Bucking the trend

In most developed economies, 2011 was a pretty tough year for private equity. But not so in Canada, where the industry enjoyed a record year: 235 deals were announced in 2011, according to the Canadian Venture Capital & Private Equity Association. That was 38 percent up on the equivalent figure for 2010, and higher even than the previous peak of 229 recorded in 2007. Disclosed deal volumes also shot up, rising by a dramatic 69 percent to C$11.6 billion (€8.8 billion; $11.6 billion).

Admittedly this figure was skewed by the two largest transactions in Canada last year – OMERS Private Equity and Berkshire Partners’ C$2.1 billion acquisition of moldings equipment company Husky International, and British Columbia Investment Management Corporation’s C$1.03 billion deal for timber company Timberwest Forest alongside PSP Investment Board – which accounted for more than a quarter of the total.

But it’s also true that the mid-market, which continues to account for the bulk of private equity activity in Canada, seems to be in good shape.

“There are a lot of opportunities in Canada still,” says Brent Belzberg, founder and senior managing partner of TorQuest Partners. “We’ve been looking at a lot of deals in the food area and have done a whole bunch of financial services support stuff.” TorQuest, which focuses on Canada’s mid-market, typically invests between C$25 million and C$75 million per deal. Its current C$550 million fund has also invested in specialty chemicals company Pinova Holdings, fuel management services business 4Refuel and insurance business SCM.

Non-Canadian GPs have increasingly been investing in Canadian businesses in recent years. “We are seeing an increasing number of US general partners paying attention to Canada,” says Stuart Waugh, managing partner at private markets fund manager and advisor Northleaf Capital Partners. “A number of players are taking a much more systematic approach to the Canadian market [and] putting dedicated resources against it from a sourcing perspective.”

In April, Morgan Stanley Global Private Equity acquired Toronto-based Access Cash, which manages Canada’s second largest network of automated teller machines, while in September, Boston-based mid-market firm Monitor Clipper Partners acquired Canadian online insurance company Kanetix.

“We’ve had a lot of success in Canada and have continued to be very active there,” says Monitor Clipper managing partner Bill Young. “Not only have we made three direct investments in Canada but a number of our US-based portfolio companies have bought businesses up there as add-on acquisitions. We think it’s a good market.”


One factor that has contributed to the robust activity in Canada has been the availability of financing for mid-market transactions – a lifeline that never disappeared even during the worst of the global financial crisis in 2008 and 2009.
“Canadian banks have been pretty steady suppliers of capital through that period of time,” says Steve Dent, a partner at Birch Hill Equity Partners. “Their balance sheets are even better now, and I think they were pretty solid then. So we view the banks as being a sort of constant.”

Canada also boasts some attractive sectors, notably natural resources. Canada’s mining sector accounted for 23 percent of all private equity deals last year, followed by manufacturing and processing at 16 percent and oil and gas and other energy-related companies at 14 percent.

These are sectors that throw up a broad range of opportunities. “We’re looking at service companies that surround that industry,” says Elmer Kim, managing director at Roynat Equity Partners (a division of a C$3 billion entity owned by the Bank of Nova Scotia). “We’re not going to be buying junior oil fields or gold mines. We’re trying to figure out how you sell the tools to the miners.”

Northleaf’s fund of funds arm backs a number of Canadian energy-focused firms, including Calgary-based firms KERN Partners and ARC Energy. “The portfolio that we’ve put together [for Canadian pension plan CPPIB] had very strong returns from the oil and gas segment,” says Waugh.

KERN, for example, focuses on Canadian energy and infrastructure development but also makes US and international energy investments. “They’d be an example of a well-established Canadian manager who has raised capital outside of Canada and is looking to continue to do that,” Waugh says.

KERN is not alone. Canadian GPs have increasingly been attracting capital from non-Canadian LPs, helping the industry’s fundraising total climb 10 percent to C$3.6 billion in 2011.

Birch Hill’s most recent C$1 billion fund attracted 65 percent of its commitments from non-Canadian LPs, up from 35 percent in its previous vehicle. Fellow mid-market investor Clairvest Group also sought commitments from non-Canadian investors for the first time when raising its fourth fund, which closed on C$467 million in January 2011.
One reason for this trend is that Canada’s large public pensions have been focusing more of their time and money on direct investment, both inside and outside Canada – a move that has reduced the capital available to local GPs, sources say.

Caisse de dépôt et placement du Québec, which manages institutional funds primarily from public and private pension and insurance funds in Québec, now puts more money to work via direct investment than via fund commitments: the respective totals for last year were C$1.3 billion and C$1.2 billion.

“We feel comfortable being about 40 percent in funds and 60 percent in direct investments,” says Luc Houle, senior vice president at the Caisse.

Historically, the Caisse has divided its investments more or less evenly between Canada, Europe and the US, he adds. “Right now we have a bit more exposure to the US, but we’ve always had quite a bit of international exposure. Our peers are also quite involved on the international scene.”

Indeed, while Canadian investment abroad fell from C$30.3 billion in 2010 to C$19.9 billion in 2011, Teachers’ Private Capital, the direct investing arm of the C$117 billion Ontario Teachers’ Pension Plan, invested more internationally last year than it did domestically – although its highest-profile deal last year was probably the C$1.32 billion sale of an 80 percent stake in Maple Leaf Sports and Entertainment, owner of various Toronto-based sports teams (Teachers had bought its initial stake in the Toronto Maple Leafs hockey team for C$44 million 17 years earlier).

While some of Canada’s large public pensions have proven their ability to co-invest successfully alongside GPs, there are doubts by some in the industry that Canadian pensions have proven their ability to be successful lead investors.

“That’s the open question,” says one GP, “whether the big Canadian plans will be successful in transitioning from being co-investors to being lead investors in their own right.”

But at least as far as the Caisse is concerned, the signs are positive. Its overall C$16 billion private equity portfolio returned 7.1 percent in 2011, slightly below its benchmark return of 7.4 percent, it returned 26.7 percent in 2010 and 10.8 percent in 2009. “If you look at the average return for the last three years, it’s about 15 percent, so I think that’s quite in line with our strategy,” says Houle.