Canada boasts second-most attractive market for PE

The Canadian market, comprised primarily of mid-sized companies, was ranked second in the world after the US for most attractive country for private equity investment, according to a recent study.

Canada is the second most attractive country for private equity and venture capital investment after the US, according to new research from the University of Navarra’s IESE Business School.

The Canadian market, comprised primarily of mid-sized businesses, shared the ranking for second most attractive country with the United Kingdom. Canada and the UK scored higher than 77 other countries included in IESE’s Global Venture Capital and Private Equity Country Attractiveness Index. The study evaluated countries based on six key drivers: economic activity, depth of capital market, taxation, investor protection and corporate governance, human and social environment, and entrepreneurial culture and deal opportunities.

The macro picture in Canada is pretty positive, even with all the riffs and uncertainties that exist today

Richard Remillard

“The macro picture in Canada is pretty positive, even with all the riffs and uncertainties that exist today, be they from Europe and the travails they’re going through or the uncertainty surrounding the US presidential election,” said Richard Remillard, executive director of Canada’s Private Equity and Venture Capital association. “The government is addressing fiscal challenges pretty well and there are low interest rates and high demand for what Canada produces.”

In terms of private equity investment activity, Canadian fund managers enjoyed a record year in 2011 with 235 announced deals, according to the CVCA. That was up 38 percent on the equivalent figure for 2010, and higher even than the previous peak of 229 recorded in 2007.

Helping drive the increase in deal activity in Canada has been a constant supply of available financing that remained strong even through the economic crisis between 2008 and 2010.

“Our financial institutions have done well because of the government regulations that did not allow them to do lots of things that could get them in trouble,” said Joe Telebar, partner in Ernst & Young’s transaction advisory services division and head of the private equity practice in Canada.

The stability of the Canadian economy is one reason US private equity firms have increasingly looked for prospective investments in Canada in recent years, according to Telebar. While investing in European companies can involve dealing with country-specific risks, US firms have been investing in Canadian businesses with relative ease, he said.

[US firms] are comfortable with Canadian tax structures. They’ve [realised] they aren’t restrictive

Joseph Telebar

“There really isn’t any different risk,” Telebar said. “[US firms] are comfortable with Canadian tax structures. They’ve [realised] they aren’t restrictive.”

While the Canadian natural resources sector remains the country’s most popular industry for private equity investment – Canada’s mining sector accounted for 23 percent of all private equity deals last year – US private equity firms continue to shy away from investing in Canadian energy assets, according to Clint MacArthur, partner in Ernst & Young’s transaction advisory  services.

 “The challenge is trying to get US private equity firms [to invest],” he said. “They have trouble wrapping their head around the energy sector and the volatility in commodity pricing. As a result, there are very few that have the appetite to understand it and to make the investment.”