Private Capital | Q4 2015

Q4 2015 ■ $6.25

THE MAGAZINE OF THE CANADIAN VENTURE CAPITAL & PRIVATE EQUITY ASSOCIATION

CANADA’S VENTURE CAPITAL

REPORT CARD Building on regional successes to stoke the long-term fire

Plus • Leading Up to the Election: CVCA’s open letter to all parties • Redefining Private Capital: “Alternative” no longer fits the bill

SAVE THE DATE CVCA ANNUAL CONFERENCE CANADA’S LARGEST GATHERING OF PRIVATE CAPITAL PROFESSIONALS

DATE

May 24th – 26th, 2016

LOCATION

Toronto, ON

VENUE

The Westin Harbour Castle

CONTACT

events@cvca.ca to enquire about sponsorship and speaking opportunities

2016

Published for

372 Bay St., Suite 1201 Toronto, ON M5H 2W9 Phone: 416-487-0519 Fax: 416-487-5899 www.cvca.ca

EDITORIAL BOARD Chair: Steve Hnatiuk, Lighthouse Equity Partners Jenifer Bartman, Bartman Business Advisory Aki Georgacacos, Avrio Capital Grant Kook, Westcap Management Robert Montgomery, Achilles Media Gregory Smith, InstarAGF Asset Management David Unsworth, Information VP

CONTENTS

Peter van der Velden, Lumira Capital Published by

701 Henry Ave. Winnipeg, MB R3E 1T9 Phone: 204-953-2189 Fax: 204-953-2184 www.lestercommunications.ca President, Jeff Lester Vice-President & Publisher, Sean Davis Director of Business Development, Jeff Wall EDITORIAL Editorial Director, Jill Harris Editorial Assistant, Andrew Harris ADVERTISING Walter Lytwyn, Darryl Sawchuk, Cathy Zimmerman

COVER STORY

ARTICLES

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ICT Venture Capital Breakout Report

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Leading Up to the Election: CVCA’s open letter to all parties Proposed Stock Option Tax Increase

Canada’s Venture Capital Report Card Building on regional successes to stoke the long-term fire

DEPARTMENTS

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CEO’s Message

3

CVCA Board of Directors and Management

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Fund News

By Mike Woollatt

People on the Move

DESIGN & LAYOUT Art Director, Myles O’Reilly Crystal Carrette, Jessica Landry, John Lyttle, Gayl Punzalan

By Mike Woollatt

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Redefining Private Capital As private capital steps on to the main stage, the “alternative” label no longer fits the bill

By Gregory Smith

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Life Sciences VC Breakout Report Life sciences have seen a recent surge in investments

Jennifer Holmes © Copyright

2015 CVCA.

All rights reserved. The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of CVCA. Direct requests for reprint permission should be made to the CEO of the Canadian Venture Capital & Private Equity Association.

Statements of fact and opinion are the responsibility of the authors alone and do not imply an opinion on the part of the officers or members of the Canadian Venture Capital & Private Equity Association or Lester Communications Inc.

Comments, questions and submissions are welcome. Please send to the editor at privatecapitaleditor@cvca.ca.

Please follow the CVCA on LinkedIn, Twitter and Facebook

Publication Mail Agreement #40606022 Return undeliverable Canadian addresses to: 701 Henry Ave., Winnipeg, MB R3E 1T9 Printed in Canada.

Please recycle where facilities exist.

Private Capital § Quarter 4 § 2015

ABOVE: IDELDESIGN/SHUTTERSTOCK.COM COVER: MIKHAIL BAKUNOVICH /SHUTTERSTOCK.COM

DISTRIBUTION

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CEO’s Message

Mike Woollatt, CEO, CVCA

The Verdict is In O ctober 19th brought about huge change in Ottawa.

The Red Tide turned the Orange Crush into the Orange Crash. The dramatic decline in NDP support at the end of the campaign largely eliminated the vote-splitting the Conservatives had depended on and paved the way for the Liberals to surprise most of us and claim a majority government.

This, of course, leaves the Liberal government with a lot of runway to implement the policies they ran on. It also leaves us with a lot of work to do at the CVCA, as many of the potential policy changes could have a significant impact on our industry.

So where exactly do the Liberal platform policies and the private capital industry intersect? For those who are CVCA members, you already know that we sent a letter to all political parties during the election outlining our stance against increasing stock option taxes. You can read that letter in full on page 15 in this magazine.

