Private Capital | Q4 2014 by Private Capital

Q4 2014 ■ $6.25

THE MAGAZINE OF THE CANADIAN VENTURE CAPITAL & PRIVATE EQUITY INDUSTRY

DATA SECURITY Plus

The exponential rise of cybercrime and the opportunities that come with it

•F ive Reasons You Won’t Raise Your Next Fund – Part 1 in a 3 Part Series • Independent Directors – No Conflict, No Interest • Crowdfunding: Disrupting Private Capital Markets?

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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 Grant Kook, Westcap Management Ashley Smith, CVCA Robert Montgomery, Achilles Media Aki Georgacacos, Avrio Capital Gregory Smith, InstarAGF Asset Management David Unsworth, RBC Venture Partners Peter van der Velden, Lumira Capital Mike Woollatt, CVCA

Published by

701 Henry Ave. Winnipeg, MB R3E 1T9 Phone: 204-953-2189 Fax: 204-953-2184 www.lesterpublications.com President, Jeff Lester Vice-President & Publisher, Sean Davis EDITORIAL Editorial Director, Jill Harris Editorial Assistant, Andrew Harris

CONTENTS COVER STORY

ARTICLES

By Moe Kermani and Brian Martin

DEPARTMENTS

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

By Mike Woollatt

Message du chef de la direction

CVCA Board of Directors and Management

7 10 12

Five Reasons Why You Won’t Raise Your Next Fund Reason 1: Strategy deviations without explanation

Facts, Evolution and Potential Disruption in Private Capital Investing Crowdfunding may be more disruptive than initially realized

Par Mike Woollatt

Fund News

By Hitesh Rathod

People on the Move Private Capital Pioneer Insights An interview with John Puddington, CVCA past president (1987–1989)

CVCA Membership Benefits & Information Request Form

More Capital? A Canadian perspective on the life sciences sector By Alain Davis and Peter van der Velden

Quotes of the Quarter Top Deals of the Quarter

Why a Brilliant Business Strategy Isn’t Enough Clarity is key in strategy execution By Fred Pidsadny

By Steven Hnatiuk

28 31 36

No Conflict, No Interest An investor’s opinion on the fallacy of independent directors and corporate governance By Aki Georgacacos

CEO’s Message

ADVERTISING Sales Director, Danny Macaluso Stephanie Allen, Larry Kiska, Darryl Sawchuk

Hacking and Attacking The exponential rise of cyber crime and the opportunities that come with it

Plus de capital? Une perspective canadienne sur le secteur des Sciences de la vie Par Alain Denis et Peter van der Velden

Nikki Manalo DISTRIBUTION Jennifer Holmes © Copyright 2014 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 president of Canada’s Venture Capital & Private Equity Association.

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

Please follow CVCA on LinkedIn, Twitter and Facebook

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 Canada’s Venture Capital & Private Equity Association or Lester Communications Inc. Publication Mail Agreement #40606022 Return undeliverable Canadian addresses to: 701 Henry Ave., Winnipeg, MB R3E 1T9 Printed in Canada. Please recycle where facilities exist.

COVER PHOTO: FOTOGESTOEBER/SHUTTERSTOCK

Private Capital § Quarter 4 § 2014

PAST PERFORMANCE. FUTURE UNCERTAINTY. WHAT IS THE BUSINESS WORTH NOW?

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CEO’s Message

Mike Woollatt, CEO, CVCA

The Opportunities of Data have embarked on this comprehensive transaction data set, complete with league tables that you will see released shortly. We will need your help to refine this data on an ongoing basis to ensure it is as accurate as possible. But perhaps what comes most quickly to mind are the many business and investing opportunities in data. These opportunities not only lie in the great power of big data, but also in its protection, which we have seen growing in importance and gaining particular public attention. And in fact, many of our members are seizing these opportunities. Examples from recent transactions include GE’s acquisition of Wurldtech Security Technologies – a Vanedge-funded software company that provides cybersecurity for protecting critical infrastructure; Relay Ventures’ investment in Bionym – the developer

of the Nymi Band authentication wristband; Georgian Partners and Northleaf Capital Partners in eSentire – an active threat protection platform; iNovia Capital’s investment in Allocadia – a cloud-based marketing performance management software; and Innovacorp, BDC and Rho Canada Ventures’ investments in Analyze Re – a developer of pricing and risk management software. Whether it is in the specific investments by our members, or helping to illuminate our industry, the opportunities on all sides of the big data boom are obvious. And, like our members, CVCA intends to seize these opportunities. n

Mike Woollatt, CEO, CVCA

“ Improving the data on transactions in Canada represents a huge opportunity for our industry.”

Private Capital § Quarter 4 § 2014

GST/SHUTTERSTOCK MINERVA STUDIO/SHUTTERSTOCK

s we all know well, data is ubiquitous these days. Even articles written on data are everywhere. In fact, I’m sure there is even a data set available on the number of articles about data. In this issue of Private Capital, we are adding to that data set. And for good reason. The opportunities that data presents for our industry are substantial. First off, from our immediate perspective at CVCA, you have likely heard us make a fair bit of noise about the need to improve the data in our own industry. Improving the data on transactions in Canada represents a huge opportunity for our industry. It will not only help ensure better market-based decisions by our members, but will also improve our ability to lobby various governments and help attract capital from outside Canada. That is why we

Message du chef de la direction

Mike Woollatt, CEO, CVCA

De l’opportunité des données gouvernements et d’attirer des investissements étrangers de capital de risque. C’est pourquoi nous avons développé un jeu de données intuitif sur les investissements, auquel s’ajoutera prochainement la publication de classements. Nous aurons besoin de votre aide pour entretenir cette base de données de manière régulière afin de s’assurer de l’exactitude des données. Toutefois, l‘une des premières choses qui vient à l’esprit est peut-être le nombre d’affaires et d’investissements potentiels qu’offrent les données. Ces opportunités résident non seulement dans le pouvoir des mégadonnées, mais aussi dans leur protection, sujet qui comme nous avons pu le constater a gagné en importance et attire l’attention de tous. Ainsi, plusieurs de nos membres ont déjà eu l’occasion de saisir ces opportunités. Quelques exemples de transactions récentes, incluant l’investissement de Relay Ventures dans Bionym – le développeur du bracelet d’authentication Nymi

Band; l’investissement de Georgian Partners et Northleaf Capital Partners dans eSentire – une plateforme de protection active contre les menaces informatiques; l’investissement de iNovia Capital dans Allocadia – une solution de gestion de la performance marketing basée dans le nuage; et l’investissement de Innovacorp, BDC, Rho Canada Ventures dans Analyze Re – développeur d’un système de gestion du risque de portefeuille et de tarification. Que ce soit à travers les investissements de nos membres, ou pour faire la lumière sur notre secteur d’activité, les occasions à saisir autour des mégadonnées sont évidentes. Et tout comme nos membres, CVCA a bien l’intention de saisir ces opportunités. n

Mike Woollatt, CEO, CVCA

« L’amélioration des données sur les transactions au Canada représente une énorme opportunité pour notre industrie. »

Private Capital § Quarter 4 § 2014

MAKSIM KABAKOU/SHUTTERSTOCK

e nos jours, comme chacun le sait, les données sont omniprésentes. En effet, les articles écrits sur le sujet abondent. Je suis par ailleurs persuadé qu’il existe un jeu de données sur le nombre d’articles consacrés aux données elles-mêmes. Ce présent numéro de Private Capitale s’y ajoute. A raison, les opportunités que présente la gestion de données dans notre secteur d’activité sont considérables. D’abord, à CVCA, nous avons abordé à maintes reprises la nécessité d’améliorer le traitement de données concernant notre propre secteur d’activité. Améliorer le traitement de données sur les transactions qui ont lieu au Canada représente une énorme opportunité pour notre secteur d’activité. Non seulement cela assurera à nos membres de meilleures prises de décision basées sur le marché, mais nous permettra également de promouvoir notre secteur d’activité auprès de nombreux

CVCA Board of Directors 2014–15 OFFICERS Dave Mullen.............................................Highland West............................... 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 Sarah Goel................................................Edgestone Capital.......................... 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.............................................Graycliff Partners.......................... 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 CEO:...........................................................Mike Woollatt Communications Associate:..................Ashley Smith Research Director:...................................Ted Liu International Trade Liaison Officer:......Andrew Keenan Research Associate..................................Marie Labitté Administrator...........................................Elaine Bedell Events Manager:......................................Lauren Hart Member Liaison:......................................Emily Gallant Director of Communications:................Kieran Lawler

Private Capital § Quarter 4 § 2014

› fund news CRDC: $150M for 2015 with 45 per cent Quebec tax credit Capital régional et coopératif Desjardins (CRCD) has announced the new terms governing the sale of its shares for its 2014 issue, as set out in the Quebec budget tabled on June 4, 2014. Having reached its $1.25-billion capital limit, CRCD is limited to issuing an amount equal to the preceding year’s redemptions. As a result, the authorized sale amount for the 2014 issue will be $63 million. For the 2015 issue, CRCD has been authorized by the Quebec government to raise a maximum of $150 million. The rate of the Quebec tax credit on the purchase of CRCD shares is now 45 per cent.

Northleaf Infrastructure Co-Investment Partners closes $520M Northleaf Capital Partners has recently held a final close for its pooled infrastructure fund, Northleaf Infrastructure CoInvestment Partners (NICP), with $520 million in commitments, surpassing its $300-million fundraising target. With the final close of NICP, Northleaf’s infrastructure platform now has more than $900 million in capital commitments. NICP is building an attractive portfolio of mature, yielding assets in OECD countries and has already invested approximately 15 per cent of the Fund’s capital in three operating assets. In June 2012, Northleaf Capital Partners announced that it has reached approximately $500 million in capital commitments across its infrastructure co-investment fund, Northleaf Infrastructure Co-Investment Partners, and customized investment mandates.

McMorgan commits newly closed McMorgan Infrastructure Fund I to GSIA McMorgan & Company LLC and GrandFund Investment Group LLC have formally closed the McMorgan Infrastructure Fund I, L.P. and through the fund committed $1.325 billion to Global Strategic Investment Alliance (GSIA). McMorgan Infrastructure Fund I is the sixth and final member of the GSIA, which has more than $12.5 billion in capital commitments. The GSIA is a co-investment program developed by the Ontario Municipal Employees Retirement System (OMERS) that deploys the expertise of OMERS infrastructure investment arm, Borealis Infrastructure, to pursue large-scale, core-infrastructure investment opportunities around the globe.

