The launch of peHUB Canada got me thinking – Canadian private equity has come a long way in a short time. A landmark year was 1983, when Gerry Schwartz founded Toronto’s Onex Corp. and acquired the Canadian subsidiary of American Can Co., then the largest leveraged buyout in domestic market history.
Onex went on to do bigger things, in part due to the leadership of Andrew Sheiner, who joined the firm in 1995. Eighteen years later, Sheiner retains a yen for innovation, leaving Onex in 2012 to found Altas Partners. I caught up with him recently and we spoke about the early days of private equity.
“I’m grateful for the opportunity to have worked at Onex,” he said. “Gerry and his team created a unique culture. From the beginning Onex pursued a strategy that was based on the principle that investments should be made using our own money and the firm’s capital. And Onex continued this practice as it evolved to managing third-party partnerships.” (Onex committed US$1.2 billion to the US$4.7 billion Onex Partners III LP, which closed in 2010.)
“Onex is one of the best private equity firms in the world today largely because of this principle,” he added.
In his nearly two decades in private equity, Sheiner has made note of some significant changes. For example, in the 1980s and 1990s, “private equity was an entrepreneurial business,” he said. “Now it’s an asset class. It’s a global industry, institutionalized by a large limited partner community and supported by a massive number of service providers.”
Additionally, private equity has become “homogenized,” in Sheiner’s words. He pointed to the influence of the traditional limited partnership model, which drives market dynamics and which has not changed much over time. “Because all buyout firms operate through identical fund structures, and because they’re compensated in the same manner, virtually all of them do the same thing,” he said. “They acquire a company, improve it, and then sell it within three to five years.”
While Sheiner says he believes the traditional mode of private equity investing remains viable, he also thinks its locked-in behavior of buying and selling overlooks a great many opportunities. “There’s no magic in five years,” he said. “Great businesses are hard to buy. If you are fortunate enough to own one, and that business continues to perform strongly, you should be careful about selling it.”
This perspective may resonate with LPs. As the owners of private equity-backed assets, some limited partners are frustrated when quality companies are sold too early, in their estimation. Sheiner said LP frustration has increased in the post-2007 market environment and its heavy reliance on sponsor-to-sponsor deals.
“There’s a mismatch between many private equity firms and LPs,” he said. “Institutional investors need options for longer-term ownership and for ownership strategies that make more effective use of their capital.”
Sheiner said he has repeatedly heard this message from LPs and that is what convinced him of the need for a new type of buyout firm. “When innovating, sometimes you need a blank sheet of paper,” he said. The result was Altas Partners.
Altas collaborates with investors that share its orientation. The firm’s model features less imposing fees, less utilization of leverage in deals, and longer-lasting majority stakes in diverse North American companies that are “hard to replicate,” Sheiner said. All aspects of the Altas Partners’ culture – such as the structure of management, compensation and the selection of advisors – are designed to align with the firm’s novel approach to ownership, he notes.
Since its founding last year, Altas Partners has grown to a team of seven professionals, has secured its first backer and is looking to invest up to US$500 million in high-quality businesses, Sheiner said.
As might be expected, he is bullish about Canadian private equity. “The Canadian market has emerged strongly and consistent with the size and stability of the economy,” he said. “It’s a very attractive market, though it remains under-served.”
Sheiner is particularly proud of the market role played by ONCAP, established by Onex in 1999. He is also proud of the relationship he developed with Michael Lay (ONCAP’s managing partner, and formerly of Teachers’ Private Capital). He said the two worked closely to build ONCAP into “one of the pre-eminent mid-cap firms in North America.”
Photo courtesy of Altas Partners