CANADA’S BUYOUT & PRIVATE EQUITY MARKET IN 2011

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Buyout and related private equity (PE) market activity in Canada took significant strides forward in 2011, with a record number of deals, and dollar flows reaching their highest levels in three years. These were among the findings of a statistical report released by CVCA-Canada’s Venture Capital & Private Equity Association and research partner Thomson Reuters.

According to the report, disclosed buyout-PE disbursements in Canada totaled $11.5 billion last year, up 69% from 2010, and the highest level since 2008. In addition, announced and closed transactions, totaling 235 in 2011, grew 38% year over year. In fact, domestic deal volume was the highest on record, surpassing even the 229 transactions of 2007.

“Private equity investment made sizeable gains in 2011 and, in so doing, helped further economic recovery in Canada,” said Gregory Smith, President of the CVCA and Managing Partner of Brookfield Financial Corp. “Not only did we see the return of large-cap deals backing major firms in growth mode, we saw record levels of mid-market investment that engaged large numbers of small and medium-sized businesses.”

Mr. Smith added: “As the overall economy continues to shift gears in the months ahead, the evidence from 2011 suggests that private equity deal-making is playing a vital role in spurring Canadian business investment, expansion and employment creation.”

Key to the higher values last year were the largest transactions completed since 2008, including the $2.1 billion acquisition of Husky International Ltd. of Bolton, Ontario, by OMERS Private Equity and Berkshire Partners from Onex Corp. The Husky buyout was Canada’s top deal in 2011, and one of the largest on a North America-wide basis.

The report found Canadian deal-making trends were sustained in Q4 2011, with 54 transactions capturing $2.2 billion. The largest deal in this period saw Sterling Partners completing a $590 million take-private acquisition of Ottawa’s MOSAID Technologies Inc. On balance in 2011, transactions sized greater than $500 million took 52% of total dollars invested, followed by transactions of between $100 million to $500 million, which garnered 32%.

“One of the surest signs of renewed Canadian private equity investment has been its across-the-board growth,” said Mr. Smith. “Deal-making gained both breadth and depth in 2011, with dollar flows increasing in virtually all segments of the market,” he noted. “This trend was also reflected in the domestic firms that succeeded in attracting private equity, as these were widely diversified by industry sector and region.”

While Canadian buyout-PE funds were somewhat less active in global markets in 2011, investment abroad accelerated in the year’s final months. Indeed, Q4 2011 activity, totaling $11.0 billion, was in dollar terms the highest since early 2010. Leading activity was the US$6.1 billion acquisition of Kinetic Concepts Inc. of Houston, Texas by Apax Partners, CPP Investment Board and PSP Investment Board, and the US$1.6 billion acquisition of 99 Cents Only Dollar Stores of Commerce, California by Ares Management and CPP Investment Board.

On balance, Canadian funds led or participated in 42 international transactions, totaling $19.9 billion, last year. This compares with the 49 transactions, totaling $30.3 billion, to which domestic investors contributed in 2010.

“Canadian large-cap and mid-cap funds continued the search for value opportunities around the world in 2011, and appeared increasingly to be finding them as the year unfolded,” observed Mr. Smith. “In the process, they confirmed their role as global deal-leaders, and as essential drivers and shapers of market trends in the United States, Europe, and other venues,” he added.

The report found that buyout-PE fund realizations of Canadian portfolio assets remained at post-slowdown levels in 2011. Totaling 56 at the end of December, liquidity events were 25% below the record high established in 2010; however, activity exceeded that reported for all prior years.

Strategic sales continued to account for the lion’s share of exits, or 68% of the total last year. Indeed, three Canadian exit-related acquisitions were among the 10 largest in North America in 2011, including Teachers’ Private Capital’s $1.32 billion sale of its stake in Maple Leaf Sports and Entertainment Ltd. to Bell Canada Enterprises Inc. and Rogers Communications Inc., announced in Q4 2011.

“The continuing high volume and values of liquidity events will have important spillover effects for Canadian private equity investment in 2012,” said Mr. Smith. “Exit trends should also foster fund-raising activity over the long run, as distributions to limited partners reaffirm the strong returns performance of this asset class,” he added.

In the challenging fund-raising environment of 2011, new capital committed to Canadian buyout, mezzanine and other PE funds tended to keep pace with activity over the past two years. At year’s end, total funds raised reached $3.6 billion, edging out by 10% the $3.3 billion brought into the market in 2010.