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TORONTO - Canadian information technology and biotechnology companies now a have a less dilutive, long-term capital financing alternative to that provided by traditional private equity placements.

GATX Capital Corporation, a global diversified investor and asset manager in the commercial aircraft, rail equipment and IT industries, and MM Venture Partners, a new venture capital firm based in Toronto, in early August unveiled the C$50 million ($31.88 million) GATX/MM Venture Finance Partnership. The vehicle will provide debt financing such as working capital loans and software and equipment leases to Canadian venture-backed IT and biotech companies. GATX Capital and MM Ventures are the vehicle's sole limited partners.

GATX/MM Ventures will offer companies less dilutive forms of financing and will either structure deals as loans or buy a portfolio company's equipment or intellectual property and then lease it back, said Minhas Mohamed, the founder of MM Venture Partners. The property will be sold back to the company at the end of the fund's investment period. Transactions are structured to include equity interests in portfolio companies, generally in the form of warrants to purchase common or preferred shares of stock.

The fund will invest an average of C$1 million ($640,000) to C$2 million ($1.2 million) per deal - with a cap of C$5 million ($3.19 million) to C$6 million ($3.83 million) - in companies with revenue north of C$4 million ($2.55 million). This type of financing is particularly attractive to companies Mr. Mohamed referred to as "orphans" - also known as "fallen angels" or young public companies that have hit hard times.

Investments by GATX/MM Venture Finance Partnership do not require companies to offer a controlling position such as a board seat in return, Mr. Mohamed said. The fund will complement existing Canadian venture capital investments, and partnering with GATX Capital will help bring the vehicle the clout it needs to get started, he added.

"What we bring to companies in Canada is the North-South factor," Mr. Mohamed said, pointing to his knowledge and contacts in the Canadian venture market and GATX's experience in venture leasing in the United States. In fact, it was precisely these two factors that brought the two parties together in the first place.

GATX Capital, with its Orinda, California partner Meyer Mitchell & Co. (MMC), has been involved in the venture leasing business in the U.S. for more than a decade through the MMC/GATX Partnership. Over the past 11 years, the fund has placed more than $220 million in biotech and technology venture leases and other later-stage funding.

One particular venture deal brought MMC/GATX north of the border: Newstar Technologies Inc., a venture-backed Toronto software company. GATX became acquainted with Mr. Mohamed while working to structure a software leaseback for Newstar with Quorum Group of Companies, the company's primary venture backer. When GATX began to interview Canadian VCs to form a venture leasing partnership in Canada, it soon became clear that Mr. Mohamed was best suited for the job.

"Basically, we liked [Mr. Mohamed's] entrepreneurial attitude," said Robin Barnato, a director of corporate finance at GATX Capital. "He's very knowledgeable and experienced in the technology industry in Canada." Because this partnership was one of the first to attempt venture leasing in Canada, she added, it was very important that it be run by someone with familiarity of the market.

Mr. Mohamed disclosed that the fund already had signed two letters of intent - a sale-leaseback of lab equipment for a Vancouver biotech company and a C$2 million ($1.28 million) loan to a life science business - although he would not name the companies until the deals were completed. GATX/MM Ventures also will actively pursue opportunities created by postponements in the Canadian IT initial public offering market, which poses a huge opportunity at this time, he added.

The C$33 million ($21.12 million) fund is dedicated for the next two years, although Ms. Barnato said she believed that its volume goals can be easily achieved in that time span. The allocation can be increased if needed, because GATX Capital and Mr. Mohamed are the only sources of funding, she added. -- M.G.

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