US Private Equity in Canada: Insights from Stikeman Elliott/ ACG Toronto’s Private Equity Seminar.
On January 31, Stikeman Elliot and ACG Toronto hosted a sold out Private Equity Seminar in Toronto. Our CEO, Ilan Jacobson, was a panelist, and shared his views on the changing nature of US Private Equity activity in Canada. Here are his answers to questions posed by Mario Nigro, a partner in the Mergers & Acquisitions and Private Equity & Venture Capital Groups.
MN: We are seeing a lot more US Buyers in the Canadian marketplace. Ilan, we wanted to get your sense of the type and character of the US buyers in the marketplace. Are you seeing more US Buyers looking at deals or winning deals? Are they willing to pay more than Canadian buyers and driving up multiples?
IJ: Let’s start anecdotally…back in 2014, I’d get a call maybe once a week from a US PE looking to do a deal in Canada. Now we get emails and calls every day asking to speak from US PE funds looking to do deals here. But they have to – US multiples have really escalated – US PE’s are flush with cash and Canada provides a natural hedge because of the cross-border discount. There’s also the geographic proximity. They can diversify geographically while staying close to home, or at least within North America. At FirePower, we’re seeing tons of interest in our mid- and lower mid-market space.
Generally, US PE’s are much more aggressive than Canadians – for years, we’ve seen business development partners from US PE firms solely focused on sourcing. You just don’t see that level of business development activity in Canada. Let’s face it – Americans are simply more aggressive than Canadians. (I’ve lived it…when we bought an axe throwing company in 2014 – we expanded in Canada and were told don’t go to the US until you are ready – they are different. After a few years and a handful of competitors we entered the US in 2017. We now have 200+ competitors.)
But back to US PE.
What we see at FirePower: US PE wins on price and on deal terms. They have a focus on bolt-on acquisitions, on verticals, so they can pay more because they act like strategics (corporate buyers). At this stage, I’d say Canadians are still more generalist, although that’s changing. But for now, most can’t pay strategic prices. And Canadians get crushed on deal terms. That hasn’t changed and I don’t see it changing
But whether the US or Canadian buyer wins ultimately depends on the seller. If cultural fit is important, the Canadian buyer will have the edge. There’s also a hole in the lower mid-market which is still too small for US PE firms – Canadian PE firms can play there, and pay lower multiples..
MN: What do you see as an emerging trend or opportunity for mid market deals in Canada over the next 6 to 12 months?
IJ: We think valuations and competition for quality mid- and lower mid-market companies will remain high in 2019. We expect to see more Canadian PE’s moving towards a vertical strategy to compete on valuations. Also, something I haven’t mentioned, rep & warranty insurance continues to move down-market, and we expect to see more of that in 2019 – more in our deals. And we’ll likely see more private debt activity; Canada is definitely lagging the US in that area.
Our client, a software distributor, sought to optimize the pricing of its products and the incentives of its salesforce . Within the 3-month duration of the VMX exercise, EBITDA run-rate increased by 15%, with visibility into more increases down the road.