisse has developed high-level expertise in private equity, maintaining an edge over other institutional investors in this area-and leading to a new focus on investment niches with the greatest return potential.

Indeed, the Caisse’s partnering approach is an interesting study in private equity partnerships.

Partnering is a core philosophy at the Caisse. Typically, the Private Equity team at the Caisse functions as a value-added lead or joint investor, partnering with experienced, like-minded firms.

Strategically building key partnerships with a select group of institutional investors sharing the Caisse’s goals and objectives is not a new approach-for the industry or the Caisse-but it is increasingly a way to create and unlock value. This is especially true when it comes to expansions, buyouts, mergers, acquisitions, refinancings and privatizations and other projects in any sector across Canada, the United States, Europe, Asia Pacific and emerging markets.

Insight is Everything

What makes a good partner? Ready capital is obviously the price of entry. A long track record of open, fair and honest dealings with its partners is equally important. But the most vital quality is expertise, which comes from market knowledge, experience and, of course, insight.

Never underestimate the power of leveraging somebody else’s expertise. A key “value-add” is an experienced investment team. A significant player on the private equity scene, the Caisse is one of Canada’s leading private equity investors-due to its ready capital, but also because of its flexibility to structure, recommend and ensure the success of investment deals. True to form, the Caisse is positively regarded for its ability to structure joint venture transactions and service the needs of its partners.

The key to its investment success is the quality of its people-in other words, its extensive expertise. In addition to long-standing fixed income, equity and currency know-how, the Caisse possesses vast expertise in various alternative investment areas-private equity, hedge funds and real estate. Fittingly, it is also at the forefront of risk management.

To identify fundamentally sound investments that allow value creation requires specialized expertise-in every sector and in every market. To succeed, firms need to identify windows of opportunity based on capital market conditions and possess financial engineering skills to build products for value extraction.

To create or respond to opportunities for engineering, structuring and/or leading high-quality investment deals, the Caisse brings to the marketplace an in-house team of more than 70 investment professionals and seasoned senior executives with years of private equity, operational and financial experience.

A Valuable Network

For institutional investors, a valuable network of private equity contacts in every sector across Canada can only translate into one thing: access. Through this powerful network, venture capital firms can find and join forces with strategic partners for acquisitions.

Gleaned from its investment, management and industry experience, the Caisse’s vast and robust network of close, longstanding industry relationships with contacts and partners worldwide gives it the ability to conduct valuable research, make powerful introductions and provide strategic guidance. The Caisse can leverage its extensive relationships within private equity to effectively identify and respond to opportunities in the marketplace.

Ultimately, the broad insight and connections of the Caisse’s network adds value well beyond the capital it invests.

Venturing Into the Future

After careful analysis of its technology venture capital investment approach, the Caisse has a new strategy for biotechnology, information technology and industrial technology companies. The Caisse’s new approach? Partner with the best venture capital firms around the world to better capitalize on market opportunities.

The Caisse’s supply of capital and expertise will serve the best interests of technology companies seeking financing. From a global standpoint, the Caisse’s new approach is to increase its venture capital investments in technology. How? By partnering with venture capital firms-renowned for their expertise and first-quartile results. In light of these objectives, all existing portfolio companies in technology in Quebec made by the Private Equity team have been outsourced to Genechem and Propulsion, two Montreal firms. In addition, the Caisse’s international investment portfolio in technology venture capital has been entrusted to VantagePoint Venture Partners (in California); SAM Private Equity (Switzerland); and AXA Private Equity (Europe).

In addition to these partnerships, the Caisse will continue to invest on venture capital markets by partnering with other specialized firms-to ensure geographic and sector diversification of its portfolio of venture capital investments in technology.

A Growing Commitment

Activity in Canada’s venture capital industry showed moderate signs of growth in 2004, as CA$1.8 billion was disbursed in aggregate, up by 6% over the CA$1.7 billion of 2003, according to Thomson Macdonald. Also, last year was the first year-over-year increase in industry capital invested since 2000. Who contributed significantly to this growth? Canadian industry players who had increased their activity. Chief among them was the Caisse.

Private equity has always represented an attractive source of returns and the Caisse plans to invest more money in it. In 2004, Caisse expressed its aim to expose a larger portion of its portfolio to alternative investments-to offset the lower risk premium on traditional markets. In the process, the Caisse would like to step up its venture capital investments to take advantage of the many market opportunities-and has, in fact, done a thorough review of its practices in this area to generate more solid returns.

In due course, the Caisse’s vision will have a substantial leverage effect, contributing directly to the development of a more diversified venture capital industry-since it will be a major partner in a strategic-growth industry.

Sylvain Gareau is Vice President, Venture Capital, Caisse de depot et placement du Quebec.