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Jul 21, 2022

Power Corp's Portage closes US$655M VC fund as tech values fall

There's been a reset, an official adjustment in tech: Bruce Croxon

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Portage Ventures, the venture-capital firm owned by Power Corp. of Canada, closed a US$655 million fund to seek a new batch of financial-technology investments around the world and take advantage of a recent tumble in valuations.

The firm’s third fund, Portage III, raised money from 34 institutional investors from nine countries, with about half of the backers new to the firm, Portage said Thursday. The fund is almost twice the size of the firm’s US$335 million second fund.

Portage -- an early funder of Canadian online financial-services firm Wealthsimple -- sees more room for fintechs to grow as large firms accelerate their tech investments, work to expand digital banking and improve their customer experiences, said Adam Felesky, Portage’s co-founder and chief executive officer. The recent decline in fintech valuations -- underscored by Stripe Inc.’s 27 per cent internal valuation cut and Klarna Bank AB’s 85 per cent reduction -- only makes the investment possibilities more attractive, he said.  

“With the secular tailwinds in fintech, we thought it was a great time to be in fintech over the last few years,” Felesky said in an interview. “With this correction in valuations, it’s an even greater opportunity.”

Startups with more efficient, less capital-intensive business models are now in favor, while larger, consumer-focused firms that have to spend a lot on customer acquisition are more challenging, he said.

Portage is owned by Sagard, the alternative-asset-management arm of the Desmarais family’s Power Corp. financial conglomerate.

That ownership structure informs Portage’s investment process, which includes seeking out startups that can partner with Power Corp. companies or other backers of its funds. Investors in Portage’s previous funds have struck almost 60 partnerships with portfolio companies. About half of Portage III’s investors are financial firms using the fund partly as a way to learn about industry trends or eventually strike deals with firms that Portage invests in, Felesky said.

 

WEALTHSIMPLE INVESTMENT

The most notable of Portage’s investments to date is Wealthsimple, which started as a robo-adviser and no-fee trading platform and has expanded into services such as payment cards and tax preparation. Portage invested $55 million (US$43 million) in Wealthsimple in 2017. Wealthsimple and Power Corp. last year raised $750 million in a funding round that valued it at about US$4 billion. Portage still owns about 8.7 per cent of Wealthsimple on a fully diluted basis.

Like its peers, Wealthsimple has been hit by the drop in fintech valuations. IGM Financial Inc., another Power Corp. company that owns 23 per cent of Wealthsimple, slashed the value of its portion of the firm by 20 per cent from the start of the year to March 31.

Other notable Portage investments include telemedicine provider Dialogue Health Technologies Inc., which has a partnership with Sun Life Financial Inc., as well as digital mortgage-finance company Nesto Inc. and prepaid-card firm Koho Financial Inc.

Portage’s first fund, introduced in 2016, was US$102 million, and Portage II, launched in 2018, totaled US$335 million. The two funds have made a combined 65 investments in 13 countries.

Portage III will focus on investments in wealth and asset management, banking, insurance and payments, said Stephanie Choo, a partner in the firm. Some of those applications may be in debt collection, debt resolution, cyber insurance and embedded payments, she said. While Portage doesn’t directly invest in cryptocurrencies, it would consider companies that use blockchain technology, particularly as a payment rail, she said.

 

'POTENTIALLY DISRUPTIVE'

“It’s very difficult to ignore the transformative and potentially disruptive power of Web3 and crypto to segments we invest in,” Choo said.

Helping more investors access private equity, real estate and closely held technology stocks also will be a significant focus for the fund, she said.

“Over the next decade, we believe that both retail and institutional investors will want a larger proportion of alternative investments as part of their portfolios,” Choo said.