Canada buyouts boom, venture capital near bust

TORONTO (Reuters) - Canada's buyout industry is flush with cash after years of near-record fund-raising, and is on track to resume investment activity toward the end of 2009 as asset valuations firm following global economic turbulence.

Gregory Smith, president of Canada's Venture Capital and Private Equity Association (CVCA), told Reuters in an interview on Tuesday that the country's buyout industry is still one of the world's strongest, even after the U.S. credit crisis swept across the globe toward the end of last year.

The private equity buyout industry has added more than C$30 billion ($24.6 billion) in value to Canada's GDP in the past five years, creating more than 100,000 jobs, the CVCA says.

"I think we'll see some softness in terms of investment numbers in 2009, but the amount of money that's been raised by private independent funds, the size and liquidity of our pension plans in Canada, the strength of our financial institutions, our banks in Canada, will continue to put Canada in a very strong position for the mid-market in the buyout industry," Smith told Reuters.

"We had a very strong fund-raising year 2008 and it was strong in 2006 and 2007, which means we have a lot of capital that is available to invest in 2009," he said.

Just as the buyout industry booms, the venture capital sector, another key component of private equity in Canada, is flailing.

Investors who already had begun to shy away from the sector before the global crisis gained momentum, have not looked back, and Smith said things could get worse.

Deal activity in the Canadian venture capital market slowed to its lowest level in 12 years in 2008, coming in at just over C$1 billion.

Smith said venture capital investment levels could fall even further this year.

"There's been a number of long-term venture capital firms in Canada, I'd say about a half of dozen in number, who have tried to raise new money to invest but have stopped fund-raising efforts because of the inability to raise capital," Smith said.

REVERSE SNOWBALL EFFECT

The shortfall follows years of fading enthusiasm for venture capital. And when a portfolio shrinks, each allocation of funds to more risky sectors gets smaller.

As ideas receive investment but are not brought to a commercial stage, investors lose heart and some innovations are shelved forever.

"Good ideas can die because there's no place to go," Smith said. "I think that the global crisis will have a further dire consequence on what is already a very fragile venture capital industry in Canada."

The CVCA is working with the federal government to find new ways to promote investment in venture capital, including partnerships such as one announced this week between Canada's largest pension fund administrator and the province of Quebec.

Caisse de depot et placement du Quebec announced a venture capital fund with the Quebec government on Monday worth as much as C$825 million.

Similar, but much smaller-scale funds already exist in the provinces of British Columbia, Alberta and Ontario.

Smith said the CVCA is also working with the government to change Section 116 of the Income Tax Act, which deals with property.

The red tape for foreigners involved in this regulation is considered onerous, and is blamed for many investors looking elsewhere to park their money.

"We hope they will move to fix that. I would hope to see it changed this year," Smith said.

($1=$1.22 Canadian)

(Reporting by Pav Jordan; editing by Peter Galloway)