US mid-market: Canada shows its strength

To the north of the giant US, there is a quieter neighbour called Canada – a landmass stretching from the Pacific to the Atlantic to the Arctic, but inhabited by a population only one-10th the size of America. The US’s GDP was $16.77 trillion in 2013, while Canada’s was a comparatively meagre $1.83 trillion. But, despite its lesser financial clout, Canada can also be a leader in the private equity space.

“Private equity [in Canada] is more than on an even playing field with the US,” Mike Woollatt, chief executive of the Canadian Venture Capital and Private Equity Association (CVCA), tells Private Equity International. “In fact we are leading in many aspects; you have a booming market, domestically, for deals.”

Last year there were 296 deals worth a record C$41.2 billion ($37.2 billion; €28 billion), partly bolstered by the biggest transaction of 2014 with Tim Hortons merging with the American Burger King for about $11 billion in December. There were 33 active funds that raised C$12 billion in total.

“Investors like the stability and the performance, but also what’s going on in Canada,” Woollatt says, pointing to the competitive tax rates and a strong, stable financial system. “We’re seen as a practical place to put money, which is why we get calls all the time from LPs doing basic research asking, ‘Hey, what’s going on there?’”

Brent Belzberg, senior managing partner of TorQuest, the private equity firm, agrees, citing a good legal system and less of a litigious environment than in the US.

“We’ve never been busier than we are today,” Belzberg says. “It seems that there are just lots of opportunities right now and so it’s understandable that European, Asia and US investors would find a need to have a position here.”

One notable aspect of the Canadian PE market is the sophistication of its public pension systems.

“We have some enormous pension plans that are rock stars internationally,” Woollatt says. “There is very little-to-none political direction on Canadian pension plans. Because they have much more leeway, they structure themselves however they see fit to get the best return.”

This freedom has allowed them to pursue more direct and co-investing. Given their size, they can hire the best talent, provide them with strong pay incentives and equip themselves to go direct more than US pension funds.

The Ontario Municipal Employees Retirement System (OMERS), which manages C$72 billion in assets, established OMERS Private Markets in 1987 to invest in private equity on behalf of the pension system. When OMERS’ global head of PE Mark Redman joined the system six years ago, two-thirds of its private equity investments were through funds with the rest via direct deals. Redman says this ratio has now reversed and he expects the amount of fund investment in the next few years to fall close to zero.

“That’s been a huge change in the business,” Redman says. “The reason we do that is, first of all, obviously you’re paying a lot of fees to third-party fund managers if you invest in funds.”

Last year, OMERS generated a 10 percent return, surpassing its long-term requirement of 6.5 percent. Its private investments returned 9.5 percent for the year.

Healthcare of Ontario Pension Plan (HOOPP), which manages C$60.8 billion, also pursues direct investing, although it is not planning to dramatically squeeze out its fund investment opportunities like OMERS.

“We did make a strategic decision to not get out of the fund business,” says HOOPP Capital Partners managing partner Jim Walker. “We think that, given the scale of the pension fund, it can also be a good way to allocate capital, so we’re not going to be a solely direct shop.”

Stephen Smith, partner with HOOPP Capital Partners, adds that funds provide them with geographic and industry exposure they would not otherwise have.

“That said, we don’t feel constrained in Canada in our ability to do direct deals,” Smith says. “We can go anywhere in the world and most of our current direct investments are outside Canada.”

HOOPP is indeed expecting to up the percentage of direct deals. Walker says that while fund investments will remain a core of its PE programme, the 70-30 ratio between funds to direct investing may decrease slightly.

LPs doing direct deals and skipping the middlemen may frighten some GPs, but it is not a concern for mid-market firms.

“A lot of people say, ‘Isn’t it tough to get Canadian investors because most of them are going direct?’ I say that the Canadian pension funds are very sophisticated,” notes TorQuest’s Belzberg. “They tend to do larger transactions than we do, and, as a result, we don’t ever run into them as competition.”

He says the large Canadian LPs have been supportive of smaller GPs like TorQuest and form a “large part of our investor base”, because TorQuest covers a market they don’t.

