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After the slowest year on record for the Canadian private equity market, the sector started to bounce back in the first three months of this year.

Private equity firms in Canada invested $4-billion during the first quarter of 2024, the Canadian Venture Capital and Private Equity Association said Friday, nearly doubling the $2.1-billion invested during the same period in 2023. The total represents the strongest start to the year since 2021, when privately equity firms invested $4.9-billion in the first quarter of that year.

At the same time, private equity investors made $2.8-billion from 15 exit deals during the quarter, exceeding the total exit value for all of 2023 and signalling more money will be available for investment in the months ahead.

Despite a dearth of initial public offerings – historically among the most common private equity exit strategies – investors in the space are increasingly making money by re-privatizing public companies. Privatization deals – such as Logistec Corp.’s $1.2-billion sale to Blue Wolf Capital Partners LLC and Stonepeak Infrastructure Partners, or Q4 Inc.’s $257-million sale to Sumeru Equity Partners – accounted for 47 per cent of total exit value for the quarter, the CVCA said.

“The public markets have been challenged overall so we are not surprised to see this trend,” association chief executive officer Kim Furlong said in an interview. “This market has been extremely challenged with liquidity given the fact that the IPOs are low.”

Out of roughly 20 companies that went public during the market frenzy that began in late 2020 and did not subside until early 2022, six have since reprivatized, with most selling for well below their IPO prices. That experience, Ms. Furlong said, has permanently shifted how both entrepreneurs and private equity investors define success.

“Nobody is looking at you and wondering why you are still private as long as you are continuing to grow, whereas I think in the past, people would ask ‘Why are you still private,’” she said.

“I think that trend is here to stay, but I think the public markets will always play a role because there is a validation of your success that comes with that moment when retail investors have a chance to be a part of your success.”

Secondary market transactions, where one private equity firm sells to another, also fuelled the rise in exit deals during the quarter, the CVCA said, with total exit value for 2024 on track to surpass figures from 2021 and 2022.

“This is just the beginning. I don’t think we’re there yet. I still think we will see more activity in Q2 and Q3, but it will be interesting to see what the new proposed changes to the inclusion rate will do to transactions,” Ms. Furlong said.

Ottawa plans to increase the inclusion rate on capital gains from one-half to two-thirds for businesses and for individuals with capital gains over $250,000 as of June 25. Shortly after the change was announced as part of the federal budget in April, Ms. Furlong posted on LinkedIn that her association was “baffled” by the decision.

She expects some private equity investors to try and sell certain holdings before the change takes effect.

“The rumour of the government moving on capital gains has been growing year after year so I anticipate that we may see some exits,” she said.

“I know from some of the service firms that work with our members, that over the past few years, people have prepared in case there was a change. You can do a lot of paperwork in advance.”

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