In it we outlined the negative impacts that raising taxes on stock options would have on private (as opposed to public) companies of all sizes and sectors. Our actions resulted in some changes during the election, with the Liberal Party altering its stance somewhat acknowledging that options are “a useful compensation tool for start-up companies.” Since the election we have spoken with the government, who have indicated they are open to suggestions. Notably, the Finance Minister’s mandate letter from the Prime Minister does not reference stock options

ARINDAMBANERJEE / SHUTTERSTOCK.COM

Justin Trudeau during an October 2015 election rally in Brampton, Ont.

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Private Capital § Quarter 4 § 2015

but does include ensuring “tax measures are efficient and encourage innovation.” So all in all, we are cautiously optimistic that the new government understands the important and unique role stock options play in Canadian private companies.

Other issues include bringing back the LabourSponsored Venture Fund Tax Credit, repealing and refining parts of Bill C-51 (Anti-Terrorism Act), creating a new Canada Infrastructure Bank and spending in a variety of areas, including clean tech and IRAP. As well, there are a number of issues we need to raise with the new government outside platform items, including a continuation of the successful Venture Capital Action Plan, and ensuring the work we did last year to allow charities to act as LPs is ratified.

One thing the change on October 19th won’t impact is our resolve to advocate on behalf of our industry. I am very confident that we will be able to work well with the Liberal government over the next four years to ensure our industry is well represented in Ottawa. n Until next time,

Mike Woollatt CEO, CVCA

CVCA Board of Directors 2015–16 OFFICERS Dave Mullen, Highland West Capital, Board & Chair Peter van der Velden, Lumira Capital, Past Chair Pierre Schuurmans, Birch Hill Equity Partners, Treasurer Gary Solway, Bennett Jones LLP, Secretary

VICE-PRESIDENTS Jocelyn Blanchet, KPMG LLP, Vice President Gilles Duruflé, Independent Consultant, Vice President Grant Kook, Westcap Mgt. Ltd., Vice President Gregory Smith, InstarAGF Asset Management, Vice President

DIRECTORS Alain Denis, Fonds de solidarité (FTQ), Board Rob Barbara, Build Ventures, Board John Berton, Georgian Partners, Board Ross Bricker, Optimum Technology Fund, Board Joseph Catalfamo, Summerhill Venture Partners, Board Paul Day, Export Development Canada, Board Howard Donaldson, Vanedge Capital, Board Joe Freedman, Brookfield Asset Management, Board Aki Georgacacos, Avrio Capital, Board Cheryl Brandon, Waterton Global Resource Management, Board Michael Hollend, TorQuest Partners, Board Wally Hunter, EnerTech Capital, Board Lorne Jacobson, TriWest Capital Partners, Board Tom Kennedy, Kensington Capital Partners, Board Edmund Kim, ONCAP, Board Elmer Kim, Roynat Equity Partners, Board Erik Levy, CPPIB, Board Jeff Linner, PFM Capital, Board Geneviève Morin, Fondaction, Board Dave Mullen, Highland West Capital, Board & Chair Karamdeep Nijjar, iNovia Capital, Board Rob Normandeau, SeaFort Capital, Board Jerome Nycz, BDC, Board Marc Paiement, Novacap, Board Michael Raymont, AVAC, Board Whitney Rockley, McRock Capital, Board Jane Rowe, Teachers’ Private Capital, Board Rakesh Saraf, Alberta Teachers’ Retirement Fund, Board Pierre Schuurmans, Birch Hill Equity Partners, Board & Treasurer Lloyd Segal, Persistence Capital Partners, Board Kent Thexton, OMERS Ventures, Board Edward Truant, Imperial Capital, Board Mark Usher, Wellington Financial LP, Board Peter van der Velden, Lumira Capital, Board & Past Chair Mike Walkinshaw, Fronterra Ventures, Board

MANAGEMENT Mike Woollatt, CEO Kieran Lawler, Director of Communications Ashley Smith, Communications Associate Ted Liu, Research Director Andrew Keenan, International Trade Liaison Officer Elaine Bedell, Operations Manager Lauren Hart, Events Manager Amy Kim, Research Associate

Private Capital § Quarter 4 § 2015

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Fund News

› fund news

Dundee Sarea LP has raised $112.5 million in an initial close for its inaugural fund, Dundee Sarea Acquisition 1 Limited Partnership, and expects to raise over $200 million. Dundee Sarea Acquisition 1 intends to invest in companies requiring turnaround expertise in North America and Europe, focusing on manufacturing, distribution, industrial products, agriculture, oil and gas and forestryrelated industries.

Chrysalis launches buyout fund Chrysalis Capital Advisors Inc. announced the official launch of the Chrysalis Acquisition Fund I. The fund intends to acquire majority ownership positions in fundamentally strong small-to-medium-sized enterprises (SMEs) and play a pivotal role in facilitating ownership transition for founders, major shareholders and management teams.

