Nearly half of Canadian venture capitalists anticipate an improvement in the economic climate in the upcoming months, according to a joint study released today by Deloitte & Touche and the CanadianVenture Capital Association.

The 47% of respondents with a postive outlook in the fourth quarter of 2002 signals a return to the confidence levels of early 2002 after a low of 29% in the third quarter. This is in stark contrast to south of the border where the majority of U.S. VCs have a gloomy outlook with less than 20% expecting an improvement in the economy.

The growing number of respondents expecting higher valuations in the next six months also reflects the restored sense of optimism among Canadian VCs. According to the survey’s results, 28% and 44% of respondents expect exit and portfolio valuations to increase, compared to 9% and 32%, respectively, in the previous quarter.

The improved outlook suggests that venture capital valuations have bottomed-out. “With confidence soaring and higher valuations in sight, we expect a revival in VCs interest in pursuing new investment opportunities and fund raising,” said Michael Badham, Partner, Deloitte & Touche. “This optimistic sentiment is one indicator of the market’s resiliency and also signals that increased deal activity is on the horizon.”

The renewed bullish stance of Canadian VCs is supported by more than half (53%) of respondents expecting to completely invest current funds in less than two years. The number of VCs looking into raising new funds nearly tripled (21%), up from the low of 8% in the third quarter of 2002.

However, fewer indicate earmarking funds for follow-on investments, as nearly two-thirds (65%) of VCs responded that less than half of their funds are available, compared to 53% the previous quarter. These findings could signal an impending upswing in investment activity this year. “This renewed optimism confirms the stabilization of our industry,” said Brad Ashley, president, CVCA and Managing Partner, PRIVEQ Capital Funds. “As macro conditions continue to improve, VCs will continue to shift their focus, from dealing with issues in their portfolio, to funding investments in new businesses.”

According to the VCs surveyed, the most important factor in recoveries in investment levels is an increase in technology spending (51%), versus a recovery of the public market (38%). This finding is a complete switch from the prior survey when the comparative responses were 31% and 53% respectively.

Nearly three-quarters (72%) of respondents also expect that a recovery in IT spending will contribute significantly to the recovery of VC markets in the short term, compared to 54% in Q3, 2002. However, technology related sectors such as communications, internet and semi-conductors, continue to lag behind manufacturing (48%) and consumer business (41%) as VCs see growth in these sectors for investments in the short-run.

The survey was conducted between December 4 and December 30, 2002 and surveyed over 800 professionals from venture capital and private equity firms across Canada.