Gibraltar Ventures Fund One holds first close Gibraltar & Company, Inc. has announced first close of Gibraltar Ventures Fund One Limited Partnership. Limited Partners include BDC Capital Inc., Corus Entertainment Inc. (TSX: CJR), and several successful technology and media entrepreneurs from across Canada. Over the next three years, the fund will invest in 10 to 12 early to mid-stage technology companies. Gibraltar has made its initial investment in FanXchange, leading a combined $5.2-million seed and Series A round of financing in the company.

Extreme Startups and GrowLab Ventures become HIGHLINE GrowLab Ventures and Extreme Startups have merged to launch HIGHLINE, the first pan-Canadian accelerator platform. The merger of equal creates new powerhouse above the 49th “HIGHLINE,” said the companies. The merger is made possible by the financial backing of major Canadian VCs, including BDC Capital and Relay Ventures.

InstarAGF backed Stream Asset Financial closes initial fund Stream Asset Financial Corp. has held a final close for Stream Asset Financial Limited Partnership (Fund), a midstream oil and gas infrastructure fund. The Fund was oversubscribed with equity commitments of approximately $210 million. The Fund has already invested and committed approximately $115 million across several transactions in the Canadian midstream energy sector, thereby creating a portfolio of yielding infrastructure investments. AGF Management Limited is a cornerstone investor in the Fund with a commitment of $50 million. InstarAGF holds an interest in the Fund’s general partner alongside Stream’s management team, including Ryan Dunfield, president of Stream and FrontFour Capital Corp.

Avrio Capital holds $65M first of close for Avrio Ventures Limited Partnership III Avrio Capital Inc. has held first close for its fourth institutional late stage venture fund, Avrio Ventures Limited Partnership III, securing initial Private Capital § Quarter 4 § 2014

commitments of $65 million from previous fund limited partners, Farm Credit Canada (FCC) and Export Development Canada (EDC). Avrio Ventures Limited Partnership III remains open to new investors and expects to have a subsequent closing some time over the next several months. This first closing has provided incumbent Limited Partners with the opportunity to continue working with the Avrio team as they expand their leadership position as agriculture and food sector investors.

Real Ventures Fund III holds $25M second close Real Ventures has secured an additional $25 million to Real Ventures Fund III, bringing the total commitments to date to $75 million. Limited partners in this close include BDC Capital Inc., Export Development Canada (EDC) and Fondaction CSN, alongside with a select number of family offices and individuals in addition to Real Ventures’ General Partners. They join earlier investors, Teralys Capital, FIER Partenaires L.P. and the Government of Canada, via its Venture Capital Action Plan (VCAP) managed by BDC Capital.

Knight Therapeutics invests in Forbion Capital Fund III Knight Therapeutics Inc. (TSX: GUD), a specialty pharmaceutical company, has expanded its innovative pharmaceutical product sourcing strategy of investing in time-proven life science funds for preferential access globally to top biotechnology and pharmaceutical companies and their products. Knight expanded its reach from its investment in Sectoral Asset Management’s New Emerging Medical Opportunities Fund II, Ltd. by entering into an agreement with Forbion Capital Partners, committing €19.5 million to Forbion Capital Fund III C.V., as part of an initial close of €92 million on Oct. 2, 2014. Formerly known as ABN AMRO Capital Life Sciences, Forbion is targeting €150–200 million for its third fund.

Version One Ventures closes $35M Fund II for even more seed deals Vancouver-based seed investment fund Version One Ventures has attracted $35 million in new commitments for its second fund, announced in late-October. This comes closely on the heels of Version One’s first fund, which secured $19M in February 2013. Founder and sole GP, Boris Wertz, has secured backing for his second fund from Northleaf Venture Catalyst Fund (the first of the federal government-backed VCAP fund-of-funds), as well as existing investors including BDC. The new fund will again be focused on seed and Series A investments. Version One so far lists a whopping 45 portfolio companies from across North America on its website. Version One will continue to be led by the firm’s Vancouver-based founder, who is supported by one associate in Palo Alto.

HIT US WITH YOUR OPINION Talk back to us about industry issues, how we’re doing at Private Capital and the CVCA. Send in your letters to the editor to privatecapitaleditor@cvca.ca Note: Not all letters will be published, and those published may be edited for style and consistency. Submissions are anonymous unless otherwise requested.

Private Capital § Quarter 4 § 2014

TVM Capital Life Science, a Munichand Montreal-based life science venture capital firm, has held a final close for TVM Life Science Ventures VII, surpassing its target with more than $200 million raised from a broad mix of investors. Limited partners include cornerstone investors Teralys Capital and Eli Lilly and Company, and other investors BDC Capital Inc., Minnesota Life Insurance Company, CD Venture and Fondaction. The fund also attracted significant investment from other pharmaceutical companies such as Bukwang Pharma of South Korea. TVM Life Science Ventures VII is a unique collaboration between TVM Capital Life Science and industry to finance and access innovation, in addition to being a way to manage risk and share reward. The fund acquires early-stage molecules from pharmaceutical or biotechnology companies around the world.

STOCK IMAGES: GETTY & SHUTTERSTOCK

TVM Life Science Ventures VII final closes at $201.6M

Fund News

Hellman & Friedman attracts $750M from major Canadian LPs Hellman & Friedman, LLC (H&F) has held an initial close for its eighth fund, Hellman & Friedman Capital Partners VIII, with US$9.969 billion in committed capital. Hellman & Friedman is reportedly to soon hold a final close with investor demand in excess of the hardcap of $10.25 billion. At initial close, two Canadian pension funds led by Canada Pension Plan Investment Board (CPPIB) committed $760 million to the fund, accounting for 7.6 per cent of the total commitments from 204 LP investors.

Information Venture Partners launches Fund I Information Venture Partners Inc., a newly established venture firm focusing on enterprise and financial technology companies, has announced the launch of Information Venture Partners Fund I (a MBO of RBC Venture Partners). Information Venture Partners is managed by co-founders Rob Antoniades and David Unsworth with Kerri Golden, co-founder of JOLT Fund, joining the firm as CFO. Golden previously worked with Antoniades and Unsworth while at Primaxis Technology Ventures,

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a member of RBC Ventures family of funds, from 2000 to 2008. The team is concurrently raising Information Venture Partners Fund II.

Teralys Capital Innovation Fund holds $279M initial close under VCAP Teralys Capital Innovation Fund, a new fund of funds created under the Government of Canada’s Venture Capital Action Plan (VCAP), has held an initial close with $279 million in commitments. Limited Partners include BDC Capital on behalf of the Government of Canada, Investissement Québec on behalf of Government of Québec, Caisse de dépôt et placement du Québec, Fonds de solidarité FTQ, Fondaction CSN, National Bank of Canada, Desjardins Group, Knight Therapeutics (TSX: GUD) and OpenText Corporation (NASDAQ: OTEX, TSX: OTC). The fund is the only Canadian investor dedicated to all sectors of the knowledge economy – information technologies, life sciences and clean or industrial innovations. It will cover all investment stages from start-up to expansion and growth, providing innovative businesses the skills and capital required along every step of their development. n

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› people on the move

LP is a lender to Growth Works Capital, having provided $5.36 million in debt financing to GWC.

McRock Capital appoints Echelon’s Ron Sege to advisory board McRock Capital has appointed Ron Sege, chairman and CEO of Echelon Corporation, to its advisory board. Sege has served as president and CEO of Echelon since August 2010 and chairman of the board since October 2011. Prior to Echelon, Sege served as president and COO and a director of 3Com Corporation from 2008 through to its acquisition by HP.

John Ruffolo Recognized as the #1 Most Influential Business Person in Canada by Canadian Business OMERS Ventures CEO John Ruffolo was at the top of the annual “Power 50” — Canadian Business magazine’s ranking of the most influential business people in Canada for 2014. This is a fantastic recognition for Ruffolo and for venture capital and innovation in Canada. The annual round-up by Canadian Business recognized Ruffolo’s work investing in innovative Canadian tech startups, commenting on John’s pivotal role across Canada and OMERS Ventures “record-breaking US$165-million deal to finance Vancouver-based social media platform Hootsuite and a $100-million deal with Ottawa-based e-commerce platform Shopify establishes it as a heavyweight player on par with U.S.-based VCs.” The #1 power broker ranking further said “in the startup world, everyone knows Ruffolo. But what he represents – a fix to Canada’s chronic lack of VC – should matter as much to Bay Street as it does to entrepreneurs.” On behalf CVCA, a big congratulations to John for this recognition. John served as a longtime CVCA board member and chair of our Government Relations Committee until Sept. 2014.

Christopher Morris becomes CEO of Growth Works Capital R. Christopher Morris, principal of R.C. Morris & Company Special Opportunities Debt Fund II LP and president of R.C. Morris & Company Ltd., will assume the position of president and CEO of Growth Works Capital Ltd. (GWC), a subsidiary of Matrix Asset Management Inc. David Levi will become executive chairman of Growth Works Capital and will continue to be president and CEO of Matrix. R.C. Morris & Company Special Opportunities Debt Fund II 10

Private Capital § Quarter 4 § 2014

Sarona names Menno Derks fourth partner Sarona Asset Management has named Menno Derks as the company’s fourth partner. Derks will continue to lead the company’s fund investment activities as managing director, Fund Investments. Prior to joining Sarona as managing director, Fund Investments in August 2013, Derks served as senior investment manager and investment committee member at PGGM.

Alberta Enterprise names Kristina Williams president and CEO Alberta Enterprise Corporation has appointed Kristina Williams, interim managing director, as its new president and CEO. Williams has been with the company for five years and has an extensive background in the technology industry.

Wellington Financial appoints Rob Helm and Sean Lynden partners; opens new North American office Wellington Financial L.P. announced the addition of Rob Helm and Sean Lynden to its growing team of professionals. Helm and Lynden will be based in Wellington’s new office in San Jose, Calif. Prior to Wellington, Helm joined Gold Hill Capital as partner in 2003. Lynden joins Wellington with over 20 years of experience, including founding partner of Gold Hill Capital.

Thrasos appoints Gaétan Gravel and Joseph Zakrzewski to board of directors Thrasos Therapeutics has appointed Gaétan Gravel, life sciences portfolio director at the Fonds de solidarité FTQ, and Joseph (Joe) Zakrzewski to its board of directors. Gravel joined the Fonds de solidarité FTQ as senior investment advisor in the Life Sciences group in February 1997 and was promoted to portfolio manager in February 2000. Zakrzewski has over 20 years of experience as an

Neil Johnson resigns as president of Difference Capital Financial Neil Johnson has resigned as president of Difference Capital Financial Inc. In addition, Johnson has also resigned as CEO of Difference Capital Inc., the parent company of Difference Capital Management Inc. (DCM), the manager of Difference Capital Financial Inc. Formerly global head of technology and managing director of Investment Banking at Canaccord Genuity, Johnson joined DCF as CEO in September 2012. On Feb. 20, 2014, Johnson resigned as the CEO of DCF and was appointed DCF president. Michael Wekerle was appointed as CEO.