Crown Capital Partners announces closing of Crown Capital Fund IV, LP Crown Capital Partners Inc. has closed its fourth special situations debt fund, Crown Capital Fund IV, LP with initial capital commitments of $100 million. Initial limited partners, including Crown, will contribute a total of $15 million for the initial capitalization of the Fund with further capital calls to be made as funds are required. Crown IV LP has a maximum size of $300 million, with additional closings to occur within the next three years as opportunities are identified to fund Special Situations Financing transactions.

Integrated Asset Management announces $385M first close for fifth fund for Integrated Private Debt Fund V LP Integrated Asset Management Corp. and IAM Private Debt Group, its private corporate debt team, announced the first close of the fifth investment grade private corporate debt fund, with commitments of $385 million.

Catalyst raises over USD$1.5B for fifth Canadian distressed fund The Catalyst Capital Group Inc. has secured over USD$1.5 billion in capital commitments to its most recent fund, Catalyst Fund Limited Partnership V (Fund V), surpassing its target of USD$1.25 billion and its hard cap of USD$1.5 billion. Fund V received strong backing from a diverse group of investors, including public and corporate pensions, university endowments, foundations, family offices and financial institutions located across the U.S., Europe, Canada and Asia. Atlantic-Pacific Capital served as global placement agent, and Fasken Martineau DuMoulin LLP served as legal advisor.

Wellington Financial launches $300M Fund V Wellington Financial has launched Wellington Financial Fund V, the Canadian specialty finance firm’s new $900 million investment program. Fund V has already held its first close, working towards the “hard cap” of $300 million of recirculating equity commitments. The fund will assist both public and private companies with a demonstrated customer following, minimum of $5 million in trailing revenue, talented management and well-defined growth strategies. n

RAWPIXEL/SHUTTERSTOCK.COM

Dundee Sarea Acquisition 1 holds $112.5M initial close

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› people on the move

Vistara Capital expands team – Noah Shipman joins as senior associate Vistara Capital Partners announced the addition of Noah Shipman to its investment team as senior associate.

Shipman has seven years of experience in corporate finance, M&A and strategic planning. He has worked as an advisor to, as well as in-house for, public and private companies. Prior to joining Vistara Capital Partners, Shipman was principal at Garibaldi Capital Advisors, a technology-exclusive boutique investment bank. While at Garibaldi, he successfully executed growth capital and secondary financings, as well as buy and sell side M&A mandates for a variety of technology and technology enabled service companies.

Ontario Teachers’ appoints Nicole Musicco as managing director for Asia-Pacific The Ontario Teachers’ Pension Plan (Teachers’) has appointed Nicole Musicco as managing director for AsiaPacific and head of the Hong Kong office. Musicco joined Teachers’ in 2002, and in her new role will be responsible for the full investment cycle from origination to execution across asset classes in the region.

Kensington announces the appointment of Harold Huber as senior vice-president Harold Huber, previously a partner at Torys LLP, has joined Kensington Capital Partners Limited as senior

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vice-president. At Torys LLP, Huber acted as legal counsel for Kensington’s infrastructure business. He has been working in the acquisition and development of energy and infrastructure projects in North America for over 30 years with extensive senior experience in the power, oil and gas and pipeline sectors.

MaRS names four additions to board of directors MaRS Discovery District appointed Annette Verschuren (chair and CEO, NRStor Inc.), Michael Serbinis (CEO, LEAGUE), Stefan Larson (entrepreneur-in-residence, Versant Ventures and CEO, Northern Biologics) and Martha Tory (retired partner, Ernst & Young LLP) to its board of directors. The new board members are influencers in the innovation economy, bringing broad experience and leadership in the three sectors that MaRS focuses on: health, cleantech and ICT.

TriWest Capital Partners appoints Dino DeLuca as COO TriWest Capital Partners announced the appointment of Dino DeLuca to the new position of chief operating officer of TriWest. In his new role, DeLuca will oversee a wide variety of areas within TriWest including responsibility for all administrative, finance, investor reporting and governance functions, as well as supporting the transaction and investment teams.

People on the Move

Neil Petroff, formerly executive vice president of investments and chief investment officer at the Ontario Teachers’ Pension Plan since 2009, has been appointed to the role of vice chair of Northwater Capital Management Inc. In 2014, Petroff was recognized as “Chief Investment Officer of the Year” and he received the prestigious Lifetime Achievement Award at the industry’s Innovation Awards ceremony.

