Osler sees more opportunities for PE and VC funds in Canadian financial trends

Canadian law firm Osler, Hoskin & Harcourt LLP this week published its 2014 Capital Markets Report, painting a picture of mixed activity in Canadian capital markets that the firm believes offers new pockets of opportunity to PE and venture capital fund investors.

Osler deemed 2013 a good year across North American equity trading markets, with the S&P/TSX Composite Index closing on a high note. But the picture in specific segments is less promising – for example, total equity offering proceeds for TSX and TSX-V issuers declined 23 percent from the prior year.

On a brighter note, the Canadian IPO market showed moderate year-over-year gains in 2013, and Canadian corporate debt issuance of $187 billion was an all-time high.

The report showed a mixed performance in Canadian M&A markets. Overall, transactional activity involving domestic businesses remained soft, with 2,325 announced M&A deals valued at $158 billion. That was down 28 percent from 2012 and marked the lowest level of activity since 2009.

Despite the lower M&A volumes, a number of strategically-important deals got done. Major transactions in which Osler advised a principal party last year included Valeant Pharmaceuticals’ purchase of eye care specialist Bausch + Lomb from U.S. private equity firm Warburg Pincus for US$8.7 billion, and Chemtrade’s acquisition of specialty chemicals manufacturer General Chemical from American Securities for US$860 million. 

The lacklustre financial environment in 2013 and prior years has caused many Canadian businesses to seek alternative ways to fund growth or maximize shareholder value. Osler said this has opened a door for domestic and foreign PE shops, which are finding plenty of opportunities to “build their funds and acquire significant positions in good Canadian companies.”

Frank TurnerFor example, PE investors see rich deal-making prospects in resource sectors, such as oil and gas.

Energy companies experienced a more than 80% year-over-year decline in M&A activity last year. They also faced shortages of investment capital due to trends in public and private placement markets. And the sector was hit hard by recent changes to federal rules governing acquisitions of Canadian producers by foreign state-owned enterprises (SOEs).

Osler partner Frank Turner told peHUB Canada that these conditions have created a “perfect storm” for energy and other resource businesses with respect to capital availability.

“Junior and mid-market issuers are finding that they can no longer finance their growth plans as they once did,” he said. “And major energy companies that previously relied on SOE investments have also been left with fewer options. This absence of funding alternatives is being matched by greater receptivity in resource sectors to private equity investment.”

There was considerably more PE investment in Canadian resource sectors in 2013, with some observers suggesting that related transactions accounted for almost 25 percent of the new capital raised by oil and gas alone. “We will see more of this in 2014,” said Turner.

Those private equity funds that took advantage of emerging capital gaps came in all types and sizes. The PE arms of Canada’s largest pension funds were particularly active and brought a number of important features to the deal-making table in 2013.

Groups like AIMCo Private Equity, CPPIB Private Investments, OMERS Private Equity and Teachers’ Private Capital have become significant global market leaders, because they have sophisticated investment strategies and the capacity to deploy capital flexibly and over long time horizons. As a result, pension funds were able to pick up some of the slack in resource sectors, close some key PE acquisitions, and increase their exposure to infrastructure, real estate and other alternative assets.

Osler believes Canadian pension funds will continue to extend their influence at home and abroad in 2014. They may also show an interest in new sources of deal flow, such as asset divestitures by Canadian governments. And the track records of large pension funds may encourage small pension funds to grow their own PE and alternative asset programs.

The Osler report also highlighted the renaissance taking place in domestic technology sectors, which was a bright spot for VC investors in 2013.

A range of factors have sparked a renewed interest in technology. Catalysts include the spillover effects of the large U.S. innovation wave, greater breadth and depth in Canada’s startup ecosystem, new deal leaders, and the launch of Ottawa’s $400 million Venture Capital Action Plan, which aims to put more money in the hands of entrepreneurs.

Chad BayneLast year also saw especially well-capitalized financings of a new generation of tech companies, such as social relationship platform HootSuite Media – which raised US$165 million from Insight Venture Partners, Accel Partners and OMERS Ventures. Osler was the lead counsel to HootSuite on this deal, the largest in the history of Canada’s venture market.

Osler partner Chad Bayne believes that such financings are “absolutely essential” if Canada is to effectively leverage worldwide innovation trends.

“Canadian technology startups have typically been under-capitalized,” he said. “When young companies are ready to hit the accelerator and compete on a global stage, they too often lack the necessary funding. This is very different from the experience in Silicon Valley, where startups can get money at higher valuations and receive the VC backing they require to grow more quickly.”

Equity trading markets were also more responsive to technology offerings in 2013. Bayne welcomed this development, arguing that if Canadian innovative companies are to grow to scale, they must in future have more opportunities for going public.

Osler is expecting better days ahead for Canadian capital markets. The report is upbeat on the outlook for the M&A activity, given increasing confidence in the strength of the economic recovery and access to capital for many businesses. In 2014, strategic investors are also likely to want to build on “the sound business logic and demonstrable synergistic value” of deals done last year.

From the sounds of it, PE and venture capital investors will also be figuring more prominently on the financial landscape in 2014.

To view Osler’s capital markets report videos, click here.

Photo of Canadian flag courtesy of Shutterstock.

Photos of Frank Turner and Chad Bayne courtesy of Osler, Hoskin & Harcourt LLP.