The current investment climate is forcing firms to get creative and heighten their focus on building up relationships with potential partners.Nathan Denette/The Canadian Press
You may have to spend money to make money – but what if everything's expensive? Roman playwright Plautus didn't leave behind a convenient one-liner for the current private equity climate.
The "dry powder" – industry parlance for capital available to be spent – is piling up around the world, reaching a decade-long high of $752-billion (U.S.) last year, according to data firm Preqin. And that's to say nothing of the record number of funds that have amassed in what's being called the private capital space – groups specifically seeking investments in asset classes such as real estate, infrastructure, energy and private debt markets.
That cash in the hands of buyout firms in Canada and beyond is a sign of the tough environment to find and win worthy investments. Unsurprisingly, global fundraising for new investments also slowed last year.
Robert Le Blanc, senior managing director at Onex Corp., put it like this on the firm's latest conference call: "2016 started much like 2015 ended – with volatile credit markets, a difficult investment environment and a weak Canadian dollar, largely driven by a steep commodity price decline and a shaken oil and gas sector.
"The current instability in the markets has made it challenging to source and finance new investments. In some recent cases we've seen considerable price gaps with sellers holding onto the hope of high valuations," Mr. Le Blanc said. And there aren't any signals that will change any time soon.
That's not to say deals aren't getting done. In Canada, a market largely composed of bite-sized private equity deals well under $500-million (Canadian), activity increased 19 per cent to 399 transactions worth $22.8-billion last year from 2014, data from the Canadian Venture Capital & Private Equity Association (CVCA) show. In addition, Canada's largest private equity investors by dollars spent – pension funds and divisions of Brookfield Asset Management Inc. – wrote large cheques abroad.
But the current investment climate is forcing firms to get creative and heighten their focus on building up relationships with potential partners in an effort to avoid the brutally competitive and time-consuming auctions that can erode an asset's value.
The Ontario Municipal Employees Retirement System's private equity group said this strategy was at play in last year's $1.7-billion (U.S.) acquisition of London-based Environmental Resources Management (ERM) alongside Alberta Investment Management Corp. For five years, OMERS had been in touch with management and watched the business, which provides international environmental and safety consulting services for the public and private sectors. Ultimately, OMERS was able to negotiate with the seller exclusively.
Specialty funds with strategies focused on particular industries are also increasingly being developed and coming to Canada. Many bankers, lawyers and other investment pros are looking to oil-and-gas-focused funds to drive more activity in the coming year. There were only 54 private equity deals done in Alberta last year, worth $8-billion (Canadian) over all as the transaction value of energy deals declined 34 per cent from a year earlier, according to the CVCA.
At the same time, the number of deals in the industrial and manufacturing sector leaped 48 per cent, and the value of deals climbed, too.
The largest was the $1.9-billion acquisition of contract manufacturer Kik Custom Products Inc. by New York-based firm Centerbridge Partners LP. Kik operates in Canada and the United States, making everything from deodorant to sunscreen and pool chemical products for other companies to brand as their own.
The greatest volume of Canadian deals came from Quebec, with 151 transactions last year worth $5.4-billion. The largest was mining-focused Magris Resources Inc.'s private-equity-backed $597-million acquisition of the Niobec mine in Quebec, which is one of the very few places in the world that produces a soft, grey metal called niobium.
In Canada, Quebec's provincial funds dominated the list of most active private equity investors when broken down by the number of deals. Investissement Québec, the province's investment arm and economic development agency, worked on 64 deals. And labour fund Fonds de solidarité FTQ did 53 deals.