Shirley Speakman to head Cycle Capital’s Toronto office Cycle Capital Management Inc. has officially announced the opening of a new office in Toronto. Shirley Speakman, a partner a Cycle Capital, will head the office. Based in the MaRS Discovery District, the new office will expand Montreal-based Cycle Capital’s presence in the Ontario cleantech market.

Northleaf Capital Partners continues to build global investment team with new additions and promotions Northleaf Capital Partners expanded its global capabilities with the addition of new team members and a number of key promotions across the firm. The Northleaf team

now numbers 70 professionals located in Toronto, Canada; London, U.K.; and Menlo Park, U.S. In the London office, Matthew Woodeson was appointed managing director, Infrastructure and Richard Bolton joined as an associate.

In the Toronto office, Dimitrios Siomos was appointed director, head of infrastructure and asset management.

Recent promotions include Ian Carew (director, Private Equity Partner Relations), Matthieu Ducharme (director), Susie Lee (vice president, Investor Operations), Nadim Vasanji (vice president), Brad Blowes (senior associate) and Christ Rigobon (senior associate). In addition, Northleaf recently promoted and expanded the roles of several key team members, recognizing their experience, track record and significant contributions to Northleaf’s growth and success.

Birch Hill Equity Partners promotes Andrew Fortier to partner Andrew Fortier, who joined Birch Hill Equity Partners in 2011, has been appointed partner at the firm. Since his start with the company, he has had a leadership role in Birch Hill’s investments in Shred-it, GDI and MET. Prior to joining Birch Hill in 2011, he was a vice president at Audax Group, a mid-market private equity firm based in Boston. n

Private Capital § Quarter 4 § 2015

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Neil Petroff joins Northwater Capital Management Inc. as vice chair

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Canada’s Venture Capital Report Card

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Cover Story

Building on regional successes to stoke the long-term fire

By Jenifer Bartman, Jenifer Bartman Business Advisory Services

T

he Conference Board of Canada’s most recent Innovation Report Card includes some impressive venture capital benchmarks, but there’s much more to consider when looking beneath the surface.

Decreased venture capital investment levels in peer global markets, which are largely a lingering byproduct of the financial crisis, coupled with brisk but isolated investment activity in select geographies here in Canada, raises questions about our ability to sustain a high ranking when conditions improve elsewhere.

Perhaps, even more importantly, these findings put the focus on what actions should be taken to bring improvement to Canada’s weaker markets, of which there are quite a few.

›› The number of companies receiving venture capital in Canada has increased from 378 in 2009 to 416 in 2014.

Peak levels of approximately 450 companies receiving venture capital in 2011 and 2012 have not been met in recent years. ›› The vast majority (80 per cent) of Canada’s venture capital investment in 2013 was later-stage, with only 20 per cent taking the form of early-stage financing.

This falls well short of international trends where more than 60 per cent of venture capital targets earlystage financing. The report notes that Canadian venture capital took a much more balanced approach in 2009, when financing was more evenly split between early- and later-stage.

THE FINDINGS

The provinces

Increased venture capital investment, primarily in Canada’s most populated provinces, coupled with lagging investment in European countries since the recession have resulted in Canada moving from one of the weakest performers to one of the strongest. Specifically: ›› Canada’s ranking has improved from third worst in 2009 to second best in 2014 in venture capital investment, relative to 15 peer countries. Canada earned a “B” grade and a fifth place ranking overall. ›› Canada’s venture capital investment has more than doubled, from nearly $1 billion (0.07 per cent of GDP) in 2009 to over $2.3 billion (0.12 per cent of GDP) in 2014.

Provincial venture capital investment levels and rankings vary widely, from “A” to “D-”, with six provinces receiving a “D” or “D-” ranking. Specifically: ›› Both British Columbia and Quebec received an “A” in terms of venture capital investment (representing 0.16 per cent and 0.14 per cent of GDP, respectively) outpaced only by the U.S. (0.17 per cent of GDP). ›› Although companies in Ontario received more venture capital money than that of other provinces, the venture capital investment level of 0.11 per cent of GDP was sufficient to earn a “B” ranking. ›› Propelled by two venture capital deals totaling $60 million in 2014, Newfoundland and Labrador received a “C” ranking.

Canada

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Cover Story

Venture capitalists recognize that the presence of investor ready businesses and the right approach to get there are, in many ways, the fuel for generating a vibrant investment environment.

›› Canada’s remaining provinces received a “D” ranking in venture capital investment, with Manitoba and Prince Edward Island receiving a grade of “D-”. ›› Substantial increases in venture capital investment levels from 2009 to 2014 have occurred in four provinces: Ontario (117 per cent), British Columbia (91 per cent), Alberta (81 per cent) and Quebec (61 per cent).

