Activity in Canada’s venture capital and buyout markets continued at a measured pace in the second quarter of 2010, according to the industry’s statistical report released Tuesday by the CVCA-Canada’s Venture Capital & Private Equity Association and research partner Thomson Reuters.

“Both venture capital and private equity are showing signs of increasing activity,” says Gregory Smith, president of the CVCA and managing partner, Brookfield Financial.

Venture Capital

Venture capital activity in Canada’s innovative firms increased modestly in the first half of 2010. Several positive developments in the first half of the year have contributed to a cautiously optimistic outlook, including increases in dollars invested, both on a per company and overall basis, with the gaps between Canada and the United States narrowing. As well, the international deal activity of Canadian VC funds also increased in the second quarter. However, VC fundraising continues to pose a challenge, the Canadian market continues to be outpaced by the U.S. market by a factor of 35, and investment levels are still down significantly from only three years ago.

“There are some interesting signs of stabilization in the venture industry but significant concerns still remain,” says Smith. “And it is good to see increased investment in sectors such as clean tech that can provide leadership in innovation for Canada.”

VC activity grew in the second quarter of 2010, with $334 million invested in total, nationwide, or 57% more than the $213 million invested the year before. Indeed, the second quarter of 2010 saw the first substantial increase in dollars invested in the Canadian VC market in over two years.

Despite this growth, longer-term trends suggest a continuing slow pace. A total of $643 million has been invested to date this year, including investments by 57 Canadian funds. While this is up 31% from $492 million invested in the first half of 2009, it is down 10% from $712 million invested in the first half of 2008 — the first year of the current market slowdown — and down 37% from $1 billion invested in the first half of 2007.

In contrast with disbursement flows, the number of Canadian companies financed by VC between April and June was generally unchanged on a year-over-year basis. VC-backed firms totalled 107 in this period, as compared to 108 firms in a year ago.

Buyout Industry

Halfway through the 2010 year, Canadian funds stepped up their activity levels with more dollars invested both domestically and abroad.

The first half of the year has been marked by an increase in the activity of Canadian investors. For the fourth straight quarter, Canadian funds have been investing more in both Canadian and foreign companies, with a total of US$419 million invested domestically and US$278 million abroad in the quarter. Despite increasing investment activity by Canadian firms domestically, investment in Canadian companies by foreign firms declined slightly: US$479 million was invested by foreign funds in Q2, down 13% from the US$549 million invested a year ago.

“These figures indicate that the Canadian buyout market continues to strengthen largely as a result of increased investments by Canadian funds both here and abroad,” says Smith. “The strong fundraising record of the last three years is now being deployed to take advantage of business opportunities at home and across the globe.”

There were 54 completed and pending buyout transactions in Canada in the first half of 2010, 23 of which had disclosed values totaling of US$1.71 billion. This compares to 52 completed and pending buyout transactions in Canada in the first half of 2009, 26 of which had disclosed values of US$0.9 billion. This represents a healthy 91% increase in investment levels as compared to a year ago.

IE