Ontario Teachers’ names Jeff Davis general counsel Ontario Teachers’ Pension Plan (Teachers’) has appointed Jeff Davis as general counsel, corporate secretary and senior vice president of Corporate Affairs. Davis is responsible for the legal team, as well as compliance, corporate communications, government and public affairs and plan policy. Davis has been acting in the role of general counsel since June. Davis joined Teachers’ in 2004 and was promoted to vice president and associate general counsel in 2010. Prior to joining Teachers’, Davis was SVP of corporate and legal affairs at InsLogic Corp., and a corporate associate at Torys LLP.

Lighthouse Equity Partners attracts John Ruffolo, Gregory Smith, Grant Kook, Colin Hansen to advisory board Four veteran Canadian financial and industry leaders have joined the advisory board of lower middle-market PE investor, Lighthouse Equity Partners. John Ruffolo, recently recognized the most influential business person in Canada by Canadian Business, is well-known as CEO of OMERS Ventures and previously as Deloitte’s head of tax for Canada. Greg Smith, founder and CEO of InstarAGF Asset Management, was previously head of Brookfield

Financial Global Infrastructure, president of Macquarie Capital Funds Canada, co-head of RBC Capital Partners’ Mezzanine Fund and managing director at Deloitte Corporate Finance. Grant Kook is chair of SaskTel and CEO of WestCap Management, a Saskatchewan-focused private equity and venture fund manager with over $500 million under management. Colin Hansen is best known as the long-serving Minister of Finance, Minister of Economic Development and Deputy Premier of British Columbia during an unprecedented period of economic growth in the province from 2001-2011. Lighthouse Equity Partners, founded by well-known Vancouver-based investors Steve Hnatiuk and Joe Lucke, invests in majority equity positions in profitable and growing lower middle-market Western Canadian businesses.

Dr. Heather Munroe-Blum becomes CPPIB’s third chair Canada Pension Plan Investment Board (CPPIB) has appointed Dr. Heather Munroe-Blum as chairperson of its board of directors, effective Oct. 27, 2014. Dr. Munroe-Blum was appointed to CPPIB board in 2011 and currently is a member of its human resources and compensation committee. Dr. Munroe-Blum is currently a director of the Royal Bank of Canada, the Trilateral Commission and the Gairdner Foundation and a member of the President’s Council of the New York Academy of Sciences, the Canada Foundation for Innovation and the board of Stanford University’s Center for Advanced Study in the Behavioral Sciences.

La Caisse appoints Christian Dubé executive vice-president, Québec La Caisse de dépôt et placement du Québec has appointed Christian Dubé as executive vice-president, Québec. Dubé will sit on La Caisse’s executive committee and its investment-risk committee, and will also advise La Caisse on all strategic issues in Québec. Before joining La Caisse, Dubé represented the riding of Lévis in the Québec National Assembly. As finance and treasury spokesperson for the Coalition Avenir Québec, he was vice-president of the Commission des finances publiques. n YANLEV/SHUTTERSTOCK

executive in the biotechnology and pharmaceutical industry, serving on the board of directors of Acceleron Pharmaceuticals, Amarin Pharmaceuticals, Insulet Corporation, Liposcience and Gliacure.

Private Capital § Quarter 4 § 2014 11

Private Capital Pioneer Insights An interview with John Puddington, CVCA past-president 1987–1989 By Steve Hnatiuk, Lighthouse Equity Partners

ohn Puddington became the seventh president of CVCA in the late 1980s, at a time of rapid change in Canada’s private capital industry. Private equity and venture capital investment in Canada was on the cusp of the first big wave of unprecedented growth heading toward the 1990s. The 1980s was a decade of emerging specialization and maturation of PE and VC into distinct asset classes – yet there was limited awareness or understanding of PE/VC outside of a small number of industry insiders. At the end of the 1980s, John was CEO of Trucena Investments, which later became Trilwood Investments, one of the pioneering independent firms with a significant allocation to PE and VC investments during the early days and growth of alternative asset classes in Canada. Concurrent to his investment responsibilities at Trilwood, John started a privately owned oil and gas affiliate, Birchill Resources, in which he led as CEO over a 14-year time period. Birchill’s performance earned independent ranking as one of the top two Canadian oil and gas companies in its category over that period, and was eventually sold as an intermediate-sized producer. Today, continuing to keep an active hand in the industry he helped to pioneer in Canada, John contributes to two PE advisory boards during a very active retirement. He and his wife have travelled to over 25 countries and he is an avid skier. John joked, “I hope that I still have a few active ski years remaining in these legs after putting so many miles on them!” Private Capital caught up with John recently to talk about his time as CVCA president – now more than 25 years ago – and to get the benefit of his perspectives on the past, present and future of private capital in Canada.

Private Capital § Quarter 4 § 2014

What were the biggest challenges our industry faced during your time as CVCA president? John Puddington: I believe that gaining recognition as an important contributor to the Canadian economy and spreading an understanding of what the industry was about were key challenges. However, these were also opportunities. In an effort to expand the knowledge of private equity and venture capital, I authored the lead article in CA Magazine in September 1983, outlining the fundamentals of venture capital investing. The article also highlighted the benefits of this type of investing to the Canadian economy in terms of export sales, corporate and personal income tax revenues and R+D expenses. In 1984, to spread more detailed knowledge of PE investments, as chairman of the research committee of the then-ACVCC, I designed and led a study in conjunction with Ernst and Whinney, titled Characteristics of Successful Companies Financed by Canadian Venture Capital Sources.

What is the most significant way that the PE and/ or VC industry changed since you were CVCA president? JP: I was president over 25 years ago. Changes since then have been enormous. As I think back, we as an industry were still trying to explain the difference between debt and equity. The concept that equity, while not bearing interest, had a different type of cost in the form of ownership dilution was relatively new to private companies and needed to be explained. There was still a proclivity on the part of Canadian entrepreneurs to want to retain full control of their companies. The concept of owning a smaller percentage of a larger,

Pioneer Insights

“ The concept of owning a smaller percentage of a larger, growing company was quite new and in many cases drew skepticism from the owners … as did the idea of having an equity partner who would be able to work with them to add value.” – John Puddington

growing company was quite new and in many cases drew skepticism from the owners, as did the idea of having an equity partner who would be able to work with them to add value. I consider the most significant change, therefore, to be the growth and awareness of the industry and its significant value to the economy. The second major change is the growth of the size and specific niches of companies. As I think back, it is amazing that 25 years ago, the in-vogue types of investments being considered were aspects such as switching from typewriters to word processing, the development of automatic teller machines, the beginning of the implementation of computer-aided design in manufacturing and enabling the payment by credit card at the gasoline pump. The companies involved in the area were small by current standards and often only required one VC investor. The third major change is that the Internet, cell phones, etc. were still in the distant future during my time as president. The huge development of these industries and related applications was still to come and have had a major impact on the way we live and do business. We can only try to imagine what the next 25 years will bring.

What advice would you give to GPs who are building their firms today? JP: My advice would be to: a) Define your market niche and stay within it. b) Choose your investment team and the management teams in which you invest based on the quality of their principles and values. There will be challenges that cannot possibly be imagined at the time of the initial investment. The personal characteristics of everyone involved will transcend any problem or growth decisions and enable everyone to work constructively together to achieve success. c) Realize in what stage of growth you are proficient and can add value. Once the company is ready to move on to the next stage of development, be prepared to effect a realization or involve a group who can add value in bringing the company through the next growth phase.

What are your views on Canada’s largest institutional investors/pension funds establishing active direct investing programmes? JP: I have only viewed this development as an observer, mainly through the media. I understand, to an extent, where they are coming from. The last rate of return figures I saw indicated that only about the top quartile of PE firms had rates of return that were in excess of those that could be achieved in the public markets. In return for this, an investment in a PE firm generally involves paying a two per cent per annum fee, a 20 per cent carry over on agreed upon threshold, giving up an element of control and giving up an element of liquidity. This certainly justifies establishing direct investment programs. The rate of return on venture capital in Canada over the years has not enticed many to want to invest in the industry. Given the large size of the pension funds, my perception is that they are suited to making large investments that suit their future cash requirements and risk/ return spectrum. Venture capital investments are by nature made in smaller companies with significant growth potential. The large pension funds, therefore, may be in a position to provide large amounts of capital to enable later stage VC backed Canadian companies to develop the scale to enter and successfully compete in international markets. This would be a significant advantage for developing world-scale Canadian companies.

Where do you think the best returns in private capital investment will come from over the next decade? JP: If you mean geographically, the rapidly changing geopolitical situation makes this virtually impossible to forecast. In addition to the business and political risk, there is the foreign exchange rate factor to be considered. The high debt loads being carried by many countries, the questionable security positions of many banks worldwide, the potential for asset and/or share valuation bubbles to develop as a result of expansionary monetary policies and what the effect of an increase in interest rates might be Private Capital § Quarter 4 § 2014 13

Pioneer Insights

“ As I think back, it is amazing that 25 years ago, the in-vogue types of investments being considered were switching from typewriters to word processing, the development of automatic teller machines, the beginning of the implementation of computer aided design in manufacturing and enabling the payment by credit card at the gasoline pump.” – John Puddington are all risks to be considered. Who would have guessed a decade ago that the most successful companies from a capital appreciation perspective would be ones such as Google, Facebook and Apple – all U.S.-based companies.

What are your thoughts on the geographic scope of investing and fundraising then vs. now? JP: Twenty-five years ago the fundraising by VCs from multiple investors was just beginning and was primarily from Canadian sources. Now, there is intense competition when obtaining funds. Some of the large funds, including the large Canadian pension funds, are seeking suitable opportunities on a worldwide basis. We must remember that Canada only represents around three per cent of world equity with the TSX comprised primarily of three industry sectors. The large funds, therefore, must expand internationally to obtain their desired IRR on capital and to diversify by industry and geographically. It is interesting to note that KKR has recently opened an office in Calgary to invest in the oil and gas business. Canada, therefore, is also a recipient of foreign-based PE in an industry to which this is relatively new.

Hot sectors then versus now?

