This week, Torys LLP released its annual Private Equity in Focus, which covers the environment for deal-making in the coming year.
In an exclusive to peHUB Canada, Torys is sharing key report findings with readers in three installments. In the first installment, we talked about how recent shifts in Canadian market dynamics have shaped today’s opportunities.
In this second installment, Derek Flaman, Matthew Cockburn and I discuss the broadening scope of PE investment activity.
For example, PE funds are increasingly looking at industry sectors that have not historically been a focus, such as oil and gas. They are also taking a fresh look at some familiar sectors. And in many instances, they are exploring risk-sharing structures to address the currently high prices of many good businesses.
In the deals
With significant capital available for investment, PE funds are seeking new and untapped opportunities in Canada. Activity is manifesting itself in the nature of the deals that are getting done; it is also apparent in the types of sectors that private equity has been targeting of late. In 2014, PE-led M&A touched on a broad range of sectors, with investment in natural resources showing particular growth.
Ever-higher EBITDA multiples for targets in the Canadian market are motivating some PE fund sponsors to focus on offloading risk. For example, we are seeing PE funds increasingly deploy capital to minority investments to de-risk exposure. Given the high valuations of this seller’s market, investors are also on the lookout for partners to share the risks of any given investment.
Club deals involving two or more sponsors have become less common since the credit crisis. This has happened as a result of the competitive deal environment and reduced emphasis of mega-buyouts. PE funds are instead turning to “friendly” parties (often the sponsor’s own LPs) as transactional partners. Torys’ Michael Akkawi, Cameron Koziskie, Joseph Romagnoli and Richard Willoughby recently wrote about this issue in an article for peHUB Canada.
Another important focus for PE funds is the purchase of assets to complement existing portfolio companies. By pursuing add-on acquisitions and consolidation plays, investors have aimed to enhance the value of their current investments. We have seen this strategy put to use in multiple sectors, including retail, healthcare and professional services.
Changing relationships between PE fund sponsors and their investors have also influenced deal-making. As LPs have become more sophisticated, they have increasingly sought more information from sponsors. This intelligence is used for monitoring investments and identifying co-investment opportunities, among other things. Activity has, in turn, led to heightened deal making in the secondary market.
Private equity in the oil patch
Opportunities for energy-focused PE investment in Canada’s oil and gas sector remain plentiful, despite the collapse in oil prices in the latter half of 2014. U.S. PE funds and Canadian institutional investors have been dominant players in the space, with attention paid to both early-stage exploration and production startups and midstream infrastructure plays.
A number of large U.S. sponsors, such as KKR, Warburg Pincus, Goldman Sachs and Blackstone, recently raised new funds dedicated to energy deals. It was also reported in early 2015 that Apollo Global is raising a new fund on a compressed time frame to focus on buying the distressed debt of troubled oil and gas companies.
Given depressed commodity prices, we expect to see a wealth of buying opportunities at attractive valuations. Consequently, there is ample reason to expect a continued strong appetite for energy transactions in the months ahead.
Zeroing-in on juniors
PE investors are seeking opportunities to participate in the development of established Canadian energy assets. This interest was reflected in PE-backed Jupiter Resources’ acquisition of Encana‘s Bighorn assets. At the same time, investors want to back proven management teams in exploration and production startups.
Deals along these lines include Riverstone Holdings’ $200 million investment in Canadian International Oil Corp, and Lime Rock Partners’ $300 million commitment to Imaginea Energy. These deals suggest that many Calgary-based juniors are showing a preference for partnerships with PE funds over tumultuous public capital markets, which have proved less supportive of exploration and production companies with high-risk profiles.
Deal spotlight: In June 2014, Encana announced the $2 billion sale of its Bighorn assets to Jupiter Resources, a newly formed entity funded by Apollo Global. The assets cover about 360,000 net acres that mostly produce natural gas, along with related pipelines, facilities and service arrangements. It was announced that total net proved reserves at the end of 2013 were about 1.1 trillion cubic feet equivalent, about 75 percent of which was natural gas.
The appeal of the midstream
Conditions in Canada’s midstream space are also providing attractive opportunities for PE transactions.
For example, the current lack of suitable infrastructure, incremental upstream development, and a sharp rise in upstream capital costs have caused producers to look at prospects for monetizing their existing midstream assets. This strategy is intended to free up capital for investment in upstream development. Producers are also focused on outsourcing new facility builds and expansions to avoid direct expenditures.
Deal spotlight: In late 2014, KKR and Veresen formed a joint venture to buy natural gas gathering and processing assets in the Montney region of Western Canada from Encana and an Encana-Mitsubishi partnership. Torys represented KKR and Veresen. The joint venture will acquire the assets for about $600 million, plus actual costs accrued in 2015, and undertake up to $5 billion of new midstream expansion under a 30-year fee-for-service arrangement.
The entire Torys’ report and related statistical charts can be viewed here.
Neville Jugnauth is a partner at Torys LLP, practicing corporate and securities law in the areas of private equity, corporate finance and M&A. Derek Flaman is a partner at Torys with a focus on commercial law in the energy sector. Matthew Cockburn is a Torys partner, practicing corporate and securities law with an emphasis on private equity and M&A.
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