Canada: Not just the 51st state

Private equity activity in Canada has slowed down in 2013 – but the country’s GPs and LPs are still well-capitalised and actively targeting opportunities both at home and abroad.

After a record year in 2012, Canadian private equity activity has slowed down noticeably in 2013. 

Preliminary first-half data from Dealogic show that the combined value of buyouts in Canada was down 73 percent year-on-year, even though the number of private equity deals increased slightly. 

Canada’s lower mid-market generated the vast majority of deal activity during the first quarter of the year, according to Canada’s Venture Capital and Private Equity Association. Of the buyout transactions with disclosed deal values, about 76 percent were valued at C$25 million (€18 million; $24 million) or less.

Meanwhile fundraising in Canada remains flat compared to 2012, with a total of $1.1 billion committed to ten partnerships during the first quarter of the year. At press time, mid-market investor TorQuest Partners, led by managing partners Brent Belzberg and Eric Berke, was expected to close its Fund III on about C$530 million, according to a source familiar with the matter. The fund has a target of C$550 million. 

Onex Corporation, the large-cap investor listed on the Toronto Stock Exchange, is also in market with its Fund IV, which launched earlier this year with a $4.5 billion target. 

The backdrop to this sluggish activity is a domestic economy that, like the US, has struggled to grow. “The Canadian economy has been mediocre,” says Avery Shenfeld, chief economist at CIBC, the Canadian Imperial Bank of Commerce. “Overall growth over [the past 12 months] has been roughly in line with the US, so around 1.5 percent or so.”


But while domestic buyout activity is down, Canadian private equity capital is increasingly being deployed internationally. 

Leading the charge are Canada’s largest pension plans, many of which are expanding abroad. In May, the Alberta Investment Management Corporation announced plans to open a London office to seek new opportunities in European markets.

Teachers’ Private Capital, the private investment arm of the Ontario Teachers’ Pension Plan, has been one of the most active international investors since opening its London office in 2007. Today, roughly 90 percent of the assets in the Teachers’ private investment group are outside of Canada. 

“We have been selectively pursuing opportunities internationally this year,” says Jane Rowe, senior vice president of Teachers’ Private Capital and Infrastructure. “For example, we are opening a new office in Hong Kong this year to serve the Asia regions as part of our long term approach.” 

In 2012, the pension acquired a 9.9 percent stake in Kyobo Life Insurance for $400 million, marking its first direct investment into Korea. 

Teachers’ generated a return of 18.6 percent in 2012, well above its 13.3 percent benchmark, helping to grow OTPP’s total assets from C$117.1 billion at the beginning of 2012 to C$129.5 billion at year-end. The private equity group committed capital to eight buyout funds and four venture capital and growth funds during the year. 

The Ontario Municipal Employees Retirement System, which has offices in New York and London, has also been active investing outside of Canada. This year OMERS Private Equity has already invested more than $300 million across two transactions in Europe: it acquired software company Civica in May and invested alongside the Alberta Investment Management Corporation in June to acquire cinema operator Vue Entertainment for C$1.48 billion.

On the exit front, OMERS sold US Infrastructure Corporation to Leonard Green & Partners. Financial terms were not disclosed, but a source with knowledge of the transaction pegged OMERS’ return at about 3.5x its original investment.

OMERS Private Equity generated a 19.2 percent return in 2012, driven primarily by OMERS’ direct private equity investments. 

“The larger Canadian pension plans are certainly doing more direct investing,” says Paul Renaud, chief executive officer of OMERS Private Equity. “Typically they start with a co-investment model, which is what we started with, and eventually you gravitate to majority control ownership.”

OMERS has not made a fund commitment in more than four years. The system has more than $6 billion of investments under management, about 70 percent of which is comprised of direct investments, with the remaining 30 percent in private equity funds.

Other Canadian pensions generating strong private equity returns last year include Caisse de dépôt et placement du Québec, at 13.6 percent; The Public Sector Pension Investment Board, at 16 percent; and The Ontario Public Service Employees Union Trust, at 20.5 percent.

At the C$183 billion Canada Pension Plan Investment Board, which recorded a 16.8 percent return on its private equity investments in foreign developed markets for the fiscal year ending March 2013, one of the most significant developments in recent years has been a push into secondaries. Since 2007, CPPIB has deployed $4.5 billion in over 24 secondaries transactions, establishing itself as one of the largest direct secondary market participants.

