Though 2023 ended in much the same way as it began, with global geopolitical instability and high interest rates, investment in Québec has remained active, particularly in the Montréal area. This post breaks down some of the details of the activity that we have seen in recent months and concludes with a summary of some important recent legislative developments in Québec.
Deal Flow in H2 2023
Québec saw the largest number of private equity deals in Canada in 2023 and Montréal-based companies continued to attract substantial investment despite market headwinds. Interestingly and unlike private equity dealmaking, the number of venture capital exits increased by year end.
Bright Spots in H2 2023 and Early 2024
The second half of 2023 and the first months of 2024 provided some bright spots for market observers. According to the Quebec Venture Capital and Private Equity Market Overview[1], for venture capital investments in particular, the final quarter of 2023 saw an 11% uptick in deal count, as well as an 88% increase in deal volume compared to the previous quarter.
Financing trends
In 2023, over 41% of the total amount invested in Québec private equity resulted from transactions exceeding $100 million, whereas deals valued at $5 million or less accounted for a staggering 67% of all private equity transactions[2]. As discussed in episode 108 of the Midmarket M&A and Private Equity Podcast, such smaller-scale investments are part of a greater shift by major Canadian banks which have increasingly embraced opportunities to finance ventures with under $5 million in EBITDA[3].
Seed-stage investments
According to the Canadian Venture Capital Market Overview[4], pre-seed and seed stage companies across Canada collectively raised $969 million from 372 transactions. On a national scale, 2023 matched record levels of pre-seed and seed investing set in 2022. The same can be said in Québec, as 2023 recorded 74 deals for a total of $235 million invested, showing a 9% increase in deals and a 1.6% increase in invested capital compared to 2022. In Canada, government-backed organizations were the primary investors in both pre-seed and seed-stage companies.
Cleantech and life sciences
Investments in cleantech were a notable exception to the general slowdown noticed in venture capital financings. Spurred in part by government initiatives, the cleantech sector experienced an increase in the number of venture-backed deals in 2023 while private equity investments remained strong. The Québec life sciences sector attracted venture capital, experiencing its third best year in terms of transaction volume in the last decade[5]. At Stikeman Elliott, we observed similar trends in the life sciences, healthcare, and pharmaceutical industries, which accounted for a little less than a quarter of our Montréal office’s recorded deals in the second half of 2023.
Exits
The majority of exits in both private equity and venture capital resulted from M&A while IPO activity remained quiet. The lower midmarket in particular has remained resilient. Succession planning is one reason for such resilience as individual- or family-owned businesses look to transfer ownership to a new generation of owners.
Anecdotally, we have observed that sellers often conduct staggered financial and legal due diligence particularly in auction settings involving private equity investors. Recent deal timelines appear to be extended as due diligence is taking longer and market forces remain volatile.
Recent Legislative Changes in Québec
Recent legislative announcements by the provincial government are likely to affect businesses operating in Québec and will need to be considered when conducting legal due diligence in the context of a M&A transaction or investment.
Québec consumer protection reform
The enactment of Bill 29, An Act to protect consumers from planned obsolescence and to promote the durability, repairability and maintenance of goods, has strengthened consumer rights relating to the repair and maintenance of goods. Beginning in October 2023, the new legislation will be phased in over the course of the next three years and will affect manufacturers and retailers in the province. Major changes include the introduction of new warranties and increased penalties.
For more information, see our article entitled “Québec Consumer Protection Reforms Focus on Planned Obsolescence, Durability, Repairability and Maintenance of Goods”.
Draft regulations affecting commercial contracts and trademarks
In January 2024, the Québec government published draft regulations that, if passed, will affect commercial contract drafting and the use of English-language trademarks. Among other things, the draft regulations specified that as of June 1, 2025, “recognized” non-French trademarks appearing on external signage and inscriptions will be limited to trademarks registered under the Trademarks Act (Canada). Moreover, products with English generic terms, markings or other product descriptions will need to display the equivalent French terms in equal or greater prominence.
Contracts of adhesion (often a company’s standard template or form) are expected to be drafted in French. The non-negotiating party (the “Adhering Party”) may choose to sign a contract of adhesion only if the other party has first provided a copy of the French version.
For more information, see our article entitled “Québec’s Language Legislation: Release of Draft Regulations Impacting Commercial Contracts and Trademarks”.
2024 Federal Budget
On April 16, 2024, the Government of Canada announced its budget, which proposes increasing the capital gains inclusion rate from one-half to two-thirds of capital gains realized by corporations and trusts, and for individuals, to the extent that an individual directly or indirectly realizes net capital gains exceeding $250,000 per year. This annual $250,000 threshold for individuals would exclude any capital gains for which the lifetime capital gains exemption, proposed employee ownership trust exemption or proposed Canadian entrepreneurs’ incentive is claimed. The Government of Quebec’s Minster of Finance confirmed that the province will follow suit and implement the same capital gains tax as mentioned in the federal budget. These measures would apply to capital gains realized on or after June 25, 2024, and may affect M&A activity in the coming months.
[1] https://reseaucapital.com/wp-content/uploads/2024/02/q4-2023-quebec-en-1.pdf
[2]https://reseaucapital.com/wp-content/uploads/2024/02/q4-2023-quebec-en-1.pdf
[3]https://www.stikeman.com/en-ca/kh/canadian-ma-law/Views-from-the-Market-Midmarket-MandA-and-Private-Equity-Podcast
[4]https://reports.cvca.ca/books/ugbs/#p=1
[5]https://reseaucapital.com/wp-content/uploads/2024/02/q4-2023-quebec-en-1.pdf
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