Canadian PE, 2014: Global Context

  • Posted By: Ari Cuperfain

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  • Comments: 1

Following the financial crisis of late 2008, private equity (“PE”) activity came back more quickly in Canada than in other geographic regions. From 2010 through 2014, PE capital invested in Canadian businesses increased from US$4.5 billion to US$13.1 billion, implying an average compounded rate of 30%. PE activity is currently comparable with pre-crisis levels, and capital deployment continued to rise steadily through 4Q 2014. By comparison, in the U.S., PE capital invested from 2010 through 2014 grew at an average annual rate of 10%, and hasn’t yet recovered to pre-crisis levels.

Canada’s quick recovery is often attributed to its banking system, which managed the crisis well. No major banks failed. Banking is much more regulated in Canada compared to the U.S., and Canadian banks were in better shape to start lending again following the crash.

Although Canadian PE activity has been strong in relative terms, in absolute terms, Canada makes up only a small amount of total private equity investments worldwide. In 2014, just under 3% of PE capital invested globally was in the Canadian market. This value is consistent when viewed in a historical context; over the last fifteen years, Canadian investments represented between roughly 2-4% of total capital invested globally. By comparison, U.S. businesses accounted for nearly 50% of total invested PE capital (48% in 2014), European businesses for approximately one third (37% in 2014) and the rest of the world accounted for the remainder.

Although slower than in Canada, global PE activity has been recovering post-crisis as well, and is on an upward trajectory. Prior to the financial crisis, strong PE activity was driven by a combination of increasing capital allocation to PE by institutional investors and accommodative leverage markets. Post-crisis, these two factors are again prevalent, fueling global PE growth. Access to leverage is tied to strong credit markets, and positive credit conditions have driven private equity valuations back to pre-crisis levels. PE firms again have access to highly leveraged transactions, increasing the demand for leveraged buy-outs.

In addition to the access to leverage, U.S.-based PE firms have also accumulated over half a trillion US dollars of investable capital. Leading up to the crisis, U.S. PE ‘overhang’ (amount of non-invested PE capital) nearly doubled from just under US$300 billion in 2005 to almost US$550 billion in 2007. This number has stabilized, with approximately US$535 billion of private equity capital actively seeking investments. PE firms generally have a time limit for investing this capital, so there is tremendous pressure to invest.

As PE activity increases both in Canada and abroad, the Canadian private market stands to benefit from the increasing demand for investment opportunities and the relative dearth of supply. This analysis is already reflected in the data. The percentage of PE capital invested in Canadian businesses has been trending upwards. Between 2000 and 2007, Canadian buyout targets represented an average of 2.4% of global PE investments, but from 2008 to 2014, this number increased to an average of 3.0%, a 25% rise in activity. Parenthetically, this is now in-line with the public equity markets as well. At the end of 2014, 3.2% of the world’s stock market cap was from Canadian companies (source: Bespoke Investment Group). Ostensibly, geographic borders are becoming less significant, and the Canadian private market is a major benefactor of this global trend.

For Canadian business owners, increased investment demand amid a steady supply of saleable businesses puts sellers in an attractive position. PE activity is on the rise globally, and investors are looking to Canada to meet this demand. As more capital chases fewer deals, competition among bidders is commonplace. This ultimately leads to higher valuations and greater realizable value for business owners.

In our next post, we will take an in-depth look at the Canadian private market through its historical context to explain the underpinnings for Canada’s current economic situation, and for its anticipated growing significance in the global PE market.

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