All other provinces have experienced declines. ›› In terms of the number of Canadian companies that received venture capital funding in 2014, the highest levels occurred in Quebec (151), Ontario (142), British Columbia (60), Alberta (27) and New Brunswick (19).

The remaining provinces ranged from one to nine companies receiving venture capital.

THE FUEL Canada’s improved ranking was assisted by the fact that, with the exception of the U.S., venture capital investments declined in all of the other peer countries between 2009 and 2013. Canada weathered the recession better than many countries, contributing to more stable venture capital investment levels. In fact, venture capital investment levels have now returned to the prerecession level of $2.3 billion. Contributions from the Venture Capital Action Plan (VCAP) have helped, as well as the ongoing participation of BDC Capital, which the study cites as Canada’s largest and most active earlystage technology investor.

Venture capital investment in Canada from foreign sources has continued to rise. Traditionally it has represented approximately 30 per cent of the total, but increased to more than 37 per cent in 2014 from U.S. sources alone. Clearly, venture capital investment levels are positively impacted by foreign participation and our own public policy that encourages investment.

However, we must also be wary of the fact that Canada is currently standing out in a cohort that is performing well below its pre-recession standards. What we do next to continue to separate ourselves from the pack now could have long-standing consequences.

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Viewing Canada’s current position of strength as an opportunity to make the necessary improvements to “lift the level of all boats” is a much more proactive approach than simply benefiting from the rise of the tide.

THE FIRE Improving venture capital investment levels across the country and generating long-term sustainability are important areas of focus. The Conference Board cites a number of factors that contribute to establishing a successful level of venture capital investment, including the presence of those with money to invest, companies that are investment worthy and a means to connect the two.

Much could be said about the challenges of establishing venture capital pools in particular geographic areas and the difficulties of allocating a portion of funds in existing pools to investments with a higher risk profile. Regardless, fueling the venture investment process requires a stable of “investor ready” companies, enabling venture capitalists to invest well, work with high potential businesses, and generate the returns that are so important in attracting fundraising over the long term. These are critical components in generating a sustainable venture capital environment.

Venture capitalists recognize that the presence of investor ready businesses and the right approach to get there are, in many ways, the fuel for generating a vibrant investment environment. Too often, the focus tends to be on leading with capital, and although this approach might find some initial success to “get money out,” it does little to generate the level of returns to stoke the fire for the long term. n

Jenifer Bartman, CPA, CA, CMC, is the founder and principal of Jenifer Bartman Business Advisory Services. An executive in the venture capital industry for over nine years, she now works with companies in transition, including those in the early, growth and succession stages of development. Visit www.jeniferbartman.com for more information.

Member Advantage Program CVCA members have access to exclusive offers and discounts on products and services that can help reduce the bottom line.

Many can also be extended to portfolio companies, and we encourage you to contact us at membership@cvca.ca for more information.

The Leslie Group is launching an employee benefits program designed exclusively for CVCA members – ideal for businesses with 3–100 employees. Savings typically range from 10–35%.

RR Donnelley is offering CVCA members a 40% discount off its standard pricing model for the Venue virtual document management solution.

Manawa is offering CVCA members up to a 35% discount on IT services, hardware & software, and Canadian cloud hosting services.

Newton is offering CVCA members operational due-diligence at 50% discount. Newton is offering CVCA members on-call operational advisory for $2,00 per month, a 60% discount.

eSentire is offering CVCA members a 25% discount off its standard pricing model for cybersecurity monitoring with solutions starting at $1,500 per month and scaling to large enterprises.

VIA Rail Canada is offering CVCA members a 7.5% discount for both leisure and business trips at “best available public fare.”

Available for up to three additional passengers.

  Visit www.cvca.ca/member-advantage-program/ for more details

TOTAL DEALS & INVESTED 2014: 269 & $1.3 billion

2015 H1: 161 & $547 million

Subsector Breakdown

ICT VC Breakout Report

A

s the year draws to a close, we thought we’d take a look back at the first half of 2015 to see where venture investment in ICT netted out. Overall deal activity and disbursement volume for the first half of the year was roughly half of all of last year’s levels with $547 million across 161 deals.

Internet software and services captured the vast majority of disbursement at $262 million (48 per cent), followed by eCommerce ($95 million) and electronic and semiconductors ($86 million) to round out the top three subsectors.

As for stage investment, 2015 H1 saw a push toward earlier-stage investing – 54 per cent of ICT investments were early-stage in the first half of the year compared to 39 per cent in 2014.