YEKO PHOTO STUDIO/SHUTTERSTOCK

JP: The high-tech sector still seems to be where most of the opportunities are. Though, I note that what was then high-tech has now become commoditized while the growth of new products has been incredible. Whatever the hot sector may be, I believe the Buffett adage of sticking to your investment principles will continue to result in success.

Any other comments? JP: The nature of companies has changed considerably over the years. I read an article recently comparing the largest automobile manufacturer to Google. The numbers showed that Google has a market capitalization of four times the automobile manufacturer while employing a fraction of the number of employees and using far less capital. Previously, the North American automobile manufacturers did most of their manufacturing domestically and reinvested a substantial portion of their profits Private Capital § Quarter 4 § 2014

back into the business. Now, companies such as Apple manufacture on a global basis, often in countries with low tax rates. Consequently, Apple has a huge amount of cash that cannot be repatriated to the U.S. without significant negative tax consequences. In contrast with years gone by, technology companies appear to be using far less capital per dollar of revenue and can locate in the most favourable countries from a labour cost and tax perspective. This creates opportunities as well as challenges for Canadian PE investors.

If you had it to do all over again, how might you have approached the industry differently knowing what you know now? JP: Knowing what I know now would not have helped then. As I think back, the industry has grown quickly, but incrementally over the years. Certain skills and knowledge required today, applicable to technology and related infrastructure, were inconceivable 25 years ago when I was president. That doesn’t alter the fact that we should adhere to the opinion expressed by Wayne Gretzky when asked about the secret of his success. He claimed that you shouldn’t go where the puck is; you should go where you think it will be. Each generation has to assess the opportunities that are available at the time and take advantage of them. It is the cumulative effect of the individual investments made over the years that have resulted in the industry and the economy being where it is today. This will undoubtedly result in continued innovation and growth in the future from the present knowledge base.

How do you feel about your time as head of CVCA and as an active PE or VC investor in the Canadian market? Would you do it all over again? JP: I would definitely do it all over again. I felt privileged to be elected president of CVCA and thoroughly enjoyed trying to make a contribution in the growth chain. It was also a privilege and pleasure to work with so many innovative, dedicated people both in the VC industry and in the companies in which investments were made. n

Independent Directors

An investor’s opinion on the fallacy of independent directors and corporate governance By Aki Georgacacos, Avrio Capital

MARIAKRAYNOVA/SHUTTERSTOCK

cting as a fiduciary in the best interests of the corporation seeking to enhance shareholder value, a board member’s most valuable characteristic is not independence, but alignment. In recent years, academics, business leaders and investors around the world have been effusive in their call for “independence” amongst corporate boards as a fundamental characteristic of good corporate governance. Institutes and schools have popped up all over the planet to teach independent directors what good corporate governance looks like. This article argues that the intricate and complicated mechanisms required to “direct and manage the business and affairs of the corporation with the objective of enhancing shareholder value, which includes insuring the financial viability of the business” are not improved significantly by the addition of independent directors but that those fundamental matters Private Capital § Quarter 4 § 2014 15

BALANDINA G/SHUTTERSTOCK

“ Instead of the independence buzzword, can we focus on alignment as the key founding principle of good corporate governance?”

are improved by the diligent efforts of directors who hold or represent substantial financial interests in the corporation. Greater interest and less independence are essential to providing the platform from which board members may be positioned to exercise their duties properly and to truly enhance value for all stakeholders. The importance of some independence is beyond doubt with regard to certain aspects of corporate governance. The prime example is the authority given to independent directors to restrain self-dealing by insiders or, when necessary, to remove a failing CEO. The usefulness of the independent directors, even in those important circumstances, continues to depend on their willingness to exercise their authority, something that is often compromised by social factors. When it comes, however, to wealth creation, innovation, economic viability and competent strategic and financial planning, those with a stake in the corporation’s success make better decisions and do more to enhance shareholder value than independent members of the board. As we all know, the duties of a board should be thought of fundamentally as a fiduciary relationship. To fulfill their fiduciary obligation to the best interests of the corporation, a director must firstly understand their ‘natural constituents’ or the parties that they are representing, and work to make that constituent’s interests align with those of the corporation and vice versa. In most private companies, this fundamental requirement for good board function

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does not exist. The boards of most of these small enterprises are backed by a principal or by an institution, in a way that permits the interests of these varying entities both to be represented and generally align with the best interests of the corporation and, in particular, in actively and energetically pursuing the enhancement of shareholder value. In most of these smaller corporate cases, the independents are not necessarily representing any constituents. Without a “natural constituency,” they effectively have no viable reason to exist. The admonition to act in the best interests of the corporation, instead of being the engaged pursuit of stakeholder value, becomes a kind of aimless defensiveness: independent directors, told in independent-director school of the long list of potential sources of liability, act not to promote the corporation or to take creative, controlled risks, but instead focus on making sure that they, and those around them, do not end up being liable for something. As said above, it is not that there is no role for independent directors, for they do serve a role as a “referee” or mediator in certain scenarios and can sometimes constrain self-dealing by insiders, both of which, among other specific ones, are roles that should not be underestimated. They are important, and independent directors are probably the best placed to take care of them. But that general benefit should not be confused with value creation and

corporate success, where independent directors, who do not have enough skin in the game, simply do not offer what most corporations need, particularly small-cap ones. The reason is that they are not directors with a proper constituency as contemplated in modern governance theory and should not be considered as such. When one moves into the public setting, there is clearly a more natural set of constituents for an independent director to represent, those being the public shareholders of a business. They may well fulfill the monitoring role designed for them to protect the public shareholders against insider self-dealing, but try as they might to promote value enhancement, their independence itself is an obstacle to doing so successfully. Only proper alignment

Independent Directors

with stakeholder interests can cause the members of the board to work towards the value creation goal effectively and creatively. It is technically impossible to be aligned with the public shareholder constituency because any independent director who is independent in accordance with the definition of one (a director of a board of directors who does not have a material or pecuniary relationship with company or related persons, except sitting fees. Independent directors do not own shares in the company.) is effectively precluded from significant share ownership. As a result of the inability to hold any meaningful equity, they do not participate in the equity upside and in the “prize” that comes after executing a long-term, welldefined corporate strategy geared at creating meaningful and long-term intrinsic value. Similarly, there is no downside risk for the independent director. Generally, substantial board fees are always paid, and often in advance with the consequence that the upside that promotes creativity an engagement is absent, leaving only an incentive to control and monitor for avoidance of liability rather than for the promotion of value creation. The aligned board members are thus left to optimizing stakeholder value, while the independents go through the paces – yet believe that they are fulfilling an important role, because the common wisdom regarding independence has so often been repeated to them. The current corporate governance requirements leave independents floating around with no constituents, no interests to represent and, so long as no one is lining their own pockets, no reason to exist. Inevitably they will gravitate in approach and strategic thinking most often to the management team, as

they are typically the stakeholders with whom independent directors can most closely identify. Likely having achieved some level of financial success over their careers, these folks are likely to relate to the CEO, and the issues he or she is grappling with, including the ongoing management of pesky shareholders and investors. Without owning a significant

as the key founding principle of good corporate governance? Please, can we bury forever all the conversation about independence and independent boards, as elaborate MBA case studies which amount to exercises in futility, or folly. Simply put, for a “shot” at effective corporate boards, remember that one must always be able to identify the

“ Independent directors, who do not have enough skin in the game, simply do not offer what most corporations need, particularly small-cap ones.” piece of equity, there is no reason for the independent director to take a hard line in the compensation committee meeting with the CEO. This would create a significant amount of tension the next time the CEO and the independent director vacation in Naples or Palms Springs, where their spouses most likely participate in the same book club or take tennis lessons together. How many independent directors do we know who comply with the non-alignment, non-pecuniary interest test, but who are aligned socially or otherwise by loyalty in ways that undermine real independence and limit the effectiveness of independent directors in those matters that they really should be best at? The rules outline stringent requirements to ensure there are no possible “conflicts” in the director’s ability to discharge their fiduciary obligations. This sounds good in principle, except for the non-SEC, human nature-based consideration that states if there is no potential return, if there is nothing to stand for, if there is no scope for conflict, there will be no interest either. So, instead of the independence buzzword, can we focus on alignment

natural constituency and ensure that those constituents and their representative are aligned. In the case of public or private companies, this means simply creating in some fashion the identical economic interests of your constituents. As a public board member, you should own common stock, and enough of it so that it represents a significant portion of your net worth. Ditto for private companies. Only by ensuring economic or financial alignment can we create boards that do more than appear to function, but actually function in a manner that permit the corporation they “manage” to achieve the only real purpose of the corporation: value creation. Once there is alignment and clear representation of the natural constituency, there is scope for meaningful and healthy debate and proper functioning. n

Aki Georgacacos, CA, CFA, CF is a founder and managing partner of Avrio Capital. With experience as a member of the board for over 20 portfolio companies, he has played an active role in all facets of strategic planning, corporate development and overall shareholder value optimization.

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MAKSIM KABAKOU/SHUTTERSTOCK

Private Capital § Quarter 4 § 2014

Data Security

The exponential rise of cyber crime and the opportunities that come with it

ver the past two years, there have been 12 IPOs of cybersecurity companies on major markets and over 115 acquisitions (Pitchbook). This is likely just the beginning. Security is accelerating as a mission critical area of spending for organizations, a growing theme for VC investing and a key consideration around boardroom tables for PE investors across every industry. Increasingly, cyber attacks against corporations and individuals are making headlines. Breaches at Target, JPMorgan, Home Depot and K-Mart highlight that large corporations remain vulnerable. Disclosure of sensitive celebrity photos demonstrates how the impact on individuals can be severe and personal. Cyber crime is not a new phenomenon and rapid change driven by technological innovation is accelerating its growth and the market for products/services that protect against it.

COURTESY OF MOE KERMANI

By Moe Kermani and Brian Martin, Vanedge Capital Partners

The growth of cyber crime In the 1990s, cyber crime and the security mechanisms to defend against it were based on one-person operations that would exploit the weaknesses of a particular software or network. The term hacker was coined for these individuals, and it was often perceived as an infantile game with no real intentions behind it. In the past decade, select technological advances have radically changed society and how we do business. Chief among them was the introduction of the smart

It is certain that the growth of the attack surface and increased reliance on software will continue to make cybercrime a lucrative endeavor. Private Capital § Quarter 4 § 2014 19

Data Security phone combined with broadband access to the cloud; this transformed how we communicate, collaborate and transact business. In addition to fueling massive gains in efficiency, these transformations have resulted in two trends. First is the mass concentration of personal and corporate information in centralized repositories. Second is in an explosion in connected devices that contain significant amounts of sensitive data. With this concentration of personal and corporate sensitive data accessible from virtually anywhere, hacking is no longer a game. Cyber attacks are perpetrated by sophisticated criminal groups, even nation states. Governments now view cyber attack/cyber defense capabilities as an important tool of modern warfare. The Stuxnet worm used to attack the Iranian Nuclear Program, cyber attacks linked to the Ukraine conflict and the decision by a U.S. grand jury to formally charge the Chinese military with cyber espionage all underscore this evolving dynamic. Cyber attacks are a massive problem, costing the world economy $445 billion annually (Centre for Strategic and International Studies, June 2014). For perspective, this is roughly double the GDP of British Columbia.

