Canadian M&As seen shrugging off market turbulence

Date: Friday, November 25, 2011

Market turbulence won't likely dissuade a wave of Canadian merger and acquisition activity in coming months as private equity funds deploy piles of cash for new investments and seek buyers for their mature assets.

Strategic buyers might stimulate further dealmaking as boards and CEOs come under pressure to spend billions in capital saved since the 2008-09 economic crisis and face limited alternatives for organic growth.

A lot of dealmaking could occur between the funds themselves, in what is known as sponsor-to-sponsor activity.

"If credit markets co-operate, we'll see a huge jump in sponsor-to-sponsor (fund-to-fund) activity in the next 12 to 24 months," said Jim Fasano, a vice-president at the Canada Pension Plan Investment Board, one of the nation's largest pension fund administrators.

The comments, made to a Canadian Venture Capital and Private Equity (CVCA) conference this week, were surprisingly bullish in light of the bleak global economic environment, with the prospects of slowing demand in China and the threat of a new recession in Europe.

Fasano estimated huge demand for so-called exit activity - where funds sell their investments or take them public - in 2012, with some C$1.5 trillion of assets to monetize globally.

Part of that is due to a backlog of assets held by private equity firms, particularly in the venture space, that refrained from selling during the aftermath of the economic and financial crisis of 2008-09, when sale prices plummeted.

"The age of portfolios seems to have grown longer than they otherwise would because of the uncertainties," CVCA Executive Director Richard Remillard told Reuters on Thursday, noting that many funds are coming to the end of their fund lives - traditionally eight to 10 years - and need to exit investments before starting new ones.

"A lot of people are going to be seeking realizations," Fasano said.


According to an informal survey released at the CVCA event, entitled Investing and Exiting in Turbulent Times, 80 percent of members expect Canadian industry investments to be equal to or greater than those of the previous six months despite the global market uncertainty.

The survey, from Nov. 9-18, showed 43 percent of respondents expect more investments in the next six months than in the previous period. The poll of 95 respondents did not cite a margin of error.

The survey showed investors expect to sell at least one portfolio company through the M&A market in the next six months, although only 9 percent expect to exit an investment through an initial public offering.

M&A activity could be further supported by healthy access to debt markets, especially important in private equity transactions that are typically dependent on leverage.

"It's a good sellers' M&A market," Daniel Daviau, head of Canadian investment banking at Canaccord Genuity, told the CVCA seminar. "We are seeing really strong strategic interest."

Separately, a report on Thursday by consulting firm PwC showed that, even with continued economic uncertainty in the United States, Canadian firms are acquiring more U.S. companies than vice versa.

The report attributed the trend to the perception that the United States is still a safer investment than Europe, as well as access to low-cost capital, a larger scope of M&A opportunities and a desire to replace public market exposure with private market exposure.