Signal Hill, another mid-market firm managing about C$300 million in assets, has had similar experiences.

“We are in the lower mid-market side, but the pension funds, because of the large amount of capital they have and the size of their teams, don’t have the luxury to invest in and manage smaller mid-market companies,” says Signal Hill partner Hai Tran-Viet. “So we don’t really see or compete against them.”

Even for larger GPs on the same playing field as the pension giants, direct investing may not have a serious negative impact.

“Except for a few, it seems that the Canadian LPs in general are looking more for co-investments,” Tran-Viet says. “There’s the opportunity to leverage relationships with GPs and invest more money.”

These Canadian public pension funds can almost be considered GPs, according to Hussein Khalifa, founding partner of placement agent MVision.

“It’s partly because they’re structured differently: they tend to be investment management companies working on behalf of those plans, so they’ve been more entrepreneurial,” Khalifa says. “They invest exactly the same way the GP does and if you talk about public LPs, the US plans have a very different model.”

According to CVCA data, energy and power was the biggest private equity sector in Canada last year, with 81 deals worth C$13.1 billion. The second largest PE exit in the country last year was the C$932 million initial public offering of Seven Generations Energy, previously owned by the Canadian Pension Plan Investment Board (CPPIB), ARC Financial and KERN Partners.

With plummeting oil prices in the past year, the largest PE industry in the country is keeping many investors on their toes.

“No one should deny that Canada has a substantial reliance on the resources industry,” Belzberg says. “If you had a private equity fund that was reliant on the resource industry, it would be hurting significantly right now; it probably is a great buying opportunity but you have to have guts.”

Indeed, Imran Siddiqui, partner with Signal Hill, says the decline in oil prices has created some near-term uncertainty in the energy sector, causing investors to be more cautious after seeing a resource- and commodities-led boom in the last decade. He says that in the last few years the resources sector, particularly energy services, has been popular with more funds being raised specifically for it.

“It’s a bit of a wait-and-see here,” Woollatt agrees, “but the neat part about private equity is that, unlike the public markets, it can wait and be opportunistic.”


When the small business owners and entrepreneurs of the baby boomer generation decide to retire without a successor in place, a niche market opens for PE funds. Business owners can reap the seeds they sowed over their lifetime and PE firms generate value through buyouts and rollups.

Chrysalis Capital Advisors, based in Alberta, is one example of a PE firm looking to guide these soon-to-be retirees in their generational transition.

“The more we looked at the market, particularly in Western Canada, owner transition was a big issue,” says Chrysalis president Glenn Huber. “A lot of businesses that started in the 70s and 80s were very successfully built, but the children weren’t interested or the management team might not have the ability to carry them on.”

CIBC estimates that C$1.9 trillion in assets owned and operated by baby boomers are expected to change hands in the next five years. Deloitte stated that more than 2.3 million small businesses exist in the country, many of which are run by pending retirees of this generation.

“Part of our business is to buy at the right phase, work with the management and facilitate the ownership transition, but also focus on the incumbent management and enhance value,” Huber says.

There’s also an opportunity with these SMEs to roll them up, bundle them and sell them to larger private equity funds.

Huber says Chrysalis Acquisition Partners held a final close in June for its Chrysalis Acquisition Fund I, which is looking to deploy C$100 million acquiring SMEs.

“It’s been slowly ramping up and it’s going to hit a brisk pace in the next three to five years,” he says. Signal Hill has also noticed this pending baby boomer transition. Tran-Viet says, because most owner-operated businesses are mid-market in size, there is an opportunity to help them transition out.

“That creates a unique opportunity for us,” Siddiqui adds. “We’ve built our capabilities to be more succession-focused and invest in that kind of opportunities.”

While it’s hard to predict trends for a country with a relatively small economy, Woollatt says Canada is well on its way, despite his predecessor at CVCA, Richard Remillard, telling PEI in March 2014 that Canada’s PE market is “underdeveloped”.

“We’re seeing real significant uptick,” Woollatt says. “We’re punching a bit above our weight in investment into Canada.”