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Trump’s NAFTA plans stall Canadian private market investment: report

Trudeau details NAFTA talks with Trump at G7
Prime Minister Trudeau says he spoke to President Trump about NAFTA re-negotiations at the G7 summit in May, which included the trade of aerospace technology, softwood lumber and steel.

The heated rhetoric on international trade by U.S. President Donald Trump could already be having an adverse impact on the Canadian economy, according to new data which shows private financial market investment stalled in the first four months of 2017.

Following a record 2016 of $2.11 billion in venture capital investment in Canada, a new report by research firm Pitchbook shows only $490 million was invested to the end of April this year.

Significantly worse is Canada’s private equity sector, where investors raised just $990 million to the end of April, down from almost $3.4 billion at the same time last year (and $7.3 billion for the full year). That puts private equity fundraising on pace for its worst year in Canada since 2012.

READ MORE: Trump administration initiates NAFTA renegotiation process

“The election of Donald Trump in America and his vocal opposition to NAFTA is partially driving this trend,” write report authors Kyle Stanford and Nico Cordiero, both analysts at Pitchbook. “Canadian businesses rely heavily on the status quo as the U.S. imported $278.1 billion of goods and $29.6 billion of services in 2016 from Canada. Given the large implications a renegotiation, or abandonment, of NAFTA will have on the flow of funds, goods, and services across the border [investors] are taking a wait and see approach.”
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The biggest chunk of venture capital activity, making up 42 per cent of deals, came from Canada’s software sector, which is heavily concentrated in Vancouver, Toronto and Montreal. Similarly, private equity funders have shifted their focus away from Canada’s beleaguered struggling energy sector to seek deals in the tech sector, which made up 26 per cent of all deals in the first four months of 2017, an increase from 12 per cent last year.

READ MORE: U.S. eyeing currency clause for NAFTA to protect against fluctuating exchange rates

In March, the federal government established a $400-million program to drive investment in growth-stage companies, with $125 million of the funds earmarked to help artificial intelligence research and development.

“Private market investors have found a new source of deals in the country’s growing technology sector, and when combined with the support from its government, both from an economic policy and financial perspective, a continuation of growth is likely,” said Cordiero. “However, further development hinges on NAFTA negotiations. If the U.S. administration is unable to renegotiate a new trade deal or withdraws altogether, Canada’s private financial markets will face consequences.”

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Pitchbook’s analysis adds that, despite the economic slowdown, the burgeoning tech scenes in Canada’s three biggest cities could stand to benefit from any potential immigration slowdown in the U.S., as the “Canadian government has been very pro-immigration, and the diversity and welcoming nature could lure non-American-citizen entrepreneurs north.”

READ MORE: Donald Trump considering executive order to remove US from NAFTA agreement

Apart from the economic uncertainty the Trump administration’s agenda is causing Canada, Pitchbook’s analysts said the country’s biggest challenge for private market investment is creating domestic support for late-stage venture capital firms, or companies that have grown significantly and require larger infusions of money.

To that end, there is a significant domestic shortage of funds to finance fast-growth and mature companies, which means many rely on investors from abroad – 62 per cent of late-stage deals involve foreign investors.

Another issue of note was private equity acquisition activity in Canada, which came to a near halt in early 2017, with just $750 million worth of exit value in strategic acquisitions versus $26.8 billion last year.

Meanwhile, exit activity has already surpassed last year in value: what was $610 million in the first four months of 2016 topped $1 billion this year.