Data & Analysis

Canada’s Well‑Capitalized Market Is Producing Some of the Fastest Valuation Growth Globally

Investors are using a pen to writing data for the 2021 09 03 12 54 23 utc


Steady valuation growth has been the persistent theme in the Canadian private market throughout the past five years. The country’s many private companies not only survived the pandemic, they prospered.

The Market Sees the Fastest Growth in Five Years

Although the median pre-money valuations of both VC-backed and PE-backed companies had slight ups and downs, they remained almost flat from 2017 to 2019, according to data from Pitchbook. 

In 2020, despite turbulence in the global economy due to the COVID-19 pandemic, VC-backed companies’ median pre-money valuation increased to CAD$25.62M, a rise of 80 percent from 2019, whereas the PE median pre-money valuation dipped by 25 percent from CAD$13.49M to CAD$10.28M.

As the Canadian economy started to recover, both VC and PE companies’ median valuations rebounded to CAD$132.36M and CAD$39.99M respectively by the end of 2021 third quarter, setting record highs and showing the resilience and strength of Canada’s investment ecosystem.

Rachel Skelton, Partner at TorQuest, described the Canadian private equity market as a very healthy and competitive landscape” in the last five years due to the combination of strong equity and debt markets. 

Besides low interest rates and the major Canadian lenders’ support of private equity assets, Canadian PE funds have been raising larger pools of capital. Combine this with increasing valuations, which drives asset owners to consider selling, and you have a recipe for meaningful market activity and strong valuations” Skelton said.

Similar reasons helped fuel the venture capital market boom.

We’ve clearly seen the growth of the Canadian private market mainly due to two factors — more money supply and lower interest rates,” said Hans Knapp, Partner at Yaletown Partners. 

A lower interest rate drives a lower discount rate that gets applied to future earnings of companies. As a result of the decline of interest rate, the valuation goes up. In addition, increased money supply drives the volume of deals, and therefore, pushes up the valuations to some extent,” said Knapp. 

Valuation Gains Happened in Nearly All Sectors

Such an upward trend of valuation can be found in almost every sector in the last five years, thanks to the expansion of the private market in Canada.

Valuations of Consumer Products and Services (B2C), Financial Services, and Information and Communications Technology (ICT) dwarfed those of other sectors, at CAD$59.48M, CAD$62.74M, and CAD$44.2M respectively by the end of 2021 third quarter. 

Trends in the three sectors correlate to the rise of digitization and consumer-led economic recovery. Craig Wright, chief economist at the Royal Bank of Canada, expressed his optimism about a consumer-led resurgence as Canadians saved large sums over the last year. 

Among the three leading sectors, the tech industry is the only one that has grown continuously in median valuation over the last five years, reflecting the technology boom at a global scale, according to Margaret Wu, Lead Investor at Georgian. 

Investment in information and digital technologies has been solid for several years in Canada. By 2019, economic activity in the digital sector made up almost the same share of Canada’s economy as mining, oil, and gas combined, the Bank of Canada reported.

Since 2017, ICT has gradually become the dominant sector in Canada’s VC market. By the end of this year’s third quarter, valuations of all VC-backed tech companies added up to more than CAD$38B, taking up to 66 percent of all VC companies’ valuations combined across sectors.

We’ve seen (valuation set-up) multiples expansion in the last five years, and an especially dramatic increase in the last three quarters. There is a lot of capital that has shown interest and is flowing into private tech companies in growth or later stage,” Wu said. It is really driving a huge impact on the fast increase of valuation in the last year.”

We’ve seen (valuation set-up) multiples expansion in the last five years, an especially dramatic increase in the last three quarters. There is a lot of capital from traditionally later stage, and even public investors, flowing into private tech companies at growth stage,” Wu said. Additional interest from these players is really a huge driver of increasing valuations.”

Record-breaking valuations signal prosperity in the tech industry and pose challenges. The large influx of capital indicates that investors are recognizing how attractive the industry is. Moreover, competition among investors makes it an entrepreneurs’ market for fundraising, Wu said. But the inflated valuations are also going to put a lot of pressure on entrepreneurs to execute and live up to the valuations that they are raising at.”

Angel Rounds See Modest Growth as Later Stages Smash Records

Median valuations of VC-backed companies across all stages sustained upward trends from 2017 to 2021. Valuation gains have been the most remarkable in later-stage rounds, with the median valuation increasing by almost 19 times in five years, while angel, seed, and early-stage companies experiencing more modest jumps of 24.4%, 98.2%, and 70.1% respectively.

After two consecutive years of growth, angel-staged companies were the only group that had a slight dip in valuation this year so far at CAD$5.54M. On the contrary, median valuation for later-stage VC-backed companies has had the steepest growth from CAD$23.61M in 2017 to CAD$453.93M by the end of Q3 2021

The discrepancy of valuation growth at various rounds of funding is primarily the function of the volume of money that is being placed and that is available to be placed at those stages,” said Knapp. 

There is more money now at every stage, but there is disproportionally more capital available at the later stages. And therefore, you are seeing higher valuations,” Knapp said. We are also seeing a greater number of companies being created at an early stage. So there is a bit of a dilutive effect happening and of course less valuation upwards pressure.”

A Relatively Small but Rapidly Growing Market

The overall Canadian private market is on a smaller scale, compared to those in the U.S., China, the United Kingdom, and Israel. The median valuation of private companies in Canada had remained around one-third of their U.S. counterparts from 2017 till 2020

However, Canadian companies have the highest year-over-year growth rate among the five markets, particularly during the post-pandemic period, reaching a median valuation of CAD$31.14M this year, narrowing the gap to about half of the U.S. valuation.

Senia Rapisarda, managing director at HarbourVest, attributed the rapid increase to the fact that Canadian companies started from historically lower levels and are catching up.”

Also, the Canadian market is for the first time in decades well-capitalized and there are many competitive situations,” wrote Rapisarda in an email to CVCA.

Investors believe that, in the short term, the same growth in the Canadian private market will continue because the ingredients for the current growth are already in place. 

For the next year, the amount of new capital that is now waiting to be deployed has to find a home somewhere,” said Knapp.