Increasing attack surface A key factor driving the growth of cyber crime is the rapid increase in

attack surface. Simply put, our appetite for new technology, increased reliance on software and greater dependence on the cloud means there are more weaknesses to exploit, and there is more to gain from an attack. For instance, consider the following: 1. Individuals: Our communication, media, finances and homes are reliant on connected devices and software. These devices and associated software contain known and unknown vulnerabilities that can be exploited. 2. Businesses: Increasingly, businesses – large or small – are reliant on software that runs in the cloud for their supply chain, manufacturing, HR, marketing or product distribution. A breach of any such cloud service could impact hundreds or even thousands of businesses and their customers. 3. Infrastructure: Our mission critical infrastructure, including the power grid, water systems and the energy infrastructure, is increasingly networked, making it susceptible. An attack on critical infrastructure can have devastating consequences on both businesses and individuals. Mass consolidation of information in applications and infrastructure dramatically amplifies the

y The cybersecurit ated from conversation has elev

curity officer se n io at rm fo in f ie ch e th of e fic the of ctors and CEOs are re di of ds ar Bo . m oo dr ar bo e th to ty of the customer increasingly liable for the securi and corporate data.

Private Capital § Quarter 4 § 2014

risks associated with a possible data breach. The most recent example was reported in September when JPMorgan lost 76 million customer records. This concentration will accelerate as cloud computing becomes more mainstream.

Increased awareness of risks and attacks Recent high profile incidents, and their impact on businesses, have elevated the cybersecurity conversation from the office of the chief information security officer to the boardroom. Boards of directors and CEOs feel increasingly liable for the security of customer and corporate data. With the average cost of an incident being $12 million (Ponemon Institute, 2013), not including the longer-term reputation damage, businesses must act to mitigate this risk. At a high level, attacks, whether perpetrated by insiders or third parties, are aimed at achieving one or more of the following: ›› Fraud and identity theft: Prevalent since the advent of the Internet and almost everyone is familiar with scam emails. ›› Extortion: An attacker may threaten to close down a business or website if money is not paid. Alternatively, the attacker may launch a denial of service

Data Security

›› Information theft/espionage: Infiltration with the goal of obtaining intellectual property, trade secrets, personal information or financial data. ›› Sabotage: Taking control of, severely degrading, damaging or destroying critical infrastructure by infiltrating the systems that operate them.

Cybersecurity With constantly shifting vulnerabilities, cybersecurity measures that worked yesterday are not always effective today. Traditional protective measures, typically firewalls, focus on the “perimeter” and creating a “hard shell” around computing assets. The perimeter protection is complemented with “end point” protection solutions, such as anti-virus products. Traditional end point and perimeter security alone are now insufficient and largely ineffective against sophisticated attacks. The current thinking is that nearly all corporate networks have been compromised at one point, and intruders are active within many of them. Attackers are sophisticated and it is not always simple to separate illicit activities from legitimate

ones. Some experts believe that from a security perspective, there are two groups of companies. The first are those that know their systems have been compromised, and the second are those that do not. An effective cybersecurity strategy cannot be to place “bigger locks” on the front door to prevent the “bad guys” from getting in. There needs to be measures to quickly detect a breach when it happens, and protect information even in breached systems. This requires a new generation of security technologies that go beyond the traditional firewalls and antivirus. Solutions that can quickly recognize anomalous behaviors, those that predict the occurrence of an attack or those that protect from insider threats should be an essential element of a cohesive cybersecurity strategy.

The “massive problem and opportunity” Enterprises and governments face a greater threat from cyber crime than ever before. This is unlikely to change as threats evolve and attackers gain in sophistication nearly as fast as the cybersecurity establishment. Therefore, cybersecurity is akin to an arms race with no defined end

point. Security solutions will evolve to keep pace with the threat until attackers manage to get an advantage. Then, the cycle repeats. This means cybersecurity companies have almost endless opportunities for innovation. Products that can secure cloud environments and reduce the risk from consolidated infrastructures, those that aggregate data from multiple sources and predict an attack before it happens or solutions that can rapidly detect anomalous behaviors will be at the forefront, for now. It is certain that the growth of the attack surface and increased reliance on software will continue to make cybercrime a lucrative endeavor. This will in turn increase the wallet-share for cybersecurity across the board and bodes well for cybersecurity companies and the investors that back them. n

Vanedge is a software and digital media investor with expertise in advanced security technologies. Visit their website at www.vanedgecapital.com.

DENCG/SHUTTERSTOCK

attack to cripple the online presence of a business for financial or political reasons.

Moe Kermani, Ph.D. is a partner at Vanedge Capital. Brian Martin, CFA, P.Eng., is an associate at Vanedge Capital.

Private Capital § Quarter 4 § 2014 21

DALIBOR ZIVOTIC/SHUTTERSTOCK.COM

Five Reasons Why You Won’t Raise Your Next Fund 22

This article is the first in a three-part series on the current fundraising environment based upon PrivCap interviews with leading global limited partners. The following is based on an interview conducted by David Snow, featuring Michael Elio of StepStone, Moose Guen of MVision Private Equity Advisors and William Chu of Zurich Alternative Asset Management. The original video interview, Strategy Deviation without Explanation, can be seen at www.privcap.com/gp-fundraising-strategy.

Private Capital § Quarter 4 § 2014

Part 1 of 3

Your Next Fund

Reason 1: Strategy deviations without explanation

avid Snow, PrivCap: We are joined today by Michael Elio of StepStone, Moose Guen of MVision Private Equity Advisors and William Chu of Zurich Alternative Asset Management. We are talking about reasons why you might not raise your next fund. Reason number one is Deviation Without Explanation. In other words, you failed to explain convincingly to your LPs why you didn’t do what you said you were going to do from your last fund. And that is the reason they might not back your next one, even

if your performance is good. William, can you talk about why an LP might pass on a fund just because of failure to explain a deviation? Chu: I would say that deviation without explanation is one of the more frustrating points that all LPs face. What was evidenced was probably during the 2005 to 2007 era, where a lot of general partners said, when they came to market, “We want to raise $X billion,” so let’s say $10 billion, $15 billion, $20 billion the next mega-buyout fund, with the view

that they want to do corporate carveouts or buy particular divisions out of what-have-you. That was the thesis for many general partners going into that era, but, of course, as we’ve all seen given the financial crisis, people had to be flexible. Ultimately, at the end of the day for investors, we spend the time, energy and effort to underwrite what the general partner’s trying to articulate as the thesis. The last thing we want to do is get negatively surprised, where they completely do a 180 in terms of that strategy without thoughtful articulation.

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“ As a GP, you have to make sure you state your strategy – what it is, what your differentiator is – and give an example of how that differentiator has worked for you and how both of those end up contributing to good performance … you’re looking for that ‘A-ha!’ moment.” – Michael Elio, StepStone

PrivCap: Moose, do GPs get demerits for deviating what they said they were going to do from their prior fund?

want to see is volatility within the portfolio. They want consistency of execution as opposed to taking significant bets.

Guen: Yes, they do. It’s interesting, because if you look at the emerging markets, for example, the targets are moving because of the growth rates, the developments and the changes. It’s natural for a general partner to come back and say, “I’m doing the same companies as I’ve done before, but they’re twice the size, so I have to be twice the size.” But, when you look at opportunities that present themselves, one big point that one has to look at is how much of an equity stake a general partner is taking. Interestingly enough, a lot of the deviation is done over simple parameters, one of them being size of ticket per investment. Not necessarily taking into consideration a co-invest or what percentage of the company was involved, and that investors first fixate around that. Then, they fixate on loss ratios, and one thing they don’t

PrivCap: Michael Elio from StepStone, are too many GPs not clear? What happens as a result of that?

Private Capital § Quarter 4 § 2014

Elio: Many GPs are not clear. When you think back to the basics, to what William was getting at, LPs and investors really like a good story. But it needs to be a complete story and, of course, end in good performance. So, as a GP, you have to make sure you state your strategy – what it is, what your differentiator is – and give an example of how that differentiator has worked for you and how both of those end up contributing to good performance. Just like when we read a book, if you’re looking for that “Aha!” moment, things will stand out in your story. PrivCap: I have a follow-up question for any one of you: shouldn’t GPs be flexible? And, to Moose’s point, in

the emerging markets, as the opportunity changes they think differently, they try different things and they respond to a changing market instead of sticking to a rigid formula that might have worked for the past fund. Isn’t that an argument that they would have back to you if you wanted to give them demerits for experimenting? Elio: It is. It gets dangerous when a GP deviates from an area where the investor is comfortable that they’re investing. If they have a history of deviating to some degree, that’s fine, but as William said, if they’re a buyout investor all of a sudden doing credit, it is not a space they’re normally investing in. Frankly, it’s not the space that the investor gave that GP the money to invest in. Guen: The bigger problem is if they fail, because if they do, it’s unforgiving, and it sets them straight back when they come back to fundraise. They’ll go through quite a bit of hardship on that.

Your Next Fund

From left to right: Michael Elio, StepStone; Moose Guen, MVision Private Equity Advisors; and William Chu, Zurich Alternative Asset Management

“I would say that deviation without explanation is one of the more frustrating points that all LPs face.” – William Chu, Zurich Alternative Asset Management PrivCap: It must be challenging for an LP to sit and to not re-up with a GP team that has actually produced good results, in part because they deviated from their strategy, correct? Chu: Yes, obviously that happens. But, going back to what all three of us are trying to echo – the point about communication and being proactive about the communication. That’s absolutely critical. At the end of the day, investors are all – well, I shouldn’t say we all are, but for the most part – rational. And they are flexible, to some degree. But what

Mike hit on was completely spot on, which is that the LP or the consultant spends the time to go forth and underwrite that particular manager. We recognize investing is certainly a world of uncertainty. But the vast majority of the LPs out there have to actually report to the ultimate client, their beneficiaries or their CIO. So, it is actually mission critical that the LP understands actually what the general partner did. Deviation without explanation is a bit challenging and it puts pressure on that LP to now explain something that, frankly, was not within their control to understand.

