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Accessing Canada’s private equity markets

Deloitte Corporate Finance Inc.

Today’s business owners are aware that mid-sized businesses drive Canada’s economy. “Yet, many companies still face a challenge when it comes to raising capital or getting the maximum exposure for their business as part of a sale process, management-led buy-out, or succession plan” suggests Doug McDonald, a partner at Deloitte.

While traditional avenues include passing a business down to subsequent generations or selling the business through an Initial Public Offering (IPO), increasingly these options are not delivering the anticipated value or benefits. However, the good news for private businesses is that Canada’s growing private equity markets have evolved to the point where there is a vast amount of capital available for companies in every economic sector.

The Canadian private equity market is made up mainly of professionally managed institutional funds. This has resulted in an even greater level of discipline in the investing process which benefits both the investee and investor. The capital these funds invest comes from private investors and other institutional sources, such as pension funds and insurance companies. In North America, it is estimated that there is in excess of $250 billion available for investment in private companies and the Canadian portion of that is growing.

“The current market environment provides a lot of opportunity for businesses interested in raising capital for growth or funding a succession plan,” suggests McDonald. “Companies with solid growth prospects and top management teams will be attractive to a number of private equity investors and are likely to get a favourable business valuation.”

The private equity market is growing in importance in Canada, but as Doug McDonald, of Deloitte, makes clear, “partnering” is important. Not all private equity funds have the same approach, nor do they all have similar operating philosophies regarding their investments. Some are decidedly hands-off while others roll up their sleeves and get involved in their portfolio companies.

Given the long-term nature of the relationship, it is imperative to find the right match. The typical holding period for a private equity fund is anywhere from three to seven years and typical exits are realized through an IPO, a sale to a strategic buyer, or a management buy-out. Having an idea of where the exit may come from is an important decision-making factor for many funds.

“For business owners looking to raise funds or sell equity, it comes down to creating a compelling financial story and demonstrating they are the right person to unlock the anticipated returns,” McDonald explains. “For their part, owners looking to sell as part of a succession plan must show their business has the management expertise to achieve its targets once a transition has happened.”

If you are interested in exploring your options with private equity investors, it is important to work with advisors who can help you get the best value for your business. In this way, you can begin to take the necessary steps to raise the financing you need to achieve your goals.

Finding value in the private equity markets
To uncover opportunities in the private equity markets, it’s important for business owners to understand their underlying goals. Take the case of the owners of a large Canadian retailer who, after running the company for several decades, were eager to find an exit strategy. After consulting with an advisor, the owners agreed they were interested in positioning the company for sale and ideally raising the funds they needed to retire in style.

By keeping the owners’ goals in mind, this company’s advisor was able to bolster this business’s revenues and profits, positioning it for sale in the private equity markets. As a result of this advance planning, the company attracted the eye of a U.S. private equity fund that was able to offer a higher multiple than the owners ever anticipated thanks to its specialized understanding of the retail industry.

Is your business attractive to private equity investors? 

Doug McDonald of Deloitte notes that before you can access  funds to grow your business or sell it as part of a succession plan, you must take steps to make your company attractive. If you answer “yes” to a large number of these questions, you may want to consider consulting an advisor before attempting to raise money on the private equity markets :

  1. Is your business overly dependent on one or two key individuals?
  2. Does your business have management gaps or weaknesses?
  3. Do you run a lot of discretionary expenditures through your business?
  4. Does your business hold significant non-revenue or redundant assets (i.e. real estate)?
  5. Is your customer base too concentrated in one area of the market or one customer?
  6. Are you unsure about how to extract maximum value from your equity investment in your business?
  7. Do you see consolidation opportunity in your industry?
  8. Are you worried that you are holding too much (or too little) debt?
  9. Does your business have compelling growth opportunities that will generate returns in the 20% range or higher?
  10. Are you considering selling your business because you received an unsolicited offer, without considering other potential buyers?