2014

■ Internet Software & Services (55%) ■ eCommerce (15%) ■ Electronic & Semiconductor (10%) ■ Computer Hardware & Services (8%) ■ Mobile & Telecommunications (7%) ■ Software (non Internet/mobile) (6%) percentage of dollars invested

2015 H1

■ Internet Software & Services (48%) ■ eCommerce (17%) ■ Electronic & Semiconductor (16%) ■ Computer Hardware & Services (8%) ■ Mobile & Telecommunications (5%) ■ Software (non Internet/mobile) (5%) percentage of dollars invested

ICT VC Breakout Report

2015 H1 Funding by Stage

Mostly trending in a similar path to 2014 with a push toward earlier-stage investing.

2015 H1 Stage (millions)

Stage (millions)

2014

0 100 200 300 400 500 600

■ Seed ■ Early ■ Later ■ Bridge ■ Other

VC ICT INVESTMENT total disbursements largely split between 3 provinces

0 100 200 300

■ Seed ■ Early ■ Later ■ Bridge ■ Other

#1

Ontario 76 deals & $331 million invested

Quebec #2

90%

39 deals & $82 million invested

British Columbia #3

23 deals & $80 million invested

2015 H1 Private Capital § Quarter 4 § 2015

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Proposed Stock Option Tax Increase CVCA’s letter sent to all parties ahead of the federal election Ahead of the federal election, the CVCA sent a letter to all parties clearly outlining its stance against increasing stock option taxes, a policy that both the Liberals and NDP included in their platforms. The exact letter is printed here. n

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Open Letter

Proposed Stock Option Tax Increase Would Hurt Canadian Growth Industries Eliminating deduction on stock options targets much-needed talent in key growth sectors Stock option based compensation is a critical component of private industry success in Canada. Used widely across all the industry sectors we finance, and at all stages of growth, stock options provide employees with a direct equity interest in the companies they are working to build. From small tech start-ups to large successful private growth companies, stock options help attract, align and retain the vital talent driving innovation and growth in Canada.

Despite this, raising taxes on stock options by eliminating the 50 per cent deduction on stock option benefits has surfaced as an election issue. This action would cripple participation particularly in the tech start-up community and risk driving our entrepreneurs and their employees out of Canada.

Instead of looking to raise taxes and drive people out, we should look for ways through tax and public policy to further incentivize people to enter, stay, and thrive in Canada’s private companies. We need the best and brightest to want to work for private Canadian companies – especially at a time when Canada sorely needs the growth, innovation and jobs that these companies drive.

Stock options are widely used in private companies’ employee compensation as a critical growth incentive tool.

Particularly as many private Canadian start-up and growth companies cannot afford to pay cash compensation at a level competitive with larger public companies, or employment opportunities outside of Canada. It is the promise of a potential delayed outcome through stock options that helps offset these lower salaries, aligns incentives, and rewards success.

The risks of pioneering innovation are significant and the potential upside benefits must be commensurate for the idea to begin. Stock option based compensation is critical to achieving this risk/reward equilibrium and allows private Canadian growth companies to attract and retain the talent required to thrive and create more jobs and success right here in Canada.

There appears to be a desire to single out stock options for top level employees, such as CEOs. This may be partially driven by the oft-reported equity packages granted to large public company executives. However, Canada’s large public corporations are in a much better position, due to strong cash flow and free-trading equity, to shift to other forms of compensation should taxes on stock options increase.

Meanwhile, employees at virtually every level in Canada’s emerging and growing private companies receive stock options and will therefore be captured in this policy shift, and deterred from doing something we need more Canadians to do – take risks.

Some have discussed setting a threshold level prior to raising the taxes on stock options, whether it be the size of the company, or the amount of the stock option benefits per individual per year. As mentioned, stock options are used across all sectors, stages and employee levels amongst private companies. This would ensure that the impact of this tax hike would be profound, regardless of any company-size or individual employee threshold that might be set.

Furthermore, private company employees typically have no say over when their options are exercised, unlike employees of public companies who are able to sell liquid public company stock and thus smooth out any individual annual threshold level. Typically, private company options generate value over a very long period of time and must be exercised all at once when the company goes through a merger or acquisition – often after many years of earning a lower salary and taking ssubstantial risk. As a result, the impact of a change to stock option taxation would be most severe and widespread amongst the employees of Canadian private companies.

But perhaps most importantly, any threshold level that could be set ignores the fact that it is the potential for a high return – not a low or moderate return – that is required for people to take risks and a lower salary to start or join a private venture.

Reducing the potential for an exceptional return by raising taxes will have a significant impact on risk taking in Canada.