Guen: There’s one point I’d like to raise within this theme – that, in the U.S., the GPs are becoming more and more specialized. If we look at the funds we’re working with or the funds we’re pitching to work with, in the technology space you have this type of profile company. In the consumer products, these types of companies to which we will invest in this manner. We haven’t seen it at all in Europe. A handful of groups are talking in that direction, even though people have sectors of expertise that they focus on, but it’s a moving target. n Copyright © Privcap LLC

Private Capital § Quarter 4 § 2014 25

Facts, Evolution and Potential Disruption in Private Capital Investing Crowdfunding may be more disruptive than initially realized

VKA / SHUTTERSTOCK.COM

By Hitesh Rathod, NexusCrowd Inc.

Crowdfunding – disrupting private capital markets

New areas of growth

As the crowdfunding market continues its evolution from donation and reward-based models to include increasingly sophisticated investors, the industry that was formerly marginalized and misunderstood by traditional finance has made one thing clear: crowdfunding is here to stay. In fact, crowdfunding may even be more disruptive than anyone initially realized. Driven by technology that has enabled improvements in all aspects of the investment process, crowdfunding has allowed capital providers and capital users to connect with unprecedented efficiency, leading to explosive growth. According to crowdsourcing solutions firm Massolution, global crowdfunding volumes increased from US$1.5 billion in 2011 to US$5.1 billion in 2013, and many market observers believe crowdfunding will continue growing well into the decade.

The proliferation of crowdfunding platforms has brought with it an increased level of risk as the opportunity for negligence or outright fraud increases. As crowdfunding transaction volumes continue their ascent, platforms have begun paying greater attention to the potential risks associated with exchanging real money for unproven projects, goods and services. The tension between ensuring investors are protected and companies gain greater access to capital is most deeply felt in the rapidly expanding securities crowdfunding segment. Currently, securities crowdfunding platforms offer investors the chance to invest in companies in exchange for securities. As crowdfunding platforms recognize the increased risks from providing capital to unproven companies, several securities crowdfunding platforms have attempted to mitigate the risk by bring-

Private Capital § Quarter 4 § 2014

Crowdfunding

ing investment due diligence in-house or investing their own capital alongside investors. Time will tell whether these platforms can provide unbiased due diligence and whether securities crowdfunding platforms that invest can do so with the same risk management and returns as professional fund managers. In the meantime, demand for securities crowdfunding has global regulators scrambling to regulate its meteoric growth. According to Massolution, global equity and lending-based crowdfunding raised US$643 million in 2011 and current estimates expect that value to have totaled US$2.1 billion in 2013.

Canadian crowdfunding innovation Canadian securities regulators recently released proposed rules to permit and regulate crowdfunding. Although some variations occur by province, the securities commissions in Ontario, British Columbia, Quebec, Saskatchewan, Manitoba, New Brunswick and Nova Scotia have all proposed rules that would implement prospectus exemptions to permit the sale of securities to raise capital through online crowdfunding platforms. The proposed prospectus exemption would permit both public (reporting issuers) and private (non-reporting issuers) companies to conduct a prospectus exempt private placement financing for a maximum of 90 days (subject to extension by another 15 days) to raise up to $1.5 million in any 12-month period through a registered crowdfunding portal. Investors would be restricted to investing no more than $2,500 per investment and no more than $10,000 in a calendar year under the exemption. Supporters of the crowdfunding exemption claim that companies will benefit by gaining a wider investor base and that retail investors will potentially gain access to new early stage investment opportunities. However, these benefits are accompanied by significant risks as crowdfunding portals focused on unsophisticated retail investors must ensure they do not fall prey to fraudulent pitches. In addition, the $2,500 per investment restriction placed on investors creates a significant administrative burden for companies wishing to rely on crowdfunding as a means to raise capital. Companies using crowdfunding platforms to raise capital from non-accredited investors will have to provide investor relations services to larger groups of individual investors, which could divert valuable resources away from growing their business. The majority of Canada’s securities crowdfunding platforms are relying on the proposed prospectus exemptions to sell securities to retail investors to raise capital for companies online. Consequently, many existing platforms may have to alter their business models if the proposed crowdfunding exemption is amended. The securi-

ties crowdfunding platforms that solely target accredited investors, however, are relying on existing accredited investor exemptions and will therefore be unaffected by changes to the proposed crowdfunding exemption.

The future of private capital markets As the discussion surrounding securities crowdfunding crescendos, the future of private capital markets may hang in the balance. The competition for retail investors will continue to intensify, as the majority of new entrants in the crowdfunding market will rely on the proposed crowdfunding exemptions. Professional fund managers will face increased competition from securities crowdfunding platforms that attempt to attract accredited investors by offering in-house investment due diligence, significantly lower capital requirements and the opportunity to invest in individual private companies. As private capital market players assess the risks and opportunities presented by the various models of securities crowdfunding, crowdfunding platforms that can offer a unique value proposition to both accredited investors and professional fund managers have an opportunity to capture a significant share of the exempt market. n

Hitesh Rathod is co-founder and CEO of NexusCrowd Inc., a unique crowdfunding platform that connects accredited investors to exclusive private company investments led by professional fund managers. For more information visit www.nexuscrowd.com. Source The Crowdfunding Industry Report, Massolution, 2013

Private Capital § Quarter 4 § 2014 27

Sound Bites

Quotes of the Quarter “New founders in [the] last 10 years have ONLY been in [an] environment where money is always easy to raise at higher valuations. THAT WILL NOT LAST. When the market turns, and it will turn, we will find out who has been swimming without trunks on: many high burn rates co’s will VAPORIZE.”

What’s been buzzing in PE & VC in the last quarter? Here are some sound bites that had people talking in Quarter 3. “I think that Silicon Valley as a Note that the opinions do not necessarily represent that of CVCA, but are included in Private Capital in an effort to represent varied industry voices and opinions.

– Marc Andreessen

via Twitter, September 2014

“I don’t specifically identify my business as woman-owned. There is no benefit, perceived or otherwise.” – Woman Entrepreneur, The Diana Project Executive Summary 2014 Diana Report, Women Entrepreneurs 2014: Bridging the Gender Gap in Venture Capital, September 2014. Professors Candida G. Brush, Patricia G. Greene, Lakshmi Balachandra, and Amy E. Davis.

“For the love of god, don’t shoot for eighth place. Aim big. We [in Canada] have all the raw materials; we just need to adjust our orientation.” – Jonathan Ehrlich, Partner at Foundation Capital, to a group of Canadian entrepreneurs

The Globe and Mail. Leah Eichler, “Learning the language of Silicon Valley.” Published Friday, Jun. 20, 2014 at 7:00 p.m. EDT.

whole, or that the venture-capital community or startup community, is taking on an excessive amount of risk right now – unprecedented since ’99. In some ways less silly than ’99 and in other ways more silly than in ’99 … no one’s fearful, everyone’s greedy, and it will eventually end.” – Bill Gurley, Benchmark Capital

Wall Street Journal. Toree Koh and Rolfe Winkler, “Venture Capitalist Sounds Alarm on Starup Investing – Silicon Valley Hast Taken on Too Much Risk, Gurley Says.” Updated Sept. 15, 2014 3:17 a.m. ET.

“According to the recently released report based upon information collected from 128 institutional LPs and 101 active private equity GPs, 91 per cent of GPs said LPs took part in meetings to get their hands on ‘sensitive information’ to benchmark other funds they were looking at. And 84 per cent think LPs have lied to them as to why they didn’t invest in their funds. Nearly all, or 99 per cent, of those questioned in a recent survey suspected LPs have met with them even though they had no intention of investing in their fund.” Reputational Risk in Private Equity Report (RRiPE) 2014

“But if the capital from that new fund is burning a hole in your pocket, what’s a firm to do? How about finding some proprietary deal flow where the competition isn’t so hot. Right...then you can go searching for unicorns and leprechauns … I don’t believe in proprietary deal flow.” – John P. McNulty, Publisher, Private Equity Professional Digest October 17, 2014

Private Capital § Quarter 4 § 2014

Strategy

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any believe that having a first-rate business strategy is the key to bolstering a company’s growth, gaining the competitive edge and increasing shareholder value. But if that’s true, why do so many companies with “great” strategies fail? And what, then, is the real key to success? According to a Harvard Business Review article, a study by Neilson, Martin and Powers of 1,000 organizations in over 50 countries reported that 60 per cent of companies rated themselves poor at turning strategy into action. Businessman and author Steven Covey, in his book The 8th Habit, explains some of the common blockages to great strategy execution: ›› Only a third of employees say they clearly understand their company’s direction ›› Only 22 per cent have a clear sight line between their own goals and the organization’s

›› Only nine per cent are highly energized and committed So what’s missing from many organizations’ strategy execution? It’s clarity. Is everyone crystal clear on the actions and decisions for which he or she is accountable? Alongside clarity are close cousins alignment and commitment. Are your employees’ objectives and plans laser-aligned with the strategic priorities? Are they unstoppable when it comes to their commitment levels? The question is how can organizations ensure clarity, alignment and commitment in order to celebrate the execution of what matters most? The clarity, alignment and commitment process consists of five activities: 1. Align the top team (It only gets worse if they are not). It all begins with the top team’s involvement in a practical meeting known as

Why a Brilliant Business Strategy Isn’t Enough Clarity is key in strategy execution By Fred Pidsadny, Focus Management

Private Capital § Quarter 4 § 2014 29

Strategy

So what’s missing from many organizations’ strategy execution? It’s clarity.

SYDA PRODUCTIONS / SHUTTERSTOCK.COM

the strategic alignment meeting (SAM), which creates, based upon strategic and operational priorities, the focus and direction for the total organization In this working meeting, the top leadership team reaches consensus on the enterprisewide strategic focus areas such as operational excellence or

Private Capital § Quarter 4 § 2014

leading edge product innovation, success metrics such as incremental GP from shop floor, goals such as increase GP by 20 per cent within two years, strategic initiatives such as lean manufacturing and who does this by when. 2. Cascade the alignment. The outcome of the top team’s meeting becomes the template for cascading the alignment through the organization, level-by-level and functionby-function with a team member at one level becoming a leader at the next. This ensures continuity and linkage of the alignment process throughout the enterprise, enhanced by all levels being involved and having a voice. 3. Roll it back up to check the fit at each cascading level

to ensure focus areas, success metrics, goals and action plans reflect internal and external realities. 4. Deal with any inter-team concerns with a meeting of two teams to examine the perceptions, realities and blockages leading to actions that will increase the success of both teams. 5. Track results easily with software and re-visit the process as necessary.

