Rising above the fray

Until recently, Canada’s thriving private equity industry had been one of the best-kept secrets in North America.

Canadian fund managers have been chalking up impressive performance numbers for years. Canada’s private equity and mezzanine funds at the end of 2009 had achieved a net return of 16.8 percent over a five-year period and 14.2 percent over a 10-year period, according to Thomson Reuters data released late last year by Canada’s Venture Capital & Private Equity Association. That compares to a figure of 4.6 percent for buyout funds in the US over the same period (US mezzanine funds were counted separately, achieving net returns of 2.9 percent). European private equity funds, meanwhile, recorded an 11.9 percent net return over the same period.

Despite such strong performance figures, Canada’s private equity firms have had trouble in recent years attracting interest from foreign limited partners who look no further than the US for exposure to the North American mid-market, in which the vast majority of Canada’s businesses operate. In 2009 foreign commitments to Canadian funds accounted for only 31 percent of fundraising totals, down from 58 percent the prior year, according to Thomson Reuters data released late last year.

We’re actually seeing US firms that have had some Canadian investment track record emphasise Canada as part of their marketing pitch

Greg Smith

The aggregate fund performance success – albeit for a smaller, younger universe of fund managers compared to the US and Europe – is complemented by positive macroeconomic indicators. Though some Canadian funds invest in international portfolio companies as well as domestic ones, it’s worth noting that the Canadian economy has outperformed the rest of the G7 countries in recent years, with a 1.7 percent growth rate from 2000 to 2009.

“We’re actually seeing US firms that have had some Canadian investment track record emphasise Canada as part of their marketing pitch,” says Greg Smith, president of the CVCA and managing partner at global investment bank Brookfield Financial. “I think you’re going to see a very active year in 2011.”

Indeed, recent data shows that shows that private equity-sponsored M&A activity was on the rise in Canada, with about C$4.9 billion invested in 2010, a 21 percent increase year-on-year. A great deal of that investment was presumably made in Canada’s mid-market.

“The average private equity investment is still somewhere between C$30 million and C$75 million,” says Smith. “That’s the bread and butter of the Canadian marketplace.”


A recent trip to Toronto by this reporter found two Canadian mid-market firms fresh off the fundraising trail with roughly 20 percent oversubscribed funds.

Birch Hill Equity Partners closed its fourth fund on C$1.04 billion (€779 million; $1.05 billion) in February, surpassing its C$850 million target.

“We were certainly talking to a lot of new people this time that we hadn’t talked to in previous fundraisings,” says Birch Hill partner Steve Dent. “I’m glad we did in retrospect, but it was a long, tough slog.”

Launched in the second half of 2009, the fund received roughly 65 percent of its commitments from non-Canadian LPs, a significant increase compared to investors in the firm’s previous fund, 65 percent of whose LP base comprised Canadian institutions. Distinguishing Canada’s private equity sector from the US market was crucial for attracting commitments, Dent says. “We were really trying to show them a lot of stats [demonstrating] there was a fairly distinct investment environment up here.”

Some recent exits didn’t hurt, either. In January, Birch Hill exited Canadian home healthcare company Comcare and telecommunications company Atria, one of Ontario’s largest fibre-optic networks. Birch Hill invested C$85 million in Atria in 2006 and sold the business to Rogers Communications, the largest cable company in Canada, for C$425 million.

Fellow Toronto-based mid-market firm Clairvest Group also closed its fourth fund over target, raising C$467 million. Fund IV represented the first time the firm sought commitments from non-Canadian investors.

One of the factors that helped Clairvest attract commitments was the fact that it is always the single largest investor in its own funds, having committed C$125 million to Fund IV from the GP’s balance sheet. “If we write a check to a company, over 25 percent of it is our own capital,” says Clairvest co-chief executive officer Jeff Parr. “For some LPs, that was almost all they needed to hear and they were in.”

Its staunchly mid-market focus also helped lure LPs, Parr notes. “Mid-market business building … seems to be where people are interested [in investing] these days, as opposed to big LBOs,” Parr says. “We’re business builders, not LBO artists.”