Sweat equity should be encouraged, not discouraged. Now is not the time to raise taxes on Canadian entrepreneurs and their employees who choose to take a risk, innovate and grow. Now is the time to look at ways to provide even more incentive for participation in private industries, and in turn lead to great strides in innovation and the creation of new industries and large Canadians success stories.

The Canadian Venture Capital & Private Equity Association looks forward to working with all political parties to help ensure Canadian private businesses from coast to coast and across all industries thrive and grow.

Sincerely,

Mike Woollatt CEO CVCA

Private Capital § Quarter 4 § 2015 15

REDEFINING PRIVATE CAPITAL As private capital steps onto the main stage, the “alternative” label no longer fits the bill

By Gregory Smith, InstarAGF Asset Management Inc.

W ativ e A lte r n

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hat’s in a name? Quite a lot, actually.

Any word association game quickly underlines how words and names evoke certain perceptions, sometimes stubbornly so. For instance, Germany is still synonymous with manufacturing, California with Silicon Valley or Internet technology, Atlantic Canada with fisheries and private capital with alternative assets.

In my view, this last association is problematic, and perhaps even damaging, for Canada’s private capital sector.

As a frequent speaker at alternative asset conferences, I’ve seen firsthand how divergent asset classes are bundled under the same umbrella, often speaking alongside hedge fund managers, natural resources investors and real estate and infrastructure funds. While it’s evident to each of the speakers that our mandates and investments are distinctive, it’s not immediately clear to many investors, boards of directors or their investment committees.

Over time, this leads to significant market confusion, lost opportunities and unsatisfactory regulatory outcomes.

The identity of private capital as an alternative asset class originated years ago because there were no other alternatives to public equities and bonds at the time. A typical portfolio construction was 60 per cent equities and 40 per cent fixed income. Today, this balance has shifted such that public equities and fixed income together represent 60 per cent of many institutional portfolios with alternatives representing 40 per cent, with the vast majority of that weighting being private capital. I believe we’ve reached a point where institutional investors and pension plans stand out – and not in a good way – if they don’t include private capital in their portfolio.

Indeed, in most economies, private capital is firmly a mainstream asset class, representing a significant proportion of institutional portfolios. According to Benefits

Redefining Private Capital

As the prominence of private capital grows, we must make a concerted effort to challenge the “alternatives” label we have been assigned – and up until now, accepted.

Canada, in 2014 Canadian pension plans allocated $152.2 billion to private real estate, $119.4 billion to private equity and venture capital and $71.9 billion to private infrastructure.

As the prominence of private capital grows, we must make a concerted effort to challenge the “alternatives” label we’ve been assigned – and up until now, accepted – and actively shape how our sector is perceived and understood by investors, regulators and other stakeholders.

With increasing allocations to private capital, and the ever-broadening definition of “alternatives,” the time has come to reposition, rebrand and redefine Canada’s private capital sector. It’s critically important to our future.

For investors, the alternatives stamp leads to a sometimes-negative association with emerging investment categories, which can include alternative investments such as hedge funds and other types of derivative financial assets as well as precious metals, art, wine and antiques. None of these opportunities has the scale to become a meaningful component of a portfolio, nor the proven track record and relatively stable return profile of private capital. Investing in private capital is now almost a necessity for institutional investors if they want to achieve the risk-adjusted return profile and diversification their beneficiaries, and long-term obligations, demand. From an alternative investment 30 years ago, today private capital is a core holding.

For regulators, applying the alternatives label to private equity, venture capital, real estate and infrastructure along with new types of “alternatives” reinforces a common approach to regulating the alternatives “class,” which does not best serve the interests of private capital investors and their millions of beneficiaries, or the long-term objectives and important economic role of our sector. Fund managers can be regulated in two ways: by how they raise

their capital, and by the nature of their investment activities. Private capital investors are active owners, operators and managers of businesses and assets, including having an important, long-term presence in the communities where these assets are located. That’s very different than a hedge fund or derivatives strategy. Over the past 10 years, neither the Ontario Securities Commission nor the U.S. Securities and Exchange Commission have sufficiently distinguished private capital from alternatives.

The result has been a broad one-size-fits-all regulatory approach that captures our sector alongside alternative categories with completely different characteristics, challenges and impacts.

In short, allowing our sector to be constrained by the alternatives label is misleading to investors evaluating investment options, and detrimental to our efforts to work with regulators on practical, balanced and appropriate regulation. We need to evolve our vernacular, and help investors and regulators see private capital as separate and distinct from alternative assets. We must continue to promote private capital as a core investment, and highlight the integration of our sector within Canadian communities. We must demonstrate our contribution to the overall economy, including to the retirement income of millions of Canadians.