Does it work? ›› A major grocery retailer saved $10 million with better alignment of its people to strategic goals. ›› A telecom company returned 500 per cent ROI for its private equity owners in less than four years. ›› A manufacturer of floor care products increased capacity by 15 per cent and re-directed the newfound capacity to product innovation. ›› And on the softer side, a CEO of an electrical utility said, “I sleep better at night knowing that our execution capability is significantly better.” This is the first in a series articles on how to effectively align your organization to overcome the key obstacles identified by research and the author’s 25 years of experience working with over 300 leadership teams in Canada, the United States and Mexico. n

Top Deals in 2014 Top 10 Canadian Venture Capital Deals in Q3 2014

Top 10 Canadian Domestic Private Equity Deals in Q3 2014

Company

Location

$ (in millions)

Company

Location

$ (in millions)

1. Aurinia Pharmaceuticals Inc.

Ontario

91.26

1. Nordion Inc.

Ontario

727.00

2. HootSuite Media Inc.

66.45

3. LightSpeed Retail Inc.

Quebec

38.33

2. Canadian Non-Operated Resources LP (CNOR)

Alberta

675.00

Quebec

400.00

4. 2NDSITE Inc./FreshBooks

Ontario

30.00

3. WSP Global Inc.

5. RANOVUS Inc.

Ontario

26.90

6. BLiNQ Networks Inc.

Ontario

16.51

4. Globalive Wireless Management Corporation

Ontario

135.00

7. Vision Critical Communications Inc.

16.00

8. Modasuite Inc.

Quebec

15.97

5. Dental Corporation of Canada Holdings Inc.

Ontario

120.00

9. Bionym Inc.

Ontario

15.48

6. 360 VOX Corporation

Quebec

53.30

10. eSentire, Inc.

Ontario

14.00

7. MEDIchair and Motion Specialties

Ontario

50.00

8. Rolland Enterprise Inc.

Quebec

39.50

9. Broda Construction Inc.

Saskatchewan

39.00

10. Enerbuilt Technologies Inc.

Alberta

20.00

PRESSMASTER/SHUTTERSTOCK

Top Canadian Foreign Private Equity Deals in Q3 2014 Company

$ (in millions)

1. Safe Harbor Water Power Corporation Pennsylvania

990.58

2. Valor Logistica Integrada S.A. (VLI)

Brasil

932.24

3. 21st Century Oncology Holdings, Inc.

Florida

360.95

4. AMPYRA Royalty Rights

New York

45.93

Private Capital § Quarter 4 § 2014 31

More Capital? A Canadian perspective on the life sciences sector By Alain Denis and Peter van der Velden

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n thinking about this article, the authors wanted to provide a holistic perspective that deals with both the legacy myths and new realities of investing in the life sciences sector in general, and in Canada specifically. There are a lot of myths about venture capital investing in the biotech sector. Unfortunately, though deeply held, many of these myths are simply untrue. In recent years, more and more has been written about this inaccuracy, with one of the best pieces being an article published in Nature Biotechnology a few of years ago by Bruce Booth and Bijan Salehizadeh. Their article debunks these myths with real data, and rather than completely “reproducing” their piece we have put together a few highlights with the addition of some current data to bring further insight to the topic.

Myth 1. Returns in life science venture investing lag behind other VC sectors The data does not support this premise. In fact, excluding the top one per Private Capital § Quarter 4 § 2014

cent of all VC funds, healthcare focused VC funds have actually outperformed all other venture sectors in the 10-year period from 2001, particularly with respect to realized returns. Close to home, Lumira Capital’s last fund included $2 billion plus exits. In the second quarter of 2014 alone, through a combination of IPOs and acquisitions, North American life sciences companies generated $4.2 billion in liquidity for their investors.

Myth 2. When biotech deals blowup, they blow-up big This myth is predicated on the belief that when biotechs “go south” there is no salvageable value. Once again the data does not support this perception. When looking at loss ratios (the percentage of dollar flow into money-losing deals, not just what percentage of deals are loss-making), a variety of sources have reported that adjusted loss ratio for healthcare was about 40 per cent whereas in sectors like technology/media/ telecom, that number is actually greater than 60 per cent.

Myth 3. Biotech takes far longer from inception to “exit” than other sectors This last myth worth debunking has been soundly defeated not just for the period ending 2012, but also during each of the past six quarters in which there have been doubledigit numbers of IPOs for life science companies. In fact, more than 100 VC-backed life science companies have IPOed during this period and they have accounted for well over 40 per cent of all tech IPO activity during the period (84 per cent of “tech” IPOs in Q3 2014). While overall M&A activity for life science companies appears to happen within roughly the same timeframe as other tech sectors, for meaningful exits (such as those over $100M), they appear to occur faster in biopharma than in the tech sectors. Having squarely “debunked” the myths, one might conclude that it is always the right time to invest in life sciences or alternatively, that there has never been a better time to invest in this highly promising sector

Life Sciences

While the timing is clearly right, one of questions investors have to be concerned with is whether or not there is enough quality deal flow in Canada to allow them as investors to benefit from engaging in this sector. While the answer is most definitely yes, the process of getting there is by no means easy. in Canada. But the fact is a track record of success has led to strong support for the sector from numerous domestic institutional investors, including Teralys Capital, Fonds de solidarité FTQ, Caisse de depot, Investissement Québec, the BDC and Northleaf Capital, resulting in a new generation of dedicated funds, such as Lumira, CTI, TVM and others. These funds are active all over the country, attracting lots of attention from around the globe. With more than $900 million of new domestic VC available for the sector and a coinvestment multiplier effect of three to four times, we are looking at $3 to $4 billion in accessible capital to support new initiatives in this sector over the next few years. Strong and mature teams of talented investors and partners, coupled with qualified networks of specialists, are rapidly changing the face of this industry in Canada. Paired with new business models and more collaborative relationships between big pharmas and the biotechs, we are seeing new and innovative ways to leverage this domestic capital along with the valuable talent available here. Given the very strong public profile for biotech during the past two years, more and more investors, both locally and abroad, are looking at our domestic capital pool as a great opportunity to get back into this asset

class. But like the VC asset class in general, it is difficult to win in this sector without consistently and relentlessly being engaged, such as the Fonds de solidarité FTQ has been doing for more than 30 years. The Fonds maintains a dedicated team of experts through all business cycles, and it is that commitment which has allowed the Fonds to enjoy a longstanding record of substantial returns from backing companies like Biochem Pharma, ViroChem, Enobia, Medicago and Atrium. But the successes are not found only in Quebec – companies like Asperva, QLT, Stressgen, YM Biosciences Sentinelle Medical and ARIUS Research Inc., to name but a few, have also generated significant returns for investors. While the timing is clearly right, one of questions investors have to be concerned with is whether or not there is enough quality deal flow in Canada to allow them as investors to benefit from engaging in this sector. While the answer is most definitely yes, the process of getting there is by no means easy. Since closing on new capital, Lumira has screened well over 1,000 new investment opportunities and to date we have invested in nine of them. While our deal flow is North America-based, with over 60 per cent originating in the U.S., we have nonetheless screened more than 350 new Canadian opportunities and invested in six to date.

Despite Canadian deal flow being plentiful, the reality is that even the best opportunities tend to come less “packaged” or “investment ready” than the top opportunities that we see from south of the border. For us as investors, this translates into a more time-consuming investment process focused on the business and financing plan (with a particular focus on clinical, regulatory, reimbursement and commercialization strategies), much more time spent on syndicate architecture (who the right coinvestors are to help the company get to the end game) and it often means tremendous early focus on helping to build out the management teams of these companies. In our view, the reward for this additional effort is the ability to become engaged earlier on in the value creation cycle (buy low) and to hopefully have a more influential role in bringing it to fruition (sell high). It’s really that simple and, unlike so many of the other VC and innovation sectors, when we do well as investors, we do even better as people – bringing new medicines and therapies to patients (friends, family and neighbours) in need. It simply doesn’t get any better than that. n Alain Denis is a senior vice president, New Economy and board member at CVCA. Peter van der Velden is the managing general partner at Lumira Capital and past president of CVCA.

Private Capital § Quarter 4 § 2014 33

Plus de capital? Une perspective canadienne sur le secteur des Sciences de la vie Par Alain Denis et Peter van der Velden

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n pensant au présent article, les auteurs ont voulu offrir une perspective holistique traitant à la fois des anciens mythes et des nouvelles réalités de l’investissement dans le secteur des sciences de la vie en général, et au Canada plus précisément. Il existe plein de mythes sur l’investissement de capital de risque dans le secteur biotechnologique. Malheureusement, quoique bien ancrés, nombre de ces mythes sont simplement faux. Au cours des dernières années, les articles traitant de cette inexactitude ont été de plus en plus nombreux, le meilleur rédigé par Bruce Booth et Bijan Salehizadeh ayant paru dans Nature Biotechnology il y a quelques années. Leur article détruit ces mythes à l’aide de données réelles, et au lieu de « reproduire » complètement leur article, nous avons assemblé quelques points saillants ainsi que des données actuelles pour faire mieux comprendre ce sujet.

Mythe 1. Le rendement du capital de risque (CR) investi dans les sciences de la vie est à la remorque du CR investi dans les autres secteurs Les données ne corroborent pas cette hypothèse. À vrai dire, en excluant le premier un pour cent de tous les Private Capital § Quarter 4 § 2014

fonds de CR, les fonds de CR axés sur les soins de santé ont en fait dépassé le rendement de tous les autres secteurs au cours de la période de 10 ans commençant en 2001, particulièrement en ce qui a trait aux rendements réalisés. Près de chez nous, le dernier fonds de Lumira Capital a inclus des sorties s’élevant à plus de deux milliards de dollars. Au deuxième trimestre de 2014 seulement, grâce à une combinaison de PAPE et d’acquisitions, les compagnies nordaméricaines en sciences de la vie ont produit 4,2 millions de dollars de liquidités pour leurs investisseurs.

Mythe 2. Lorsque les transactions en biotechnologie subissent une raclée, c’est une grosse raclée Ce mythe repose sur la conviction que lorsque les transactions en biotechnologie « vont au Sud », on ne peut rien récupérer. Une fois de plus, les données ne corroborent pas cette perception. En regardant les taux de perte (le pourcentage de dollars injectés dans des transactions perdantes), diverses sources ont signalé que le taux de perte ajusté pour les soins de santé était d’environ 40 pour cent alors qu’il dépassait effectivement 60 pour cent dans les secteurs comme la technologie/les médias/les télécommunications.

