VC and PE investment in Canada declined 63 percent in Q3, claims new report

BY Fraser Tennant

Canadian venture capital (VC) and private equity (PE) investment declined dramatically in the third quarter of 2020, according to a report published this week by the Canadian Venture Capital & Private Equity Association (CVCA).

In its ‘Venture Capital Canadian Market Overview: Q3 2020’, the CVCA reveals that $1.4bn was invested in over 155 deals in Q3 2020, 27 percent lower than Q3 2019 ($1.9bn across 177 deals). Furthermore, year-to-date (YTD) activity is tracking 25 percent below the four-year average across 2015-2019 in both dollars invested and deals ($21bn across 565 deals).

The largest deal seen in Q3 was the $354m growth investment in Toronto-based Superior Plus by Brookfield Asset Management.

However, a decrease in mega-deals served to drive the average deal size down. In Q3 2020 there were only three mega-deals ($50m plus) that closed, compared to eight in the previous quarter. As a result, the average deal size in Q3 2020 was only $7m, bringing down the YTD average deal size to $8.5m, in contrast to 2019, when the average deal size was $11m. 

“The strength of Q2 was in many ways a combination of GPs further capitalising their portfolio and the added capital injections of Business Development Bank of Canada (BDC) and Export Development Canada (EDC) matching programmes,” said Kim Furlong, chief executive of the CVCA. “Q3, however, is more aligned with the challenges the pandemic has created for deal flow. While our members are finding ways to deploy capital, the realities of COVID-19 and the continued strength of valuations is apparent in the deal flow.”

In terms of later stage deals, these represented 45 percent of the total investment in the third quarter with $1.6bn invested over 57 deals, while 42 percent ($1.5bn over 189 deals) went to early stage and 8 percent ($298m over 154 deals) went to seed stage companies.

Additionally, the CVCA notes that there were 15 PE-backed exits in the third quarter, a significant increase from the 11 exits in the entire first half of 2020. The pace of VC-backed exits is on track relative to previous years, with 26 exits completed YTD.

Ms Furlong concluded: “Despite the uncertainty due to the COVID-19 pandemic, Canadian PE firms are adapting to the evolving conditions. “Given Canadian PE’s long-term investment horizon, PE fund managers are well-positioned to help our businesses on a path to economic recovery.”

Report: Venture Capital Canadian Market Overview: Q3 2020

Two thirds of UK PE firms embrace ESG, claims new report

BY Fraser Tennant

Almost two thirds of UK private equity (PE) firms now embrace environmental, social and governance (ESG) principles as part of their investments, according to research published this week by BDO LLP.

Increasingly, says BDO, PE firms have to prove that their policies at least match what can be demanding ESG criteria set out by limited partners (LPs), some of whom have been at the forefront of ESG investment for several years.

However, with many PE firms failing to make their full ESG policy publicly available, some risk falling behind, and more work is needed to bring those firms into line with expectations of a broader group of stakeholders.

According to the BDO research: (i) 57 percent of PE firms clearly set out the changes they have implemented to make their investments more ESG-focused; (ii) 49 percent of PE firms are signatories of the United Nations Principles for Responsible Investment (UNPRI), the world’s most-recognised set of ESG principles; (iii) 48 percent of PE firms report in detail on the ESG impact of their investments; and (iv) 25 percent of PE firms have a dedicated individual or team responsible for embedding ESG into the investment process.

“A manager’s ESG approach is becoming an important consideration for LPs looking to deploy capital into PE,” said Jamie Austin, a partner at BDO. “PE firms have made a lot of progress in a short space of time in developing ESG principles and using them to guide their investments. But there is still a way to go and some firms may look increasingly isolated by making no reference whatsoever to ESG.”

Furthermore, the BDO research reveals that investors are looking for PE firms to strengthen the presence of ESG criteria in due diligence processes, with ESG credentials needing to be a fundamental focus of these risk assessments, if firms are to gain the support of investors. 

Mr Austin concluded: “We suspect the next stage is that investors will not just want a commitment to ESG – they will also want tangible proof of how the PE fund has actually delivered on that commitment. The idea that private assets mean little or no public disclosure on important issues like ESG is increasingly being challenged.”

News: Two thirds of private equity houses now take ESG into account, but more progress remains to be made

NEC Corp to acquire Avaloq for $2.2bn

BY Richard Summerfield

NEC Corp has agreed to acquire software company Avaloq Group AG in a deal worth $2.2bn. The parties expect the deal to close in April 2021.

The sale of Avaloq ends a three-year investment by private equity firm Warburg Pincus, which owns 45 percent of the company. The rest of Avaloq is held by its founder Francisco Fernández and its employees. 

Avaloq has about 2300 employees and serves more than 150 banks and wealth managers in key financial centres including London, Frankfurt and Paris. In a statement announcing the deal, Juerg Hunziker, Avaloq’s chief executive, said the deal would help the company expand its geographical footprint beyond Europe.

“The Avaloq team is delighted to be joining NEC Group, a highly trusted and well-respected company with a long heritage, which will help further enlarge our geographical footprint across the globe,” said Mr Hunziker. “Due to very similar values of professionalism, reliability, quality and excellent service for clients with a focus on precision, we firmly believe that this partnership will be a successful one for employees, clients as well as other stakeholders.”