Seventy percent of this total was deployed through the acquisition of limited partner interests, with the remaining 30 percent in direct secondaries, such as captive spin outs or by providing liquidity to tail end portfolios. CPPIB is seeking to deploy an additional $10 billion in secondaries over the coming five years.

While Canadian pensions have led the way in pursuing opportunities abroad, some domestic GPs are now starting to follow suit. Last December, Onex invested $358 million in Germany-based KraussMaffei Group, a provider of plastics processing machines.


One of the newest private equity firms in Canada is Toronto-based Searchlight Capital, which launched in 2010 and has offices in New York and London. Co-founded by Erol Uzumeri, who previously led the private equity business at the Ontario Teachers’ Pension Plan, Searchlight has invested in four companies, three in the US and one in the UK. 

The firm has yet to acquire a business in Canada, but says it continues to see attractive deals domestically. “The opportunity set on the private equity side really does tend to be more in middle-market companies and sectors where it’s more distributed [and] more diversified,” Uzumeri says.

“The interesting thing about the situation in Canada is [that there’s] a lot more US interest in acquiring Canadian businesses,” he adds. “Some [firms] are coming up to Toronto and establishing a one-man or two-man office. They’re definitely paying more attention because it is less competitive than the US.”

In February, Utah-based DW Healthcare Partners opened a Toronto office to better source investment opportunities in the eastern US and Canada. Other US-headquartered firms to open Toronto offices include Detroit-based Huron Capital and Boston-based Monitor Clipper Partners.

The latest private equity spin-out in Toronto is Altas Partners, founded in 2012 by former Onex managing director Andrew Sheiner. Altas is focusing on North American mid-market companies and will make equity investments of between $75 million and $500 million.

Natural resources remains the country’s most popular sector for private equity investment, accounting for 33 percent of all deals during the first quarter, according to the CVCA – and it continues to attract strong LP interest.

In May, Calgary-based energy specialist Camcor held a final close on its C$350 million hard-cap for Camcor Energy Fund VII. The fund targets early stage exploration and production investments in Canada.

One of the largest energy investors in Canada is ARC Financial, which closed its seventh energy-focused fund at its C$1 billion hard-cap last year, outstripping its C$850 million target. ARC invests in Canada’s burgeoning oil and gas sector, from exploration and production-focused businesses to those providing oilfield services. 

Perhaps the biggest question mark currently hanging over the Canadian energy market relates to the TransCanada Keystone XL facility, a cross-border pipeline initiative that would extend the delivery of oil sands originating in Alberta, Canada and would compete with the Colonial Pipeline in the Gulf of Mexico. After being delayed once for further environmental review, there remains substantial doubt about whether President Barack Obama will ultimately approve the project.

“Energy has always been a strategic asset in the minds of the US administration, and as a consequence, to the degree that the US can get their oil from Alberta as opposed to some place in the Middle East, I think that’s probably a good thing,” says Pentti Karkkainen, partner at KERN Partners, another Canadian energy investment group. “Still, there is an environmental constituent that needs to be listened to and respected.”


While Canada’s private equity market has gotten off to a slow start in 2013, there are reasons to be optimistic about the second half of the year. 

“We did have a bit of a dry spell in terms of big levered transactions, but we’re starting to get some of that [back],” says CIBC’s Shenfeld. “I think the door may be opening a bit. There’s still a very healthy role for both pension funds and private equity funds in buying not only abroad but domestically as well.”

“The missing ingredient in this expansion has been the lack of growth in Canada’s trading partners,” he adds. “I think we’re going to see a bit more optimism in the second half of the year in where the global economy is going, which could be a spark for some additional deal flow.”

What’s more, local practitioners insist that limited partners who bypass Canada and allocate capital only to the US for North American exposure are overlooking its unique attractions as a destination for private equity capital.

“It’s a mistake to just see Canada as the 51st state,” Shenfield says. “While that may be true in areas like manufacturing, it’s much less true in the service sector, in retailing and in local infrastructure, where you do have quite a distinct market. And case in point: the collapse in not only US residential real estate but US commercial real estate didn’t happen in Canada.” 

And while growth remains slow throughout North America, conditions in Canada are still pretty conducive to buyout transactions – certainly more so than elsewhere.

“Debt is still very low and banks are lending,” says Peter van der Velden, managing general partner at Lumira Capital and president of the CVCA. “In talking to guys in the sector, I haven’t heard anyone saying they can’t find good deals or that they’re disappointed with what they’re seeing or that prices are getting out of control.”