Canadian buyout-PE fundraising on track for record year

It’s axiomatic to say that fundraising these days is a grueling job for private equity firms of all types.

While the evidence suggests that LPs remain sold on PE as an asset class, many are still holding back from making significant new capital commitments, while others are focused on rejigging existing portfolios. And those LPs that are doing re-ups or evaluating new fund partners are often exercising a stronger hand in negotiations.

Against this background, the success of Canadian buyout, mezzanine and related PE firms on the fund-raising trail in 2013 may come as a bit of a surprise.

In the first nine months of the year, Canadian PE partnerships and other funds secured a total of $6.1 billion in commitments, according to data provided by Thomson Reuters (publisher of peHUB Canada), and published by Canada’s Venture Capital & Private Equity Association. That’s up 27 percent from the same period in 2012.

Growth was driven by 25 fund formations, with partnership closings in the third quarter playing a key role in overall commitment flows.

Among the major fund announcements of the third quarter was the US$1.5 billion final close of DRI Capital’s third drug royalty fund, and Onex Corp’s US$1.2 billion commitment to the launch of its fourth third-party fund, Onex Partners IV.

Then there was the $535 million final close of TorQuest Partners’ Fund III, the more than $250 million that has been obtained to date by Imperial Capital Group’s Fund V, and the more than $90 million that has been obtained by Persistence Capital Partners‘ Fund II.

And that’s not all. Since the end of September, there have been further significant announcements, which when added to the tally have put 2013 on track to be the best-ever year for Canadian PE fund-raising.

For example, in October, Catalyst Capital Group saw US$812 million committed to its fourth distressed-for-control partnership, Catalyst Fund LP IV, while mining-focused PE firm Waterton Global Resource Management was reported to have raised around US$600 million for its second fund. And let’s not forget the second infrastructure fund of Brookfield Asset Management, which did a final close at a whopping US$7 billion.

More announcements followed, such as the $250 million-plus that has so far been raked in by the $350 million fourth fund of Novacap Technologies, as reported by peHUB Canada in December. And the first close of Callisto Capital‘s Fund IV, targeted at $300 million, is apparently right around the corner.

Overall, we are looking at total commitment flows of well over $15 billion by year-end. That outcome is, by any measure, a huge win for a Canadian PE industry that achieved critical mass only in the late 1990s.

I say that because fund-raising of over $15 billion easily surpasses the volume for every year since the market’s renewal in 2010. It also exceeds the heights reached during the buyout boom, including the previous record year of 2006, when more than $10 billion was brought into the industry.

I believe there are a number of factors driving these trends. For now, let’s consider two of the most important.

First, Canadian partnerships and other funds are simply getting bigger. With few exceptions, established Canadian buyout, mezzanine and other PE firms have succeeded in attracting a lot more money to their latest offerings. This may seem counter-intuitive given global and U.S. fund-raising trends – is it not the case that LPs are shunning large-cap funds?

The answer is yes, according to most LP surveys. However, the vast majority of Canadian funds are not large-caps. They are focused on mid-market and lower mid-market deal opportunities, and that’s where all the action is at the moment.

The second factor worth noting is the sheer growth in the population of Canadian industry players. Since the market renewal, we have seen more new PE firms established. Some of these are spinoffs from other organizations, but more often they reflect a strategic response to new opportunities, such as increased LP interest in the natural resource sector and real assets.

Not all of this year’s numbers are in yet, so we’ll have to wait until early 2014 for  the final tally of Canadian fund-raising. Regardless, expect a blockbuster 2013.

Photo courtesy of Shutterstock.