BDC Capital earmarks $1.8 bln for mezzanine, growth equity investing

Business Development Bank of Canada has topped up resources in its private capital operation to address intensifying small-business demand for risk financing.

BDC Capital, the bank’s investment arm, today announced $1.8 billion in fresh funding. It will be invested over the next five years in established companies in Canada seeking long-term financing options to back their growth and transition strategies.

The commitment, to be overseen by BDC’s Growth and Transition Capital division, represents a 50 percent increase over the $1.2 billion deployed in the past five years.

Executive Vice President Jérôme Nycz, who leads BDC Capital, told PE Hub Canada the extra money is needed to supply under-served demand created by “a rapidly changing Canadian business landscape.”

GTC was founded three years ago to succeed BDC’s longstanding subordinate-financing group. It invests in mature small and medium-sized companies that are expanding or undergoing a key organizational change, such as an acquisition, MBO or succession event.

GTC’s financing solutions, mostly cash-flow loans, mezzanine debt and equity, are customized to suit client goals and capital structures. Investment-hold periods are typically five years or longer.

Deal-making is at the small end of the spectrum, where few other investors tend to go. Positioned to invest as little as $250,000 and as much as $35 million, GTC usually undertakes transactions sized $1 million to $2 million, Nycz said.

Nycz says this core market approach will remain unchanged. He expects GTC’s portfolio to diversify beyond its base in manufacturing, however, to include more “asset-light” service providers. Many such companies are looking to leverage opportunities and respond to competitive challenges fueled by innovation, globalization and other macro trends, he said.

A January survey by BDC found small-business executives intend to boost investment spending to $96.6 billion in 2017, up 1.6 percent from a year ago.

Focus on mezzanine, equity

To meet emerging requirements, GTC will rely primarily on mezzanine debt and minority growth equity, Nycz said.

Mezzanine investing has long been a GTC staple. That’s because quasi-equity has proved attractive to small-business owners wanting a non-dilutive alternative to traditional lending. Subordinated debt is often used in the more than 90 percent of GTC deals that include another financial institution, such as a senior lender, Nycz said.

Elmer Kim, Vice President, Growth Equity, BDC Capital
Elmer Kim, Vice President, Growth Equity, BDC Capital

Equity is a comparatively new area. Last year, BDC hired Elmer Kim from Roynat Equity Partners to head a new investment platform, BDC Capital Growth Equity. Housed in GTC, the platform offers a minority capital solution to companies for which equity is a better fit than debt.

Since he joined, Kim has been fleshing out the details of an investment strategy and ramping up capability, Nycz said. BDC expects to announce debut transactions later this year.

GTC’s portfolio, valued at more than $850 million, holds some 500 to 600 companies, many of them located outside of urban centres. Opportunities are sourced via BDC’s coast-to-coast network of offices and through deal partners, including lenders and private equity firms.

Disclosed examples of GTC’s activity include its 2016 investment alongside Caisse de dépôt et placement du Québec and Capital croissance PME in the MBO of Saguenay, Québec, communications-services provider DERYtelecom.

In the same year, GTC helped finance the reorganization of TerraPro, a Sherwood Park, Alberta, remote-access and terrain-protection company. It also invested in Montréal video-advertising platform SourceKnowledge and Ottawa phone-solutions specialist Versature.

GTC has a national staff complement of about 90. In addition to Nycz and Kim, the team’s top executives include Senior Vice President Patrick Latour and Vice Presidents Barry Hubich, Louise Langevin, Susan Rohac and Christophe Romary.

Photos of Jérôme Nycz (top) and Elmer Kim courtesy of BDC