He added: “The whole Group Executive Board at Avaloq is committed to driving forward our growth strategy and we are very glad to have a strong partner on our side who supports our long-term vision. With NEC, Avaloq found a perfect new home to continue our success story of serving our clients with solutions that make their lives simpler in an ever more complex world. The Avaloq team would like to thank Warburg Pincus for its valuable strategic advice and continued support during our successful partnership.”

“NEC strongly believes in the importance of safety and security around financial institutions, which is absolutely crucial for sustainable prosperity and digital inclusion,” said Takashi Niino, president and chief executive of NEC. “Avaloq is a recognised global leader in their field, and their compelling offering is expected to complement our current solutions. NEC aims to further expand its business in the digital government and digital finance areas, by globally developing SaaS and BPaaS business models that utilise software and technologies from throughout the NEC Group, including Avaloq’s.”

“We have enjoyed a rewarding and successful partnership with Avaloq’s chairman and founder, Francisco Fernandez and Juerg Hunziker, Group CEO,” said Adarsh Sarma, partner and co-head of Warburg Pincus Europe. “Avaloq has grown quickly to establish itself as a global leader in banking software and is one of the most strategic FinTech companies in its space. Together with management, we have transitioned Avaloq from an on-premise business model into software-as-a-service provider, launched new innovative cloud native digital products and expanded into multiple new geographies. With strong leadership and governance in place, we are confident that Avaloq will have great future success under new ownership and wish them the very best.”

The deal follows NEC’s 2018 acquisition of British IT services company Northgate Public Services and its 2019 purchase of Danish e-government services firm KMD for more than $1bn.

News: NEC to buy Swiss software firm Avaloq for $2.2 billion

CD&R agrees $4.7bn Epicor deal

BY Richard Summerfield

Four years after it acquired the company, private equity giant KKR & Co has agreed to sell Epicor Software Corp to Clayton, Dubilier & Rice, in a deal valued at $4.7bn.

KKR, which bought Epicor from Apax Partners in 2016 for $3.3bn, including debt, had been exploring a sale of the business since 2019. The deal is expected to close later this year.

“This is an exciting day for the entire Epicor family – employees, customers, and partners alike – and validates the company’s leadership position across markets we serve,” said Steve Murphy, chief executive of Epicor. “We welcome this new partnership with CD&R, which shares our vision for growing the company, and I thank KKR for a highly successful partnership these past few years. We are excited to work with CD&R to increase investment in our market-leading product portfolio and to enhance our ability to support an ever-increasing range of customer needs.”

“Epicor’s reputation for quality and performance, and its impressive portfolio of next-generation cloud products, position the company well to accelerate growth in the coming years,” said Jeff Hawn, operating partner at CD&R. “We look forward to partnering with the Epicor management team to further expand Epicor’s product portfolio as well as make strategic acquisitions to meet customers’ evolving digital transformation needs.”

“Four years ago, we embarked on an ambitious product modernization journey together with Epicor and are incredibly proud of the successes that the company has achieved to date, particularly with its recent cloud releases,” said John Park, chairman of the Epicor board and head of Americas technology private equity at KKR. “We are confident that CD&R will provide valuable support as the company continues these product- and customer-centric investments to accelerate growth in the cloud.”

News: CD&R to buy KKR’s Epicor Software for $4.7 billion

PE and VC investment in UK business hit £22bn in 2019, reveals new report

BY Fraser Tennant

Private equity (PE) and venture capital (VC) investment into UK businesses reached more than £22bn in 2019 – an increase of £1.6bn on the previous year  – according to a new report by the British Private Equity & Venture Capital Association (BVCA).

In its annual ‘Report on Investment Activity’ the BVCA reveals the full breadth of the impact of PE and VC on the UK economy, with a total of 1530 companies across the country having received backing in 2019, an increase of 15 percent on 2018 figures.

“As long-term, responsible investors, PE and VC have a key role in supporting the recovery post-COVID-19, said Michael Moore, director general of the BVCA. “What these 2019 figures demonstrate is the size of our industry’s economic impact, building businesses and jobs across the UK.”

The report’s key highlights include: (i) VC investment increased by 67 percent year-on-year to £1.65bn, with 821 companies backed, an 18 percent increase; (ii) the South West of England received the largest amount of PE and VC capital investment (11.6 percent) outside of London and the South East, followed by the North West (9.6 percent) and the West Midlands (7.8 percent); (iii) the technology sector saw the largest number of deals and investment in 2019, accounting for 37.1 percent of all companies, and 26.8 percent of total investment; (iv) UK PE and VC funds raised £47.59bn in 2019; and (v) pension funds provided 38 percent of all capital raised followed by sovereign wealth funds (14 percent) and fund of funds (11 percent).

That said, while the level of investment is welcome, the BVCA is under no illusions that there are tough times ahead for the UK. “This year’s report clearly illustrates how important PE and VC are to UK businesses big and small, providing them with the long-term capital and the investment expertise they need to thrive,” said Neil MacDougall, chair of the BVCA. “As the country emerges from coronavirus, these attributes are needed now more than ever.”

Mr Moore concluded: “I am supremely confident that PE and VC , and the companies they back, are well-positioned to support growth, sustainability and innovation throughout the UK.”

Report: BVCA Report on Investment Activity 2019