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Montreal-based Novacap solved a problem that bedevils private-equity fund managers – deadline-driven sales of businesses with strong growth potential – by making a new $1.1-billion investment in industrial company Master Group after owning it for seven years.

Novacap launched what is known as a “continuation fund” on Thursday, backed by Wall Street powerhouses Goldman Sachs Group Inc. and Blackstone, that bought a stake in heating, ventilation, air conditioning and refrigeration company Master Group from two older Novacap funds that are being wound down.

Private-equity funds are contractually obligated to sell their holdings and return capital to their backers, typically within 10 to 12 years of being launched. One of the Novacap funds that invested in Master Group made its debut in 2007. In recent years, U.S. fund managers created continuation funds as a way to maintain ownership of promising businesses, while allowing long-time backers to cash out, and the concept is now catching on in Canada.

Novacap first acquired a 65-per-cent stake in Boucherville, Que.-based Master Group in 2014, when the company’s operations were entirely in Eastern Canada – the management team continues to be significant shareholders. Over the past seven years, Master Group made 10 acquisitions to expand in Ontario and Western Canada, and quadrupled sales to more than $1-billion annually. Master Group is now one of Canada’s largest HVAC/R businesses, with 1,100 employees.

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Novacap senior partner and Master Group chair Jean-François Routhier said the private-equity firm created a continuation fund to back expansion in the U.S. market that is expected to see Master Group double sales over the next five years. “This renewed partnership paves the way for our second phase of growth as we aim to become the largest independent distributor of HVAC/R products in North America,” Mr. Routhier said.

On Monday, Master Group made its first U.S. acquisition, acquiring Richmond, Va.-based Value Added Distributors, a 200-employee company with 19 branches in six states. Master Group’s clients include schools, hospitals, offices and factories, and Mr. Routhier said the pandemic and environmental concerns are prompting these customers to upgrade their HVAC/R systems.

Master Group’s investment marks the second time Novacap used a continuation fund to extend its ownership of a business. In October, the firm raised US$800-million to buy Montreal-based technology services outsourcer Syntax Systems Group Inc. from two of its older funds. An arm of Goldman Sachs invested in both transactions.

“We were pleased to work with a high-quality group of institutional investors to help facilitate a strategic transaction that provides additional time and capital for Master’s continued growth,” Thom Spoto, managing director at Goldman’s Vintage Funds division, said in a press release.

In November, 2020, Goldman raised a US$10-billion fund to invest in private-equity-owned businesses through partnerships such as continuation funds. Mr. Spoto said, “We are delighted that this is the second opportunity that we have partnered with Novacap on a transaction like this.”

Along with Goldman and Blackstone, the new owners of Master Group include Fonds de solidarité FTQ, labour-sponsored Fondaction, iA Financial Group, Lexington Partners and Whitehorse Liquidity Partners. Mr. Routhier said Novacap spent six months working on the continuation fund, hiring independent valuators to put a price on Master Group that satisfied both incoming investors and institutions that sold their holdings.

“Continuation funds have become a way for general partners and their investors to hold on to companies longer, rather than selling them outright to another private-equity firm or listing them on an exchange,” said a recent report from Mercers. The consulting firm said continuation fund fees are typically lower than those for traditional private-equity funds, as far less work is needed to find investments, and this is attractive to institutional investors.

“Assets transferred to continuation funds are likely to be the best performers of the main fund and can therefore be considered a growth or momentum play,” Mercers said.

The Novacap continuation fund has a five-year life cycle and, after that, Mr. Routhier said the fund manager expects to exit Master Group through an initial public offering or sale of the business.

Novacap’s financial adviser on the new fund was Credit Suisse, along with law firms Davies, Ward, Phillips & Vineberg LLP and Fasken Martineau DuMoulin LLP.

Novacap is one of Canada’s largest employee-owned private-equity fund managers, with more than $8-billion of assets under management. The company has invested in more than 100 businesses since it was launched in 1981.

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