The private markets around the world have worked through a slower 2016 relative to the past couple of boom years. Through October, that same trend could be seen in Canada, where deal flow is down YoY in both PE and VC, and continued low oil prices have weighed heavily on the economy. Where Canada bucks the worldwide trend this year is in total VC invested, which has already passed 2015’s high mark of $2.1 billion.
Datasets and analysis from our 2016 Canada PE & VC Breakdown II, the second edition this year in our Canadian report series, cover:
- PE & VC investment by deal size and sector
- Investment activity by firm location
- Exit activity breakdown for both PE- and VC-backed companies
Canadian Private Markets Following Global Trends – Introduction
Given the global decline in both PE and VC transaction activity, it comes as no surprise that Canadian private markets have also followed suit to an extent. Through October, both deal value and volume across Canadian PE are pacing to be down 24% and 19%, respectively, while VC deal volume has dropped off considerably as well. That said, both asset classes have shown certain unique characteristics. On the PE side, total exit value has performed relatively well, in part supported by a weakening Canadian dollar that has helped induce certain cross-border buyers to the region. On the venture side, total capital invested figures continue to rise impressively, even as completed financing counts decline, a trend we find indicative of a relatively nascent Canadian venture market reaching an inflection point of sorts and picking up speed.
Across this report, we look to provide a general overview of both Canadian PE and VC transaction activity, along with the relevant factors driving such dealmakers. We hope you find the following commentary and datasets insightful and as always, feel free to reach us at [email protected]
Set for a year-end bump?
Private equity overview
Canadian PE activity is on pace to finish 2016 with a 24% year-over-year decrease in value and a 19% fall in the number of transactions. These numbers are not particularly surprising, as we’ve seen similar decreases in other regions after the booming years of 2014 and 2015. Canada has also seen strong numbers in the IT and healthcare sectors this year, two industries that continue to attract outsized capital despite the slowdown in other areas. Deals in the materials & resources sector are more or less on pace with the last few years, which is interesting because of the lack of those deals in other regions this year. Finally, the energy sector has only seen 18 deals close through October, totaling C$3.1 billion, compared to C$7.1 billion across 36 transactions during the entirety of 2015. Many Canadian oil & gas companies depend on fuels that are relatively expensive to extract and refine, making it difficult to break even in the cheap crude environment that has continued throughout 2016.
On a quarterly basis, PE deal flow grew in both 2Q and 3Q of this year, with the latter coming in at C$13 billion across 71 transactions, a strong quarter during any year. The most recent quarterly growth is evidence that annual figures may not come in as low as originally expected. However, 4Q is off to a slow start, so we still expect 2016 annual figures to drop significantly from the prior year.
Similar to the US PE market, addon activity as a percentage of total buyouts continues to grow—62% through the end of October. In our view, the relative prevalence of Canadian add-ons, as it does in the US, stems from the need to combine smaller companies into one larger platform as a way to combat the growth in purchase price multiples over the last few years. In the US, however, this increased add-on percentage this year has been associated with an increase in secondary buyouts as a percentage of total exits, something we have not observed in Canada.
Something else on our minds lately has been the special tax treatment that Canadian public pensions currently enjoy in cross-border transactions with the US. As recently reported by Fortune, Canadian investors are exempt from paying capital gains taxes in the US, but then pay them in Canada when repatriating funds. Canadian public pensions, however, are tax exempt in Canada, and therefore don’t pay capital gains taxes on either side of the border. As the incoming US administration threatens to disrupt trade agreements with its North American partners and others, this advantage for Canadian public pensions—some of which pioneered the direct investment strategies now used by other LPs— could come under increased scrutiny, straining crossborder PE activity in general.
PE deals by sector & size
Consumer investment is considerably off the pace seen in 2015, in terms of value.
Small businesses remain a focal point for PE firms, with nearly 47% of all activity in the sub-C$25M range in 2016 to date.
Canadian exit activity has shown mixed results this year, with C$26 billion closing across 65 transactions through October. That puts 2016 on pace for a 24% YoY decrease in the number of exits, but a simultaneous 72% increase in the value of those deals. The total value of Canadian exits this year is on pace to be higher than any other year in our datasets, save 2014.
B2C businesses have led the way for Canadian exits in 2016, accounting for 31% of the transactions and a staggering 56% of total exit value. The success of consumer-facing Canadian businesses is exemplified by the announcement of 2017 IPO plans by Toronto-based winter clothing maker Canada Goose, backed by Bain Capital. Since Bain took a controlling stake in 2013, Canada Goose has been helped in part by a weakening Canadian dollar, which keeps the cost of their inputs low—they maintain three factories and source much of their down in Canada—while simultaneously growing sales in US dollars and other foreign currencies.
Similarly to the US market, Canada has experienced a pronounced decrease in IPOs this year. Just one PE-backed Canadian company has held an IPO this year—Vancouverbased Aritzia (another consumerfacing Canadian company). The majority of PE-backed exits this year have been via corporate acquisition, 74% through October, while just 25% have been via SBO. This is not an unusual occurrence, but stands out in comparison to the US and Europe, which have both seen a significant increase in the proportion of secondary buyouts this year to about half of all PE-backed exits.
Read the full report here.