Novacap raises $417-million for fund targeting financial services sector

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Quebec private equity firm Novacap has raised almost half-a-billion dollars for its first fund targeting the financial services sector.

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Novacap raised $417 million for the fund, led by contributions from new investor Trans-Canada Capital, which manages Air Canada’s $23-billion pension fund. Existing institutional investors, high net worth investors, and some of the Big Six banks are also participating in the fund, though Novacap is not disclosing the names.

As consumers increasingly turn to digital tools to manage their wallets, the firm is looking to grab a piece of the growing financial services sector.

The fund focuses on mid-sized companies in North America, honing in on four sectors: financial infrastructure, specialty insurance and distribution, asset and wealth management and alternative lending.

Novacap has already started investing in companies through the fund, including U.S.-based mortgage technology firm Accurate Group and Calgary vehicle replacement coverage provider Optiom.

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After 40 years of specializing in technology, media and telecommunications, as well as the industrial and manufacturing sectors, Novacap started to probe further into financial services in 2018 as demand grew for unique digital tools and resources.

The private equity firm has also made massive gains on its 2017 investment in Montreal’s Nuvei after the payments-processing company made its successful public market debut last year.

Novacap is looking to bridge the gap between early stage financial services firms with ambitions to grow their ventures into national and global financial companies, according to Novacap managing partner Marcel Larochelle.

“In Canada over the past 10 years, the financial services sector has grown much faster than GDP itself,” Larochelle said in an interview. “But when you look at the public markets, financial services on the TSX is essentially the big banks and the insurers. There are companies that are operating in subsectors that are totally different from the banks and insurers, and those are very vibrant sectors, but you and I cannot find a company on the TSX to invest in.”

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After spending his career in financial services, Larochelle joined the private equity firm in 2018 and built a team of nine people with experience in mergers and acquisitions and investment banking to drive Novacap’s foray into the financial industry.

The firm aims to invest in eight or nine companies with valuations ranging from $50 million to $500 million.

In particular, Novacap is interested in companies that offer services that consumers and business owners cannot find at traditional financial service providers, including non-bank lending solutions and wealth-management platforms.

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“We’re not looking at competing with the banks or large institutional investors,” Larochelle said. “We’re focusing most on high-net-worth providers.”

And many of Canada’s banks and insurers invested in the fund. Novacap’s focus on mid-market companies gives those larger players a chance to invest in smaller firms that would otherwise fly under their radar, he said.

“Once Novacap is done helping those entrepreneurs grow their firms, and seven or 10 years from now they’re looking for an exit, at that point those companies would be at a size that would be attractive to the banks and insurers,” Larochelle said. “For them, it’s like a window into a segment of the market where they may not be as present.”

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