Recapping a busy 2016

Mark McQueen

As everyone tries to get their email inbaskets down to a manageable level, I thought I’d take this opportunity to review our firm’s 2016.

Although we committed more capital than any other time in our firm’s 16 year history, I’m not entering 2017 feeling very elated. As a nation, Canada seems to have many dark clouds on the horizon; rising taxes, increased costs to business, potentially devastating threats to its venture capital ecosystem (see prior post “Morneau Economic Growth Council recommending end of life-saving VCAP program” Dec. 22-16), disturbing protectionist noises from its largest trading partner, etc., etc.

None of this was foreseeable in 2009 when we opened our first office in the United States, but our institutional investors have definitely benefitted from our broadened geographical focus.

To give you a sense of just how much has changed around our place, consider this: in 2007, we financed 15 new Canadian companies but none in the USA. Today, 73% of our committed capital is south of the 49th parallel, even though only 25% of our folks are based there (one in Santa Monica, three in Menlo Park). As much as our business isn’t about one country or the other, the vast majority of our capital comes from Canadian pension plans and institutional investors. As such, the beneficiaries of our work are Canadian workers and employers. If things are tough at home, the health of a Canadian worker’s pension plan becomes an esoteric topic.

We committed more than $160 million last year to 14 different innovation companies. There’s the “headline number.”

Most of that $160M was raised by companies for “growth” purposes, although we closed at least a couple of transactions for firms which had discovered the downside of our competitor’s amortizing term loans. While our True Growth Capital structure is well suited for VC-backed growth companies looking to “extend the runway” (see prior post “Comparing Growth Capital to amortizing Venture Debt” Oct. 2-16), it also comes in handy for CFOs who find themselves burdened with a debt tranche that has begun to amortize. No matter what the interest rate is, it’s the principal payments that really hurt a company’s cash flow. As early and mid-stage companies raise their capital to finance growth, which leads to a better valuation and happier investors, they invariably find amortizing debt structures unnecessarily restrictive.

It wasn’t just financings that kept us busy, we also saw plenty of exits last year, too. nine in total, as a matter of fact; five of those were a result of an M&A transaction (see representative prior post “SintecMedia to acquire Fund IV Portfolio co. Operative Media Inc. for ~US$200M” Nov. 29-16).

I don’t want to dwell on any particular portfolio company, but given the surging interest in the public markets, I’ll discuss two.

Fund III portfolio company Real Matters did a material acquisition and raised two different rounds over the course of 2016. The recent valuation was reported by Reuters to be in the $1 billion range. If true, that would the first Canadian Unicorn we’ve ever had the pleasure to back with our capital.

Fund IV portfolio company Xactly Corp. (XTLY:NYSE) went public in June 2015 and has delivered IPO investors good share appreciation over the past 18 months. The San Jose-based company provides a sales performance management SaaS platform to enterprises. Shares are up more than 25% following the company’s JP Morgan-led Initial Public Offering. Analysts says the shares are going higher, despite tepid revenue guidance from the management team. In related news, Xactly CFO Joe Counsel was named CFO of the Year, which was certainly a well-deserved honour.

We also added a key new vertical with the July addition of Jeff Chapman as a Partner and Head of Healthcare & Life Sciences in our Menlo Park office.  Jeff served as Senior Vice President and Head of Life Sciences at Comerica Bank where he was responsible for life science debt financings within its multi-billion dollar Technology and Life Science loan portfolio. With Jeff on board, we quickly got into the flow of innovative life science and healthcare companies.

Things were as competitive as ever, although I’m pleased to report that debt is no longer competing with equity! There was a time in May 2015 when CEOs were getting equity term sheets that valued their business off next year’s forecast revenue. From an academic standpoint, debt will always be dramatically cheaper than the cost of equity. But there was a fleeting moment when that wasn’t the case. VCs “got religion” in the Fall of 2015, and things got back to normal by the time 2016 got rolling.

The only other change we observed on the competitive landscape was the ongoing churn within our sector and the departure of one or two competitive funds.  As was apparent with the exit of Toronto-based MMV Financial half a decade ago (see prior post “One man’s “competition” is another’s opportunity” July 18-11), the North American private debt ecosystem will continue to remain extremely robust, even as firms come and go from time to time.  There’s nothing about that which should come as a surprise to anyone: the reason why we operate in a highly competitive sector is crystal clear: the US$60 billion venture capital market will generate plenty of attractive mid-stage investment opportunities over the months and years to come. Figures like that draw attention.

Last but not least, our team’s daily spadework got some attention in 2016. Not just from news organizations such as Bloomberg, but global advisory firms as well. We were named to U.K.-based Preqin’s Most Consistent Top Performing Private Debt Fund Managers list for 2016.  This was the second time in three years that Preqin has named Wellington Financial as a “Most Consistent Top Performing” Fund Manager. Pension plan CIOs and entrepreneurs alike care about consistency, and the Wellington team was gratified to receive this acknowledgement from one of the world’s leading sources of data and intelligence within the alternative asset industry. This designation recognizes our team’s ability to consistently provide great results for our investors for more than 15 consecutive years.  Preqin’s annual list cited Wellington Financial, along with thirteen other private debt funds, for consistently generating 1st and 2nd quartile returns for their investors since inception, from a database of 140 different global managers managing 231 different funds.  In the report, Preqin categorizes private debt as direct lending, distressed debt, special situations, mezzanine, and venture debt (Fund managers need to have raised multiple funds in the same strategy to be eligible for consideration by Preqin).

Our Charitable Foundation tried to make a difference to a few targeted organizations. Our two endowed scholarships at The University of Toronto’s Rotman School of Management and Western University are up-and-running. We’ve built a new relationship with EB Research Partnership in New York, and our longstanding commitment to Sunnybrook Hospital has generated hundreds of thankful families courtesy of our various donations to that hospital’s busy birthing unit.  We were honoured play a small role with other groups, too, such as Big Brothers Big Sisters, the Naval Assoc. of Canada, Childhood Cancer Canada Foundation, and the Upside Foundation.

As our collective minds’ turn to the 2017 business plan, the pipeline of attractive new opportunities is as big as ever. We’ve got about 79% of our fund’s capital committed and/or drawn at the moment, although one or two exits would moderate that utilization rate. And, as we saw last year with 9 different exits, our business is hard to predict. A nice problem to have, I suppose.

Wishing you all a happy and healthy 2017!


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