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Share the good, the bad and the ugly on the world of Venture Capital and Private Equity in Canada!
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Mar
05
2010
Change in tax law sends a strong signal to international investors that Canada is “open for business”Following March 4th Canadian federal Budget, Deloite released a comprehensive summary (Link to full release) of the impact of the changes to the Taxable Canadian Property better knowned as Section 116, which is outlined below. The CVCA Applauds Budget Decision to Remove Foreign Investment Barrier (CVCA release Link).
Note that there were also a number of highlight’s from the Canadian government’s Throne Speech and Budget that may have a direct impact on the technology landscape of Canada. TechVibes did a good job of summarizing the main Tech elements (Link to blog here) Deloitte. SUMMARY
“The CVCA has long requested the elimination of Section 116 as it pertains to the venture
capital and private equity industry and we wish to congratulate the federal government for
taking action,” said Gregory Smith, President of the CVCA. “Many CVCA members, as well as
a large number of individuals and organizations, have been actively encouraging the federal
government to eliminate this section of the Income Tax Act which has had a dampening effect
on cross-border venture capital and private equity transactions. Its removal provides an
important signal to foreign investors that Canada welcomes their contributions to growing
companies and employment.”
Government removes tax barriers and stimulates flow of capital across Canadian border
Canadian companies across the country are likely applauding today’s federal budget, which contains tax law changes that give them the advantage they need to compete on the global stage. By amending the definition of “taxable Canadian property” to exclude shares of Canadian private companies (where not more than 50% of their value is derived from real property in Canada, Canadian resource property or timber resource property), the government has significantly reduced administrative and, in some cases, economic barriers to foreign investment in Canadian-based innovation and technology. This change puts Canada at the top of the list of places to invest globally. “The changes in tax legislation announced in today’s budget are among the most significant changes to capital gains taxation since the introduction of taxation of capital gains in 1972,” explains John Ruffolo, Global Tax Technology, Media & Telecommunications Leader, Deloitte. “The Canadian government has listened to the financing community, understood the severity of the problem and removed the major tax barriers that have prevented critically needed international investment capital from crossing our borders.” “At a minimal cost to the government, this amendment will have an immediate, positive and direct impact on Canada’s ability to grow a robust Canadian technology industry,” explains Terry Matthews, Chairman, Wesley Clover. “By sending a clear message to international investors that Canada is “open for business”, the government will make Canadian companies more attractive to foreign investors overnight. This will help Canadian companies raise the capital they need to achieve global leadership status.” The change means a much more welcoming environment for foreign investors. In the vast majority of cases, non-residents who were not taxable on the disposition of their investments in such shares due to Canada’s broad international tax treaty network, are now exempt from tax under Canadian domestic law without having to apply for treaty relief. As a result, they are no longer required to comply with the Section 116 tax clearance certificate procedure or file a Canadian income tax return. The changes also remove what were perceived to be insurmountable barriers for many venture capitalists who considered the previous administrative requirements and economic delays for each investor to be strong deterrents to investing in Canada. “The removal of the Section 116 tax barrier is a tax master stroke by the Canadian government enabling Canada’s emerging technology companies to access deep pools of international capital and the vast global customer markets to which those pools are connected,” notes Stephen Hurwitz, Partner, Choate Hall & Stewart LLP in Boston. “I predict that over time this farsighted tax legislation will help propel Canada’s extraordinary technology into global industry leadership in numerous markets, and will likely be viewed in the future as a defining moment for the Harper government in Canadian innovation.”
