The Importance of Canada’s Institutional Investors to the Venture Capital Asset Class

A lot of Canadians probably don’t realize how great we have it. When you stack Canada up against other countries, there is a ton going for us. We’re a leading G20 country with a stable and globally competitive economy, we have one of the most educated workforces in the world, we’re considered highly innovative on the global stage and we are one of the most desirable places in the world to live and do business – our immigration policies even encourage it!

These metrics are attractive and make us proud, but when investors are looking for the next opportunity, they want more: real-life examples of success and impressive fund and investment performance. Easily able to provide this evidence are Canada’s world-renowned public pension funds who drive impressive investment returns.

Among the top players in Canada are CVCA members The Canada Pension Plan Investment Board (CPPIB), The Caisse de dépôt et placement du Québec (Caisse), The Ontario Teachers’ Pension Plan Board (OTPP), The British Columbia Investment Management Corporation (bcIMC), The Ontario Municipal Employees Retirement System (OMERS), and The OPSEU Pension Trust (OPTrust). These institutional investors not only help to support the retirement ambitions of over 20 million Canadians with one of the strongest retirement systems in the world, but also contribute significantly to our national prosperity.

In 2019, researchers from McGill University published the results of a study that analyzed the returns, asset allocation strategies, and cost structures of pensions, endowments, and sovereign wealth funds globally between 2004 and 2018 and concluded that large Canadian funds in particular outperformed in all measures.

Key to their success is their governance structures and investment policies, including direct investment, that allow them to operate in the best interests of members with little or no outside interference. Being managed as a business, with a distinct performance mandate, provides Canada’s institutional investors the independence to do what is best for their members.

When it comes to direct investments, Canada’s institutional investors are global leaders says Tom Birch, Managing Director, Global Venture Capital and Technology, Caisse de dépôt et placement du Québec.

“Canadian institutional investors like CDPQ – as well as CPPIB, OTPP and few others – have been pioneers when it comes to direct investing in the private equity and venture capital space. Combining a strong local presence with an international reach thanks to offices in key cities around the world has enabled CDPQ and our peers to come alongside fast-growing businesses and provide them with long term capital that exceeds the traditional 5‑year timeline to exit of our competitors.

This approach has been particularly effective and at CDPQ, we have developed an investment continuum from early-stage VC funds to direct Series C/D investing, to growth tech, to pre-IPO and post-IPO – that is very attractive to any portfolio company who can see that CDPQ is a partner that can accompany them on their entire growth journey rather than just one phase. With approximately $55B of technology investments in its portfolio, CDPQ is a major player in the tech sector and the biggest VC investor in Canada.”

CDPQ’s direct investment strategy was paused in the late 90s and early 2000s as they refocused their risk.

“Following the dot-com bubble, CDPQ decided to limit its direct investment activity in the VC space while retaining some exposure through certain Canadian VC funds like Teralys Capital and their fund-of-funds approach,” explains Birch.

“In 2015, CDPQ decided to reinitiate its presence in Canada’s VC asset class by investing in high-quality VC funds like inovia and Georgian – as well as identifying opportunities to invest in the top performing Series C software as a service (SaaS) companies found in the underlying VC funds portfolio.

Today, we are closely tracking 1100 SaaS companies, maintain both a Top 50 list and a Top 10 list, and do between 5 – 7 Series C deals per year and play an important role in supporting the vibrant Canadian venture ecosystem.”

With more than CAD $1.25T under management, Canada’s institutional investors have increased their direct investments in several notable Canadian assets. Since 2013, Canadian institutions have made over 80 direct investments including into some Canada’s most famed companies. Shopify, Lightspeed POS, Dialogue, Hootsuite, and Nuvei have all received direct investments from institutional players. By the end of 2015, these players had invested approximately CAD $600B across various asset classes within Canada.

Birch says these examples of success have provided an endorsement of the ecosystem in Canada and CDPQ believes the positive momentum is going to continue.

“Even the established U.S. VC community has taken notice – and instead of asking the founders of fast-growing businesses to relocate to California they are investing directly in Canada.

Importantly, the Toronto Stock Exchange (TSX) is increasing its reputation as a promising IPO exit route – with large Canadian institutional investors and retail clients investing in the newly TSX-listed companies which create a nice ​“flywheel effect” that enable new market entrants such as Dialogue and Vendasta to go public.”

Laura Lenz, Partner at OMERS Ventures says that Canada’s strengthening position as a focal point for investors and founders gives the country an opportunity to take the podiumpost-COVID-19.

“There’s incredible momentum in Canada right now. The value of Canadian exits is at an all- time high. Nine of the top 25 venture backed Canadian tech exits ever have occurred since January of 2020. And Toronto was is in the top 5 talent markets in North America in 2020.

The combination of growing early stage investor sophistication, founder confidence and know-how, and the prospect of a high-paced post-COVID recovery, means if ever there was a moment for Canada to shine on the global stage, it’s now. “

In 2015, when CDPQ made the decision to re-enter the VC asset class, CVCA reported that $2.3B was deployed in Canada that year. Last year, Canadian investors injected $4.4B in Canadian start-ups. All the signals of a strong and maturing market are visible. In turn, the participation of Canada’s world class pension plans in this domestic asset class will surely only grow.