Given private capital’s historical performance, current significance and projected growth in the years ahead, “alternative” simply no longer fits the bill.

Let’s control how we are defined. By refusing to selfidentify as “alternative,” we can work to change the conversation about private capital – one word at a time. n

Gregory Smith is the president and CEO of InstarAGF Asset Management Inc.

Private Capital § Quarter 4 § 2015

17

The CVCA is currently working with Canadian consulates to connect member funds with foreign LPs Contact Andrew Keenan at andrew.keenan@international.gc.ca for more details.

December 9–11, 2015 Las Vegas: Marcus Evans Private Wealth Summit: CVCA member funds attending will have 10 –15 pre-arranged meetings with family fund LP investors at the event December 9–11, 2015 Dana Point, California: Opal Group Alternative Investing Summit: through the Opal Exchange platform CVCA member funds will have pre-arranged meetings with LP investors including endowments, institutional funds and family funds February 23, 2016 Los Angeles: RG & Associates ConsortiumWest Event: CVCA member funds will have pre-arranged meetings with potential LP investors followed by and a networking event with LP investors at the Canadian Consulate in LA February 22–26, 2016 CVCA mission to Berlin, Germany and Zurich, Switzerland where CVCA member funds can participate in networking events with LP investors hosted by the Canadian Embassy at both locations.

March 19–20, 2016 Panama City: Marcus Evans Group Latin Investors Summit: CVCA member funds attending will have 10–15 pre-arranged meetings with LP investors based in Latin America at this event followed by a networking event with LP investors at the Canadian Embassy in Panama April 4–6, 2016 Boston: PartnersConnect East Event: CVCA members will have pre-arranged LP meetings at this event followed by a networking event at the Canadian Consulate in Boston with LP investors May 23–25, 2016 Chicago: Opal Emerging Managers Summit: CVCA member VC funds will have pre-arranged meetings with institutional and family fund investors followed by a networking reception with LP investors at the Canadian Consulate Chicago June 8–9, 2016 New York: RG & Associates 13th Annual Consortium East event where CVCA member VC fund managers will have pre-arranged meetings with US LP investors followed by an LP networking reception hosted by the Canadian Consulate in New York June 15–17, 2016 Shanghai, China: Marcus Evans China Investment Summit: CVCA member funds will have 10–15 pre-arranged meetings with China based LP investors followed by a networking reception with LP investors hosted by the Canadian Consulate General in Shanghai

18

Private Capital § Quarter 4 § 2015

VC Breakout Report

VC Breakout Report Life Sciences 2015 H1 Already reached almost 70% of total invested in 2014:

Sharp increase in 2015 Q over Q investment:

$448 million

2014

2015 H1

317 million

Q2

2015

Investment by Stage

$225 million

Q1

$92 million

Investment by Type

■ Early stage (45%) ■ Later stage (18%) ■ Seed (10%) ■ PIPE (10%) ■ Other (18%)

■ Therapeutic drugs & biologics (43%) ■ Therapeutic medical devices (18%) ■ eHealth & IT (10%) ■ Medical devices & equipment (23%) ■ Other (8%)

$183 million

$208 million

Regional Breakdown

Top Six Canadian Deals *

BC – 10 deals, $42 million

Ontario – 17 deals, $136 million

Quebec – 12 deals, $133 million

#1

Clementia Pharmaceuticals Inc.. . . . . . . $74 million

#2

Highlight Therapeutics Inc.. . . . . . . . . . $31 million

#3

Trillium Therapeutics Inc.. . . . . . . . . . . . $25 million

#4

Cynapsus Therapeutics Inc.. . . . . . . . . . $21 million

#5

Milestone Pharmaceutiques Inc.. . . . . . $21 million

#6

Thrasos Innovation Inc.. . . . . . . . . . . . . . $18 million

Private Capital § Quarter 4 § 2015

*Disclosed deals only

2015 H1

19

Our Membership The CVCA has a diverse membership which includes Canadian venture capital and private equity firms, as well as international investors, debt and equity providers, institutional funds, government entities, angel and family offices, and industry service providers. Join today and gain access to information and networks that will help your organization grow and prosper.

MORE THAN

200 1000 CORPORATE INDIVIDUAL MEMBERS MEMBERS

30%

23%

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VENTURE CAPITAL

PRIVATE EQUITY

SERVICE PROVIDER

TWO THIRDS OF MEMBERS ARE

SENIOR LEVEL BUSINESS DECISION MAKERS FROM CANADA’S PRIVATE CAPITAL INDUSTRY.

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