BACKGROUND INFORMATION ON THE SECTION 116 TAX BARRIERS
The following describes the tax barriers that were removed in today’s budget and that are no longer preventing international investment in Canada:
Why Canada was perceived by VCs as having an unfavourable tax environment A 2007 survey by Deloitte and Canada’s Venture Capital & Private Equity Association (CVCA) of 528 VCs from around the world found that 40% of U.S. respondents and 28% of global respondents cited Canada’s unfavourable tax environment as a key reason for not investing in Canadian companies. This level of concern is five times higher than for any other country in the survey and reflects the current investment crisis within Canada’s venture capital industry. The survey also found that Canada is attracting the attention of just 11% of U.S. VCs as a primary country for expansion — behind China (34%) and India (24%). Please find the full release by Deloitte Here. EAVB_THMQKZAOUO Mar
05
2010
More seed funding for Canada – Founder Fuel gets their first commitmentRe-post by Jevon MacDonald for StartupNorth
John and the team, which includes Austin Hill, announced today that they will be taking commitments from the Quebec Government (through Investissement Quebec) at $50 milion, Solidarity Fund QFL, which is investing $33 million, and by FIER Partners, which plans to invest $17 million. The fund still needs to raise over $8million directly from LPs, which Investissement Quebec seems to think will be a snap and done in 4 months, but I am not so sure. I hope I am proven wrong. In case any potential LPs are reading this right now, here is my advice: Do this one. Do it because this team is going to do more than just pass the time humming over deals — you will get hustle, an aggressive attitude and a group that understands that Canada needs more hustle and less of the same old. John and the team are connected and tuned in to the community. Early stage entrepreneurs trust this team and they are the kind of guys who can get your money in to some great opportunities. Congrats and good luck. Re-post by Mark McQueen for the Wellington Financial Blog March 3rd, 2010 Today’s Throne Speech contained a passage that will excite our friends John Ruffolo, of Deloitte, Stephen Hurwitz, of law firm Choate in Boston and Yaletown’s Steve Hnatiuk (Chair of the CVCA Tax Policy Committee). For several years, these three, along with the help of countless others in the venture capital industry, have tried to help the Federal Government understand that Section 116 of the Tax Act served as an unnecessary barrier to foreign investment. In a nutshell, Section 116 required the limited partners of U.S.-based venture capital funds to make individual tax filings with Canadian tax authorities when a Canadian VC investment was sold, even though there would be no tax to pay as a result of bilateral tax treaties. To some, this was such a hassle that certain VC firms wouldn’t look to invest in Canada as a result. The CVCA has long lobbied to have this dealt with, as one facet in our broad Commercializtion Support Program In yesterday’s Throne Speech, this reference caught everyone’s attention:
Continued on the Wellington blog (Link here)
Mar
04
2010
Mantella Venture Partners Launches $20M early stage fund
Mantella Venture Partners launched today.It’s a $20MM early stage technology fund based in Toronto.
The main investment partners are Robin Axon and Duncan Hill. Robin is ex-Ventures West and Ducan was an EiR at Ventures West and previously had founded Think Dynamics (acquired by IBM back in 2003). They also run Basecamp Partners/Labs where they have been incubating PushLife, Chango and a couple of other startups. It’s interesting to see an emerging breed of Canadian incubators and small funds like Mantella VP, Extreme VP/Xtreme Labs, Bootup Labs, Flow Ventures, Montreal Startup, Wesley Clover, and others. All of these have very different models and motivations. But they exhibit the need many startups have in both getting to Product/Market Fit and then the business development and go-to-market efforts. Both of these efforts require capital, and it’s great to see VCs that traditionally don’t get their hands dirty with operational details down in the weeds. Full press release below.
Re-posted from Suzanne Dingwall Williams blog at Venture Law Lines A consistent theme in Canadian innovation policy is the need to attract more foreign venture capital to underwrite our local start-ups. This is based on the theory that there is lots of venture capital willing and able to deploy cash north of the border. It’s a relativistic theory that is deeply flawed, and as yesterday’s Wall Street Journal hinted, one that becoming more foolhardy for the Canadian government to rely upon. One of the largest sources of funds for VCs and Private equity players in the US ahs been CALPERS, the largest public pension fund in the United States. CALPERS manages more than $200 billion or so in assets and is reponsible for generating returns that will fund the pension payments to be made to retired California public employees. In order to generate enough cash to meet these pension obligations, CALPERS typically targets investment that will generate an annual average of 7.75% return on its investments. Generating that rate of return consistently has led CALPERS over the last 15 years or so to make high-risk, high-yield investments in private equity and venture capital funds. As a result, CALPERS has become one of the largest sources of fuel for the North American venture capital industry, providing more than $25 billion to those fund managers our governmetns hope to attract up here. However, it now appears that this fuel source may be tapping out. Last year, CALPERS announced that it was reducing the number of funds that it invested in. And yesterday, CALPERS revealed its proposal to reduce the targeted return on new investments to 6%. If adopted, this target reduction would allow CALPERS to focus on more traditional, conservative investments – in other words, away from the venture capital funds that Ontario and the federal government are seeking to attract. This week’s federal budget will be an opportunity to assess how self aware Canada’s Government is about what will (or can) feed investment in our innovation economy. Will the budget provide the means for local growth? Or will it dangle bait over a drying up river bed? Re-posted from Suzanne Dingwall Williams blog at Venture Law Lines Just before Christmas I was out to dinner with a group that included Q1 Capital’s Mike Middleton, some US VCs and Vancouver’s Paul Lee. Paul was originally part of Distinctive Software, a Canadian game developer purchased by Electronic Arts. He stayed with EA for more than 10 years post-acquisition, rising to President of EA Studios before leaving to form Vanedge which, he explained to me, was going to be a new investment vehicle that he and his friends put together to invest in early stage digital media plays. As it turns out, Paul has quite a few friends. PE Hub reports today that Vanedge is about to close the first $100 million in commitments from partners that reportedly include EA, BDC and EDC. I am wishing I’d put my wine on his tab. Interactive folks – this is the team to get to know. More later. Jan
16
2010
Canada’s Private Equity industry is on fireRe-post: Mark McQueen and the Wellington Financial Blog of 12 January 2010 Good news abounds for the Canadian private equity industry. Just last week, Onex just closed CPPIB’s 2003 vintage investment in Onex I earned a 124.7% return on the capital invested (see prior post “CPPIB Canadian general partner Q2 2009 performance numbers” Nov 14-09). Oncap Birch Hill Private Equity Partners Clairvest Group Inc. For its part, Torquest Partners Canada’s private equity industry is definitely on a roll. MRM Oct
06
2009
Start-Up Brain Drain: The Next Threat To Canadian Venture Capital?Re-post by Suzanne Dingwall William of Venture LawWhen US VCs grow introspective, it’s almost never good for Canada. Which is why we should all be concerned about the self-reflection now taking place south of the border.
