Eric Waxman, President of Spara Capital Partners feels that recent media reports, detailing a softening of the US Private Equity market don’t accurately capture the situation in the Canadian Mid-Market;
“Recent media reports on the US private equity market may have Canadian entrepreneurs questioning the viability of these funds, but we think they will continue to be strong options as investors and buyers of mid-market Canadian companies in the coming years,” said Waxman.
Waxman points to the WSJ’s declaration, earlier this year; that “Private Equity is Dead” and to more recent statistics contained in Pitchbook’s Quarterly Survey of PE Funds, describing an increase in fund closings; the decrease in the amount capital raised by PE funds relative to last year and a reported 20% drop in PE deal flow from 2014; as markers of the maturing of the market, not the end of the private equity era, especially in the Canadian mid-market.
“From our exclusive focus on mid-market businesses led by entrepreneurial leaders, these headlines haven’t been our reality in the past few years,” said Waxman. “We have conversations every day with both strategic and financial buyers and I’m pleased to report a healthy appetite for Canadian deals in our part of the market”.
Waxman offers the following perspective for mid-market business leaders based on his teams’ fifteen years experience serving the Canadian Mid-Market, arranging M&A and financings across wide sectors:
Macro Trends Blur the Real Situation For Small and Mid-Sized Deals
While funds have raised less capital this year than last year, we should remember that 2014 was a banner year for PE fundraising and there is still a lot of money in this market. Furthermore media reports tend to get skewed by the huge deals led by mega funds but in recent years, small and mid-sized deals have offered the biggest returns in the US PE market.
The Maturing PE Market is Good For Everyone
As the PE market matures and limited partners (“LPs”) become more realistic about performance and outperformance (or lack thereof!), they have gotten wise to the notion of generalist PE players whose unique differentiator is “proprietary deal flow”. A key strategy for funds has become deep industry specialization, either as a result of a strategic focus or garnered through development of their platforms. This is good for Canadian mid-market players.
Specialized industry knowledge in an investor or acquirer allows better understanding and pricing of opportunity and risks. Today, most mid-market deals have a PE fund or a PE-backed strategic investor or acquirer somewhere in the transaction. Private Equity investors today seem to be finding their place as a strategic tool that enables management teams to pursue goals in certain situations.
It Is A Sellers Market For Great Companies Led by Strong Management
There is incredible competition today for quality deals and strong management teams in the Canadian Mid-Market. It is a seller’s market and demand exceeds the supply of quality deals. Many US-based PE firms have completed deals in Canada and are actively seeking follow-on acquisitions. There is a notion among some business leaders that funds want to take over day-to-day operations but this usually isn’t the case. They want the business to continue with a high-performance management team and seek to work together to develop a strategy that tends to involve further deployment of capital.
The Real Impediment To Getting Deals Done Hasn’t Changed
It is said that half of M&A deals fail to close (advisory firms improve the likelihood of success but there is still real risk that a deal won’t happen). The failure rate can be even more problematic in a seller’s market with buyers who are eager to see deals. Their aggressive deal origination teams will sometimes overlook “deal killer” issues early in the process with a view that they’ll invest in a situation or industry outside their comfort zone – they rarely do.
But in our experience, the real reason more deals don’t get done aren’t structural, it is more about human behaviour in any negotiations; unrealistic expectations (in particular around valuation), lack or breeches of trust, failure to establish or follow a deal framework or process, lack of preparation or information disclosure. PE funds are accustomed to working with advisors and intermediaries. Deal professionals can help companies get prepared for a sale to create tempo and sustain momentum.