Chris Arsenault (right), the founding partner of the venture capital firm iNovia, along with the new additions to the firm Patrick Pichette (left), former CFO of Google, and Dennis Kavelman (centre), former CFO of Blackberry, at the iNovia offices in Montreal on April 9, 2018.Dario Ayala/For The Globe and Mail
Inovia Capital is taking a big bet on Clearco, buying US$60-million of the challenged Canadian e-commerce merchant financier’s venture debt facility in tandem with two other investors in the windup of Silicon Valley Bank’s Canadian unit.
Montreal-based Inovia, along with fellow Clearco investor Founders Circle Capital and the fund management arm of SVB (now controlled by First Citizens BancShares after the tech financier’s failure in March), initially bid only on the Clearco portion of SVB Canada’s roughly $300-million loan book. The liquidator, PricewaterhouseCoopers Inc., decided to carve out the Clearco fully drawn Canadian credit line from the rest of the book when competing bidders ascribed a relatively lower value to the Toronto company’s debt. Clearco has a total of US$80-million in credit facilities with SVB, US$20-million of which is held by the U.S. unit.
PwC then negotiated a confidential purchase and sale agreement with the Inovia-led group for Clearco’s Canadian debt. That side deal was filed Friday in a motion by PwC with the Ontario Superior Court and will go before Justice Peter Osborne on July 20 for approval.
The pending transaction is “one of a series of corporate finance and recapitalization transactions that needs to take place to get Clearco to a place where it can focus on its core business” of extending cash advances to e-commerce companies, Clearco chief executive officer Andrew Curtis said in an interview. He called it a “transformative transaction” stemming from the “very unusual situation” of SVB’s collapse in the U.S. “It’s a great outcome for Clearco.”
The deal is the first part of a complex, three-pronged recapitalization plan. Mr. Curtis declined to comment on the next steps, but The Globe and Mail reported in April that Inovia, an early investor in Clearco, had signed on to lead a US$20-million-plus equity financing of the company that would wipe out most of its US$2-billion-plus valuation.
Toronto-based Clearco, officially known as CFT Clear Finance Technology Corp., is also looking to lock in a new off-balance sheet funding instrument from third-party financiers that it would use to advance cash to its customers. Those financiers had sought assurances Clearco could raise the equity and sort out its SVB situation before making that capital available. Securing and expanding outside capital sources is vital to the company’s survival and growth.
Clearco is one of many financial technology companies facing sharp devaluations after their cost of capital shot up and economic uncertainty mounted last year. It’s a stark environment for once high-flying startups, including many Clearco customers. Cheap capital is no longer freely available, interest rates have soared and companies have cut deeply to save cash. Conditions remain bleak and many companies are expected to run out of cash, fail or be sold for little to nothing in the next year.
The collapse of SVB, a leading financier of startups, has put further pressure on cash-strapped startups by removing a source of financing. Canada’s big banks have raided its ranks for talent including Canadian Imperial Bank of Commerce and Toronto-Dominion Bank.
While North Carolina-based First Citizens had the option to take over SVB’s Canadian arm, it left the unit here to find its own buyer. SVB Canada does not have a license to take deposits and had $301.3-million in outstanding loans on April 11. PwC had hoped to strike one or more binding sale agreements with bidders for the Canadian unit this month.
Clearco was one of the best-known among the slew of Canadian companies to reach “unicorn” status – achieving a valuation of US$1-billion or more – at the peak of the tech bubble in 2021. That year, investors including Softbank Group’s Vision 2 Fund invested a combined US$315-million in the company.
Clearco made its name by providing friendly funding for e-commerce merchants, cheaper than venture capital and less onerous than loans. It offered advances mainly to cover its clients’ marketing and inventory costs and received in return daily cuts of their revenues until advances plus fees were repaid.
Most of the advances came from off-balance sheet facilities backed by alternative asset managers. Customers didn’t have to provide personal guarantees, give up equity or submit to credit checks, but they did have to give access to their business accounts to Clearco, which would assess their economics before offering financing. Last fall, the company made changes to its product and now funds specific expenditures based on uploaded invoices, and clients commit to fixed repayment periods.
Clearco’s challenges began early last year with a slew of senior departures. CEO Andrew D’Souza gave up the job to president Michele Romanow. Clearco cut costs and temporarily stopped offering new advances to tighten underwriting practices and raise fees. It slashed jobs and pulled out of markets outside North America months after expanding to Europe.
The company hired U.S. fintech investment bank Financial Technology Partners last year to explore strategic options and brought on Mr. Curtis, a U.S. finance industry veteran, as an adviser. In January he became Clearco’s third CEO in the span of a year, as Ms. Romanow stepped back to join Mr. D’Souza as co-chair, and the company cut more jobs.
According to the liquidator’s latest report to the court filed Friday, Clearco “has been out of compliance with certain covenants” of its credit facilities since last August. SVB entered into forbearance agreements with Clearco last September and January, which have since expired, and the lender was working with Clearco to evaluate strategic options related to the credit facilities prior to the bank’s failure.
PwC said in the report Inovia’s original bid “was not acceptable to the liquidator in the form submitted” but was higher in value and “the most favorable offer” of all the bids.
The liquidator’s report also revealed PwC and its legal counsel, Osler, Hoskin & Harcourt LLP say they are due a combined $5-million in fees for their work on the file up to June 30. PwC will seek approval from the court for payment of the fees and other $70,000-plus in disbursements.
Editor’s note: PricewaterhouseCoopers filed a motion Friday July 14 with Ontario Superior Court to approve the sale of Clearco’s Canadian credit facility as part of the liquidation process of Silicon Valley Bank’s Canadian unit. Clearco has two fully drawn credit lines totaling US$80-million with Silicon Valley Bank, of which US$60-million is recorded on the books of the Canadian unit which is being liquidated. Incorrect information appeared in an earlier version of this story and has been corrected online.