Clairvest’s decision to look for commitments outside Canada was because the Canadian LP base is shrinking, Parr says. “There are more large pension funds either exiting [the asset class] or going direct…so we felt it was appropriate for us to get out there and start building our name.”  The Alberta Investment Management Company is one such pension that has indicated it would prefer to do all private equity investment in-house as opposed to investing with external managers.


But not all domestic pensions wish to forgo fund investments, the C$140 billion Canada Pension Plan Investment Board (CPPIB) being a good example. The firm maintains 50 to 60 relationships with GPs, with whom it also co-invests frequently. Similar approaches are undertaken by Teachers’ Private Capital, the private equity arm of the C$96 billion Ontario Teachers’ Pension Plan, and OMERS Private Equity, the private equity division of the C$48 billion Ontario Municipal Employees Retirement System.

The direct deals the large pensions target often tend to be multibillion transactions around the globe.

In July, CPPIB teamed up with Toronto-headquartered Onex Partners, the large-cap private equity arm within publicly listed Onex Corporation, to acquiring UK engineering company Tomkins for $4.7 billion – the largest European LBO of 2010.

The investment in Tomkins marked the second consecutive year that CPPIB co-invested in a record-setting global private equity transaction. In 2009, it partnered with TPG Capital on the $5.2 billion buyout of IMS Health.

While CPPIB is clearly a fan of private equity in its portfolio, the pension does not have a target allocation to private equity.

“The beauty of our system is that there is no pressure to invest capital as there is no specific allocation to the private investment asset class,” says CPPIB senior vice president Andre Bourbonnais. “It’s really opportunity-driven.”

When committing to private equity funds, CPPIB only invests in vehicles of C$750 million and above. Because the majority of Canadian private equity funds lie below that threshold, the pension has since 2005 invested in small- and mid-cap Canadian funds via a fund of funds programme managed by Toronto-based Northleaf Capital Partners.

“It’s a way to extend their reach into a part of the market that they like but that is hard for them to invest in directly given the large scale of their overall private markets programme,” says Northleaf managing partner Stuart Waugh. “We look at mid-market buyouts, we look at venture, we look at growth, we do co-investments, we do secondaries, and it’s designed to cover the entire market in Canada below what [CPPIB] can do directly.”

Northleaf in 2009 spun out of TD Capital Private Equity Investors, the private equity fund of funds and co-investment arm of Canada’s TD Bank Financial Group, and makes direct co-investments and secondary investments in addition to managing its fund of funds business.

In February 2010, CPPIB committed an additional $400 million to Northleaf’s fund of funds programme focused on the Canadian private equity market. The commitment represented an expansion and extension of the previous $400 million mandate Northleaf was awarded by CPPIB in 2005.

One segment of the Canadian market that Waugh says is increasingly attracting the attention of investors is the natural resources industry, which represents about 20 percent of the buyout marketplace in Canada, both in terms of the number of companies invested in as well as dollar value of investments.

“I think the whole private equity oil and gas area is one that’s attracting more interest – especially from outside of Canada,” Waugh says. “We’ve had a terrific run of supporting a core group of really good focused private equity managers in oil and gas in Calgary, so that’s starting to attract a bit more attention.”


Despite the positive outlook many have for Canada’s private equity industry, some insiders worry about trends they have begun to observe: namely, increasingly easy access to leverage on favourable terms and rising deal valuations.

CPPIB’s Bourbonnais says he may be a “contrarian”, but doesn’t particularly like the present state of the Canadian market, where he feels renewed borrowing capacity has resulted in lots of money chasing a limited number of quality transactions.

Onex managing director Andrew Sheiner agrees: “Because so much money has flowed into the debt markets, lenders are starting to be silly again about amounts they’re offering to finance acquisitions. That’s an unhealthy dynamic.”

Still, with sound macroeconomic fundamentals, an uptick in deal flow and fundraising off to a fast start, Canada looks poised to outperform its global peers.

While nobody is predicting a return to peak levels seen prior to the global economic downturn, the CVCA’s Smith says he has high expectations for the Canadian market: “We really look at 2011 as Canada’s year.”