An atmosphere of caution muted the pace of private equity deals in Canada last year as buyout firms grappled with the impact of inflation and high interest rates, while sellers of companies continued to chase lofty prices.
Deals still got done, with 441 transactions completed in Canada, according to a report from law firm McCarthy Tetrault LLP that draws on data from Pitchbook. But the negotiation process was full of starts and stops for many acquisitions, and broken deals were more common. And that has forced private equity executives to be more creative.
The volume of activity last year was similar to that in 2017 and 2018, just before a three-year frenzy of deal-making that ran through 2021. The market has cooled considerably since then, and large transactions have been rare. Most of last year’s deals – about 70 per cent – were add-ons, purchased to bolt on to an existing company in a private equity portfolio.
The total value of Canadian private equity deals for the year up to Dec. 5 inched higher to $16-billion, from $14-billion in 2022 – which was a sharp drop-off from prior years.
Selling assets to return money to investors proved difficult and private equity firms with the luxury to be patient held off from selling at depressed valuations. Exits from private-equity-backed investments slowed to their lowest level in more than a decade as the market for spinning out companies through initial public offerings (IPOs) all but dried up. There were only 88 deals to off-load assets, worth $3.7-billion, which was a precipitous fall from 146 deals worth $14.2-billion in the previous year.
“It was a year of caution, in my view, or a year of readjustment,” Shevaun McGrath, a partner at McCarthy Tetrault and co-head of its national private equity group, said in an interview.
The negotiation process was “a little stickier, our clients were taking a more measured approach, but there was definitely activity and interest,” she said.
In a more challenging environment marked by persistent economic uncertainty, private equity executives had to use more varied tools to get deals done. That sometimes meant selling only part of an asset, or carving off a piece of a business that is attractive to buyers. Joint ventures have become increasingly common, as is the use of continuation funds that roll over existing investments into new funds, extending the time frame firms have to earn a return on the investment.
“Because of the environment, they are being forced, or encouraged, maybe, to think of creative ways to deliver value,” Ms. McGrath said. But those measures may be a permanent fixture of a maturing market.
“I don’t think this is a world any more of [a leveraged buyout], rinse, repeat,” Ms. McGrath said. “You certainly can’t leverage the way we used to with the cost of capital. So you can’t do a deal the same way every time.”
After private equity fundraising nearly came to a halt in 2022, with only $2.1-billion raised, the total funds raised rebounded in 2023 to $32.2-billion. But major funds closed by large firms accounted for the lion’s share of that total. Brookfield Asset Management Ltd. BAM-T raised US$12-billion for its latest flagship private equity fund – its largest PE fund to date – and Whitehorse Liquidity Partners raised US$5.3-billion for its fifth flagship fund.
By contrast, mid-market and smaller firms struggled to bring in new money. And even Onex Corp. ONEX-T, an established leader in Canadian private equity, paused fundraising on its latest private equity fund as new commitments dried up.
McCarthy Tétrault expects fundraising “to remain tepid” to start this year. But there are several factors that could drive more deal-making, as sellers of companies accept that the lofty valuations from a few years ago are not coming back, and pressure to put capital to work, or return money to investors, ramps up.
“If last year was sticky, I expect this year to be a little bit more fluid in terms of executing on transactions,” Ms. McGrath said. “People have now factored in higher rates. People have thought long and hard about generating value at existing assets. They’ve thought about creative ways to exit. There’s been time to absorb the new world order.”
James Bradshaw