Toronto-based Kensington Capital Partners has raised $158 million CAD in the first close of its third government-backed venture fund, putting it over halfway towards its $290 million target.
Kensington is one of four fund managers selected by the Government of Canada set to receive funding from the latest round of its Venture Capital Catalyst Initiative (VCCI), and the first of this group to announce that it has closed financing.
The other three—Boston’s HarbourVest Partners, Montréal-based Teralys Capital, and Toronto’s Northleaf Capital Partners—have yet to publicly announce plans for their latest funds.
“The market changed dramatically last year. It’s not obvious that the people who did well in the prior market can continue to perform in these conditions.”
-Rick Nathan, Kensington Capital Partners
With its first close for Kensington Venture Fund III (KVFIII), Kensington has surpassed the size of its last venture fund, which reached $150 million. KVFIII will serve primarily as a fund-of-funds, backing Canadian venture capital (VC) funds, with a quarter of its capital reserved for direct investments in tech startups.
Kensington’s first close comes as some Canadian tech leaders have been calling for the federal government to hasten its deployment of VCCI capital. This ask has come in response to a tech sector facing a deep downturn that has seen valuations drop, fundraising for both companies and VC funds become more difficult, and more cautious investors, including limited partners (LPs).
As Kensington senior managing director Rick Nathan acknowledged in an interview with BetaKit, the first close took place amid “a very challenging market environment” featuring bank failures, rising interest rates, declining investment levels, and widespread tech layoffs.
“On the other hand, this is our third time, we’ve got a terrific track record, we’ve got a stronger team in market here, and our investors are generally familiar with and comfortable with the way the [VCCI] program works,” said Nathan.
Kensington is already an LP in a variety of Canadian VC funds, including Golden Ventures, Information Venture Partners, Inovia Capital, Portage Ventures, Rhino Ventures, Version One Ventures, and Whitecap Venture Partners.
Through VCCI, the federal government has committed to provide 25 percent, or $72.5 million of Kensington’s $290 million target for KVFIII. In addition to VCCI money, KVFIII’s LPs include BDC, Kensington Private Equity Fund, TD Bank, and several undisclosed individual investors and family offices.
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Three quarters of KVFIII’s capital has been reserved for fund-of-funds investments, and at least 70 percent of this amount will go towards Canadian VC funds. As a whole, KVFIII will focus primarily on the Canadian market.
Nathan expects KVFIII to invest in between 15 to 20 different VC fund managers and a similar number of companies. For KVFIII, Kensington is targeting returns in the “20 to 25 percent range” from an internal rate of return perspective, which Nathan claimed are consistent with the firm’s track record.
With its latest venture fund, Kensington plans to continue backing funds and firms across a wide variety of stages and sectors as it looks to build out a diversified portfolio. “Our investors go into our fund of funds because they want to do one-stop shopping,” said Nathan.
As Kensington looks to deploy this capital, Nathan noted that unlike some prior markets, current economic conditions call for more caution.
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“You go back a couple years [and] if you didn’t hurry up, you would miss out and lose your chance,” said Nathan. “That’s not really the case today—you can take your time, you can do your homework, get yourself as comfortable as you need to be before you actually make a final decision.”
Of Kensington’s 15 to 20 fund manager target, Nathan anticipates that five or six will be new to Kensington’s portfolio. “The market changed dramatically last year,” said Nathan. “It’s not obvious that the people who did well in the prior market can continue to perform in these conditions.”
This shift in market conditions, and the questions about tech valuations it has surfaced, has made it more difficult to evaluate the performance of VC fund managers. “Because the markets were so strong for several years, most of the funds we look at have very strong performance on paper,” said Nathan.
Rather than rely on what’s on paper, Kensington is taking a closer look at realized returns and which VC funds were able to achieve cash exits better than others. “The cash doesn’t lie,” said Nathan.
Feature image courtesy Kensington Capital Partners.