Snapshot: Chrysalis taps baby boomer PE sweet spot

Around $3.7 trillion in business assets are tipped to change hands in Canada between 2012 and 2022, creating a rich vein of opportunities for private equity firms.

The collective retirement of the baby boomer generation is leaving many privately-owned businesses in a grey area regarding succession planning. This is opening up a market for buyout opportunities for private equity firms, according to Chrysalis Capital founder and president Glenn Huber.

When Huber started Chrysalis in 2002, the firm focused on providing private growth capital for small to medium enterprises (SMEs) with an enterprise value of $10-15 million through a website linking entrepreneurs and accredited investors called The Chrysalis Exchange.

However, a couple of years ago the firm saw an opportunity to begin looking at more mature businesses with an established and longer history of profitability, something Chrysalis’ investors encouraged the firm to look into.

“We initially thought successfully profitable, strong businesses probably don’t need capital,” Huber told Private Equity International. “What we did become aware of the more we looked at the market was that owner transition was a big issue, particularly in Western Canada, and even [the whole of] North America.”

A lot of businesses that started in the 1970s and 1980s are very successfully built, Huber said, but children of those business owners may not be interested in taking over, or the management team might not have the ability to carry on the operations without the entrepreneur’s presence.

In fact, according to an EY survey, only 54 percent of high-performing companies say they have a “strong pipeline” of future successor candidates. This drops to 43 percent at low-performing companies. Furthermore just 43 percent of high performers and 38 percent of low performers say there’s a set criteria for picking out the next generation of leaders at their organisation.

Huber found a market his firm could enter, considering comparatively fewer private equity funds are focused on SMEs.

“Lots of them facilitate capital to the middle market, but there are tens of thousands of SMEs in North America,” he said. “These entrepreneurs feel the need to somehow monetise their life’s work and what they built, so we decided to set up our fund looking to deploy the first iteration of $100 million to facilitate the acquisition of SMEs.”

A November 2012 report from Canadian bank CIBC showed that there is $3.7 trillion in business assets that will change hands in the next decade in Canada, with 550,000 business owners — who account for about half of Canadian SMEs— exiting their ownership. This, CIBC said, is not just a microeconomic problem of succession planning at individual firms, but a macro issue when considering the sheer volume of such cases.

Huber said there is a tremendous opportunity in terms of valuation as entrepreneurs don’t want to trail along another business cycle before retirement. The Chrysalis Acquisition Fund I would buy SMEs and work with the management teams to facilitate the ownership transition, but also aim to add value and focus on the incumbent management, he said.

A lot of the soon-to-be retirees began their enterprises on the back of a napkin, quite literally, Huber said, and Chrysalis would come in with modern management techniques to improve the acquired companies.
There may also be opportunities to synergise the companies, or roll them up to sell them as a bundle to larger private equity funds, he said.

“The challenge is that some of these businesses have steady records that may not necessarily be near term,” he said, adding that it’s very “boots-on-the-ground” work in this sector. This may not be so interesting to larger PE groups that might not want to do heavy lifting for SMEs.

But, he said, for firms like Chrysalis, the baby boomer retirement will drive a lot of the ownership transition at SMEs that would keep this opportunity open.

“It’s been slowly ramping up and it’s going to hit a brisk pace in the next three-to-five years,” Huber said.

Look out for PEI’s Canada Briefing in the November issue.