In recent months, US VCs have cottoned on to the importance of immigrant entrepreneurs to an innovation economy. This used to be Canada’s exclusive domain; thanks to historical inclination and demographics, we’ve long known we need foreign innovators in order to grow our economy. Now, US venture capital is catching up. Their zeal is fueled by a recently released study by the NVCA, which notes that (a) immigrants have started more than 25% of U.S. public companies that were formerly venture backed, and (b) more than 50% of the employment generated by U.S. public venture-backed companies has come from immigrant-founded companies like Intel, eBay, Yahoo!, and Sun. The New York Times has also taken note, citing Harvard Law professor Vivek Wadhwa’s claim that 52.4% of today’s Silicon Valley startups have at least one foreign founder. US VCs are figuring that, to expand domestic deal flow, they need to expand the immigrant entrepreneur base. As a result, US VCs are now actively lobbying the Obama administration to increase the number of specialty worker visas (referred to longingly by Canadians with dreams of a Silicon Valley life as H1B Visa). This is not the best of news for Canada, unless you are a young entrepreneur who believes his business would get more and better financial backing if only he could relocate to California. The limited number of H1B Visas in the US has driven high tech growth in Canada, in some respects; in several cases, American businesses who cannot attract or sponsor adequate numbers of high tech professionals have near shored that work to Canada. In a larger sense, there is an active competition heating up for innovators from outside of North America, one which Canada can ill afford to lose. Canada has some immigration programs for entrepreneurs which are laudable, but not spectacularly effective. There is a need to think and plan for how to capture this desirable talent pool, before new market entrants steal our thunder. Sep
08
2009
The Institutional Limited Partners Association (ILPA) releases the ILPA Private Equity PrinciplesThe Institutional Limited Partners Association (ILPA) releases the ILPA Private Equity Principles
After a long consultative process with ILPA members and other industry constituents, the ILPA has released a best practices document that outlines a set of guidelines regarding partnership governance, alignment of interest between GPs and LPs and reporting & transparency. To endorse the Principles, please click here Please include your name, as well as the organization you are endorsing on behalf of in your e-mail. To view the Principles, click here
Below you will find the official press release issued today by the ILPA and supported by the CVCA.
