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Friday Letter: Bullish on Canada

North America is frequently described by general partners as a buyout market without borders. KKR, Bain, Teachers’ and other private equity investors have moved effortlessly between Canada and the US, with success stories such as Shoppers Drug Mart and BCE Yellow Pages confirming the “borderless” claim.  

But listening to market professionals from both NAFTA countries speaking at the Canadian Private Equity Markets Summit earlier this week, it would appear that national distinctions remain sharp, with Canadians optimistic about their home market and Americans distinctly bearish about theirs.

Perhaps prompted by a recent New York Times article declaring a private-equity bubble, the US general partners at the Summit, held in Toronto, seemed to have a dark cloud following them, and panel discussion tended to gravitate toward “silly” debt levels and a real estate bubble waiting to pop.

Canadians, meanwhile, sang a rosier tune. The country remains the one G7 nation with a budget surplus, and while the country’s politics are in flux, everybody seems content with where the private equity market there is headed. It was enough for Diamond Castle head Larry Schloss, a New Yorker, to declare that he may need to move to Canada.

Schloss, in describing how reckless the debt markets have become in the US, cited instances where his firm has put in bids that came in below the assumptions of the stapled financing. He also proffered a prediction that the parade of high returns US groups have experienced in the past few years could be coming to an end. “The economy [in the US] is about to give,” he told the Toronto audience. “We’re going to look back a year from now, and we’ll probably see that right now was the peak.”

Not so in Canada. The private equity market there has developed nicely over the past five years but there remains plenty of inefficiencies for smart GPs to take advantage of. The economy, save for the income trust market, is healthy, and Canadian investors aren’t worrying about the potential impact of a real estate collapse.

In fact, Canadian investors are actually looking forward to tomorrow. “In a classic Canadian understated fashion, I don’t think investors here understand just how well we have it,” Gilbert Palter, COO and managing partner at Toronto-based EdgeStone Capital Partners, said on a panel. “Canada is so much more than moose, trees, beer and hockey… I’m bullish about Canada.”

It is possible that while its neighbour to the south gloomily wait for a slowdown, the Canadian private equity market is set for another year of fast-paced action. And after a year without hockey following the NHL strike, nobody should begrudge them that.