Mythe 3. Le secteur de la biotechnologie prend beaucoup plus de temps, de la création à la « sortie » que les autres secteurs Ce dernier mythe, qui mérite d’être détruit, a été littéralement battu en brèche non seulement pour la période se terminant en 2012, mais aussi durant chacun des six derniers trimestres au cours desquels le nombre de PAPE pour les compagnies de sciences de la vie s’élève à deux chiffres. En réalité, plus de 100 compagnies de sciences de la vie financées par CR ont fait un PAPE pendant cette période, et elles ont représenté plus que 40 pour cent de toute l’activité liée aux PAPE du secteur technologique pendant cette période (84 pour cent des PAPE « tech » au 3e trimestre de 2014). Bien que l’activité de F&A pour les compagnies de sciences de la vie semble se produire dans le même délai à peu près que les autres secteurs technologiques, pour les sorties importantes (comme celles de plus de 100 millions de dollars), elle semble se produire plus vite dans le secteur biopharmaceutique que dans les secteurs technologiques. Après avoir carrément « réfuté les mythes », on pourrait conclure que c’est toujours le bon moment d’investir dans les sciences de la vie, ou qu’il n’y a jamais eu meilleur moment pour investir dans ce

Canadienne des sciences de la vie

Bien que le moment soit clairement opportun, une des questions que doivent se demander les investisseurs, c’est s’il y a un flux suffisant de transactions de qualité au Canada pour leur permettre de s’engager dans ce secteur. Bien que la réponse soit définitivement oui, le processus pour y arriver n’est certainement pas facile. secteur hautement prometteur au Canada. Mais le fait est que la liste de succès passés a incité de nombreux investisseurs institutionnels canadiens à appuyer fortement ce secteur, notamment Teralys Capital, Fonds de solidarité FTQ, Caisse de dépôt, Investissement Québec, la BDC et Northleaf Capital, entraînant une nouvelle génération de fonds dédiés tels Lumira, CTI, TVM et d’autres. Ces fonds sont actifs dans tout le pays et ils attirent beaucoup d’attention à l’échelle mondiale. Grâce aux 900 millions de dollars et plus de nouveau CR canadien accessible au secteur et à un effet de co-investissement multiplicateur de trois à quatre, nous constatons qu’il y aura de 3 à 4 milliards de dollars de capital disponible pour appuyer les nouvelles initiatives dans ce secteur au cours des prochaines années. Des équipes solides et expérimentées d’investisseurs et d’associés talentueux, jumelées à des réseaux qualifiés de spécialistes changent rapidement le profil de cette industrie au Canada. Conjointement avec les nouveaux modèles de gestion et relations de collaboration plus nombreuses entre les grandes entreprises biopharmaceutiques et biotechnologiques, nous remarquons l’existence de façons nouvelles et innovatrices de tirer parti de ce capital canadien et des précieux talents disponibles ici. Étant donné le très solide profil public de la biotechnologie depuis deux ans, un nombre croissant d’investisseurs, locaux et à

l’étranger, voient dans notre capital canadien une énorme occasion de réintégrer cette classe d’actifs. Mais comme la classe d’actifs en CR en général, il est difficile de gagner dans ce secteur sans y être engagé constamment et sans relâche, comme le Fonds de solidarité FTQ le fait depuis plus de 30 ans. Le Fonds maintient une équipe spécialisée d’experts à travers tous les cycles économiques, et c’est cet engagement qui lui a permis d’accumuler depuis longtemps des rendements substantiels provenant du financement de compagnies comme Biochem Pharma, ViroChem, Enobia, Medicago et Atrium. Mais les succès n’existent pas seulement au Québec – les compagnies comme Asperva, QLT, Stressgen, YM Biosciences Sentinelle Medical et ARIUS Research Inc., pour n’en citer que quelques-unes, ont aussi produit des rendements importants pour les investisseurs. Bien que le moment soit clairement opportun, une des questions que doivent se demander les investisseurs, c’est s’il y a un flux suffisant de transactions de qualité au Canada pour leur permettre de s’engager dans ce secteur. Bien que la réponse soit définitivement oui, le processus pour y arriver n’est certainement pas facile. Depuis sa réalisation de nouveaux capitaux, Lumira a examiné plus de 1000 nouvelles possibilités d’investissement et jusqu’ici, elle a investi dans neuf d’entre elles. Bien que notre flux de transactions soit d’origine nord-américaine, 60 pour cent provenant des É.-U., nous

avons quand même examiné plus de 350 nouvelles occasions canadiennes et investi dans six jusqu’ici. Malgré le flux abondant de transactions canadiennes, le fait est que même les meilleures opportunités ont tendance à venir moins « emballées » ou « prêtes à bénéficier d’investissement » que les meilleures opportunités provenant du sud de la frontière. Pour nous en tant qu’investisseurs, cela se traduit par un processus d’investissement plus fastidieux axé sur le plan d’affaires et financier (attention particulière aux stratégies cliniques, réglementaires, remboursement et commercialisation), un surcroît de temps consacré à l’architecture du syndicat (qui sont les bons co-investisseurs capables d’aider la compagnie à arriver à bon port), et qui exige souvent au début d’aider fortement à bâtir les équipes de direction de ces compagnies. À notre avis, la récompense de cet effort additionnel est la capacité de s’engager plus tôt dans le cycle de création de valeur (acheter à prix bas) et d’exercer une plus forte influence en espérant qu’elle portera ses fruit (vendre à prix élevé). C’est aussi simple que cela et, contrairement à un si grand nombre d’autres secteurs de CR et d’innovation, lorsque nous réussissons comme investisseurs, nous réussissons encore mieux comme être humains – en apportant de nouveaux médicaments et de nouvelles thérapies aux malades (amis, famille et voisins) qui en ont besoin. On ne peut simplement pas demander mieux. n Private Capital § Quarter 4 § 2014 35

YOU NEED CVCA. CVCA NEEDS YOU. CVCAâ&#x20AC;&#x2122;s mission is to promote the development of the venture capital and private equity industry. CVCA pursues this mission through active advocacy and development activities, such as:

ADD

Promoting sound public policy, including on tax, trade and securities issues to federal and provincial governments and regulatory bodies to bring about a strong, effective and internationally competitive venture capital and private equity industry. Facilitating information exchange, communication and association among all persons engaged in the investment of risk capital in Canada through periodic networking and social events.

YOUR

VOICE TODAY JOIN CVCA

Providing a forum for the professional development of its members and those interested in the venture capital and private equity industry through regular educational events.

Encouraging Canadian and foreign institutional investors, including corporate and public pension funds and insurance companies, to allocate a portion of their monies under management to Canadian venture and private equity capital investment.

Encouraging individuals, including angel investors, to invest in, and provide advice to, early stage Canadian growth companies.

Enhancing ties with leading venture capital/private equity associations around the world, particularly in the U.S., Europe, Australia and Israel.

About CVCA The CVCA is the voice of Canada’s venture capital and private equity industry. Its members manage the vast majority of private capital (venture capital, private equity, venture debt, mezzanine capital) that is designated to grow Canadian businesses. The CVCA fosters professional development, networking, communication, research and education, and represents its members on all matters of public policy matters. Founded in 1974, the CVCA has been serving its members for 40 years.

Benefits The principal benefit of belonging to CVCA comes from adding your voice to setting the agenda for the only organization in Canada solely dedicated to pursuing growth opportunities for the Venture Capital and Private Equity industry as a whole. As a highly regarded, professional organization, CVCA includes the large majority of industry participants – private and public sector firms as well as professional advisors. CVCA’s members actively collaborate to increase the flow of capital into the industry and expand the range of profitable investment opportunities. This is accomplished by CVCA undertaking a wide variety of initiatives, ranging from developing comprehensive and accurate performance and valuation statistics to promoting the industry’s interests with governments and regulatory agencies.

For pricing information and membership application forms, visit www.cvca.ca/membership

Specific benefits include ›› Government influences and access ›› Networking ›› Events ›› Publications and research reports ›› Recognition ›› Array of services and programs

Membership types Canadian Investors Partners International Investors Industry Affiliates

Maximize Your Maximize Maximize Maximize Potential Your Your Your Potential Potential Potential Maximize Y Maximize Maximize Maximize Your Your Your Potential Potential Potential Maximize MaximizeYour YourPotential Potential

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Our Our assisted Our Corporate Corporate Corporate Finance Finance Finance team team team has has assisted has bottom assisted assisted line. Our Corpo investment investment that that maximizes maximizes your your returns returns and drives and drives youryour bottom bottom bottom line. line. Our Our Our Corporate Corporate Corporate Finance Finance Finance team team team has has assisted has assisted assisted many of the leading private equity many many many firms of line. of the of the and leading the leading financial leading private private private equity equity equity firms firms firms and and financial and financial many financial of the leading pr bottom bottom line. 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Our services include: Our Our Our services services services include: include: include: Our services include: Our Our Our services services services include: include: include: • Divestitures • • Divestitures • Divestitures Divestitures • Divestitures Our Our services services include: include: Divestitures •• Divestitures Divestitures • Financing •• •• Financing Financing Financing • Financing •• • Divestitures •• Financing Divestitures Financing Financing • Acquisitions • •Acquisitions • Acquisitions Acquisitions • Acquisitions •• • Financing •• Acquisitions Financing Acquisitions Acquisitions • Due Diligence • • Due • Due Due Diligence Diligence Diligence • Due Diligence •• • Acquisitions •• Due Acquisitions Due Due Diligence Diligence Diligence • of Due • Ted Due Diligence Diligence Contact Ted McCarron, President Contact Contact Contact MNP Ted Corporate McCarron, Ted McCarron, McCarron, President President President of of MNP of MNP MNP Corporate Corporate Corporate Contact Ted McCarron Contact Contact Contact Ted Ted McCarron, Ted McCarron, McCarron, President President President ofof MNP of MNP MNP Corporate Corporate Corporate Finance at 1.877.500.0792 Finance Finance Finance at at 1.877.500.0792 at 1.877.500.0792 1.877.500.0792 Finance at 1.877.500.0 Contact Contact Ted McCarron, Ted McCarron, President President of MNP of MNP Corporate Corporate Finance Finance Finance at at 1.877.500.0792 at 1.877.500.0792 1.877.500.0792 Finance Finance at 1.877.500.0792 at 1.877.500.0792