The Institutional Limited Partners Association (ILPA) releases the ILPA Private Equity Principles Guidelines intend to create framework for sustainability and growth of asset class through improved governance, alignment of interests and transparency TORONTO, ONTARIO – The Institutional Limited Partners Association (ILPA) today introduced the ILPA Private Equity Principles, which establishes a set of principles and best practices for the private equity industry with the goal of strengthening the long-term viability of the asset class as an institutional investment strategy. Through enhanced partnership governance, strong alignment of interests and improved investor reporting and transparency, the ILPA believes the limited partner and general partner communities as well as other industry practitioners will mutually benefit from an improved set of guidelines that reaffirm a focus on investment value creation. This approach has historically served as the key tenet to the success of the asset class. “Private equity has become an important strategy for most institutional investors from around the world as overall returns from private equity have outpaced those of other asset classes over the long run,” said Joncarlo Mark, Chairman of the ILPA. “This is primarily the result of a traditionally strong alignment between general partners and their portfolio companies and a focus on growing these businesses. A similar alignment between the general partners and the supporting institutions that provide them investment capital will help ensure successful returns in the future.” The ILPA Private Equity Principles were developed through broad communication and coordination between a wide cross section of private equity investment institutions. This process included input from many of ILPA’s 215 member organizations from around the world, which provided feedback through roundtable discussions and a comprehensive survey that ultimately generated the concepts proposed in this document. “The ILPA’s mission is to provide networking, communication and ongoing research and education – including the development of best practices – that will help our members and other industry participants improve their investment capabilities and performance,” said Kathy Jeramaz-Larson, Executive Director of the ILPA. “The ILPA Private Equity Principles will establish an operating framework for investors to engage in ongoing dialogue and to develop improvements that will benefit the industry for years to come.” In conjunction with the release of this document, ILPA has formed a new Best Practices Committee that will focus on continuing to strengthen private equity as an asset class by soliciting input from other private equity practitioners and by utilizing the Private Equity Principles as a living document to incorporate changes as warranted in the future. In addition, ILPA encourages and welcomes the formal endorsement of the ILPA Private Equity Principles from both members and non-members, including general partners, fund-of-funds and industry consultants. The ILPA Private Equity Principles are posted on the ILPA website at www.ilpa.org. A list of institutions that wish to be formally recognized as signatories to the Private Equity Principles will also be posted and updated on a regular basis. The Institutional Limited Partners Association is a not-for-profit association committed to serving limited partner investors in the global private equity industry by providing a forum for facilitating value-added communication, enhancing education in the asset class and promoting research and standards in the private equity industry. ILPA has over 215 institutional member organizations that collectively manage approximately $1 trillion of private equity assets. For a copy of the ILPA Private Equity Principles or for more information about ILPA, please visit www.ilpa.org.
Aug
31
2009
CPPIB Canadian general partner Q1 2009 performance numbersRe-Post from Wellington Financial Blog, by Mark McQueenThe 1st quarter CPP Investment Board This post is the latest in the ongoing series covering the Canadian general partners that have been lucky enough to receive a limited partner commitment from the CPP Investment Board (see prior post “CPPIB Canadian general partner Q4 2008 performance numbers” May 25-09). For the ninth consecutive quarter, Canada’s very own national pension fund didn’t make a single new direct formal commitment to a Canadian general partner (other than Onex Corp). The CPPIB team did commit, however, to 18 U.S. and international GPs during 2008; but just two foreign funds in Q1 2009. In total, 42 of the last 43 direct GP commitments have been outside of Canada. If you are a regular visitor to the site, you’ll know that we pull out the figures showing the performance results that the Canada Pension Plan Investment Board is receiving from its GP relationships (they’ll want me to remind you that’s calendar Q1, not CPPIB’s fiscal Q1). The figures that follow cover four categories: CPPIB’s commitment, paid-in-capital (which tells you how much of the fund is invested in deals and/or drawn to pay management fees) reported value, and reported value + distributions (which tells you what the notional simple return of the fund is against the paid-in-capital figure). That figure is based in large part on what the manager believes the portfolio is worth as at March 31, 2009, subject to GAAP fair value accounting. MM means millions. As we’ve done in the past, I’ve added our own Fund II returns (as at Q1/09) as they get muddled when included as part of the CPPIB Legacy fund of fund program that committed $10 million in December 2004 (back when Edgestone ran the program for CPPIB) to our $83MM Wellington Financial Fund II. For the first time ever, I’ve also stripped out the returns that we provided to that fund to see how it did without our profits baked in (the loss increases from -31% to -36%). Fund II ceased pursuing new transactions in August 2006 with the first closing of our $150MM Fund III that month (CPPIB doesn’t have $ in our Fund III, either directly or via TD’s VC fund-of-fund program): Canadian Venture and Life Science Funds Celtic House VP Fund II (2002 US$): Celtic House VP Fund III (2005 US$): Edgestone Venture Fund (2000): Edgestone Venture Fund II (2004): Lumira/MDS Life Sciences Technology Fund II (2002): Skypoint Telecom Fund II (2001 US$): TD Capital Legacy VC Fund (2002): TD Capital Legacy VC Fund (2002) Ventures West 8 (2003): Wellington Financial Fund II (12/04): Canadian Buyout & Debt Funds Birch Hill Equity Partners III (2005): Clairvest Equity Partners I (2001): Clairvest Equity Partners III (2006): Edgestone Equity Fund II (2002): Edgestone Equity Fund III (2006): Edgestone Mezzanine Fund II (2000): Kensington Co-investment Fund (2002): Onex Partners (2003 US$): Onex Partners III (2008 US$): TD / CPPIB CDN Private Equity Holdings I (2006): TD Capital CFOF Legacy Buyout (2002): Tricap Restructuring Fund (2001): Tricap II (2006): —– I’ll try to tackle the non-Canadian GPs tomorrow. |