Consolidation In Canadian Venture Capital As Covington Swallows VenGrowth

While you were feasting on turkey and trimmings, Canadian venture capitalists were hard at work.

Covington Fund II Inc. said Thursday it won approval to combine with five VenGrowth Asset Management funds. It offered no financial terms for the transaction, though VenGrowth assets are roughly $320 million. According to Covington, the deal will produce one of Canada’s largest venture capital funds with net assets of $425 million and 50 to 55 portfolio investments — a rival to perhaps the largest fund, GrowthWorks Ltd.

The deal sparked some controversy. GrowthWorks also sought the assets and had circulated a dissident proxy requesting the opportunity to present a better offer. Tim Lee, the firm’s senior VP of investments, said it continues to look into the shareholder votes held Thursday as it considers its next move.

GrowthWorks, with more than $500 million in assets, has been working on a better bid for the privately held venture capital mutual funds, he said. GrowthWorks has taken issue with aspects of the Covington deal, such as its redemption fees, management fee payouts and four-year shareholder lockup periods.

Covington also secured financing for the deal that some criticize as expensive.

The reason for the merger is that VenGrowth performance has not been great and fears have arisen it will not be able to raise new capital. The firm has faced challenges coming up with capital for follow-on investments and has had to cap redemptions at some of its funds

VenGrowth said in its press release, that 83% of shareholders in the VenGrowth I fund, 81% in VenGrowth II, 86% in VenGrowth III, 83% in VenGrowth ALSF, and 70% VenGrowth TI approved the transaction. Shareholder participation was up more than 600% compared with shareholder votes in previous years. A VenGrowth spokesperson declined comment on the GrowthWorks objections and said the transaction needs court approval, perhaps as early as next week.

VenGrowth came together as part of Canadian government efforts to make more capital available for innovative startups. Shareholders will receive shares of the Covington II Fund.

Economies of scale should provide more capital for VenGrowth portfolio companies and permit share redemptions to resume, the spokesperson said.