Private equity deals set record in Q1

By Steven Lamb | May 15, 2007 | Last updated on May 15, 2007
3 min read

Merger and acquisition activity on the TSX reached a fever pitch status in the first quarter of 2007, with private equity making up an ever-increasing part of the buyout game, according to the latest statistics from the Canadian Venture Capital and Private Equity Association.

Private equity funds splashed out $5.1 billion in 36 separate deals in the first three months of the year, almost half of the $11.3 billion invested in all of 2006 — which was itself a record-setting year. These statistics cover only those deals that were publicly disclosed.

“The growth in global buyout markets is being driven by strong financial returns across the sector,” says Rick Nathan, president of the CVCA and managing director of Kensington Capital Partners. “Investors are recognizing the clear benefits available from the private capital markets, and driving transaction volumes to new levels.”

American buyers made up almost half of the total value in Q1 — little wonder since the U.S. private equity universe, awash with cash, deployed a total of $120 billion in the quarter.

Canadian buyers were active in cross-border deals as well, making up roughly half of the $5.1 billion the industry invested, and essentially matching inflows from abroad. Last year, Canadian private equity funds invested $14.3 billion in overseas acquisitions.

The stampede to secure resource assets in politically stable countries has driven equity returns on both sides of the Can-Am border so far this year, according to a recent analysis note from Richardson Financial Partners Limited, penned by Clancy T. Ethans, senior vice-president and chief investment officer, and Philip Kwon, private client investing.

“Of the 1,000 odd points that the index has gained since the beginning of the year, 100 of those is attributable to the Alcoa bid for Alcan and another 60 is from the rumours that BCE will be consumed by a group of Private Equity funds,” the note said.

“These types of transactions make it difficult to perform against the main index if managers are not positioned heavily in those stocks.” Richardson warned its clients.

Private equity fundraising activity has lagged behind that of 2006, though, with firms raising just $765 million during the quarter. Last year set a record, with $10 billion being raised over twelve months.

“Most private equity firms do not raise new investment capital every year but instead commit their funds into new opportunities over a three- to four-year period,” Nathan says. “We therefore should not expect the same levels of new capital coming into Canadian buyout funds this year as we saw last year, when many of Canada’s largest buyout firms raised new funds that have not yet been invested.”

Fundraising in the most recent quarter was broken down into $261 million for buyouts, $37 million in mezzanine financing and $467 million in venture capital.

Venture capital investment, however, saw a 62% increase year over year, totalling $598 million. Foreign investors made up a record 51% of that market, with U.S. investors being the largest foreign players in Canada. Foreign venture capital investments totalled $304 million, up from $130 million in Q1 2006.

“The real story this quarter is the increasing dominance of U.S. investors in the Canadian venture capital market,” says Nathan. “While we welcome foreign investment, it is absolutely vital that we also develop stronger Canadian-based investors if we want to build strong Canadian companies.”

American firms accounted for 82% of all capital involved in the larger transactions at the later stage of the technology growth cycle — deals in excess of $20 million.

“A healthy venture capital market in Canada would see Canadian investors partnering with foreign capital at each stage. But the data clearly shows that the U.S. investors are dominating the later stage — when the most promising companies are on the home stretch to success — without meaningful Canadian participation. And the reason is very simple, the Canadian venture capital community just does not have the financial capacity to take our best emerging companies all the way to the finish line,” says Nathan.

The vast majority of deals involved follow-on financing, with emerging companies making up just 10% of the total invested.

For the most part, venture capital fundraising has been a tough sell in Canada, and that trend showed little sign of improvement in Q1. The retail sector saw a slight increase in capital flows, but that gain was offset by decreased funding among private independent funds. Total new funds dipped to $467 million in Q1 2007, from the $474 million raised in Q1 2006.

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Steven Lamb