Torys LLP this week released its much anticipated Private Equity in Focus 2016 report.
In the report, my colleagues and I pose the questions: What lies ahead for private equity in 2016? What is the big picture?
As readers of PE Hub Canada will know, part of the answer to these questions lies in understanding how private equity deal-making in 2015 has set the stage for this year’s transactions.
With this in mind, we believe 2016’s emerging deal environment can be anticipated through three levels of focus: in the markets, in the deals, and in the terms.
In the markets – changing deal strategies in the current environment
Private equity investors continue to face competition not only from pension funds and strategic buyers, but also international investors who are increasingly pursuing deal opportunities in Canada. In this competitive environment, and in the face of persisting economic uncertainties, investors are focusing more on deal-sourcing strategies, while at the same time managing effective sales processes to maximize returns on exit.
In the deals – more “public-company style” deals in private-company auctions
This seller’s market is causing some sellers in private auctions to attempt the sale of their business in “public-company style”—that is, without offering buyers a post-closing indemnity for representation and warranty breaches. This approach has been pursued especially in dual-track processes where the target has been preparing for an IPO in parallel to an auction. For buyers, an important question will be: is representation and warranty insurance an adequate indemnity substitute?
In the terms – U.S.-Canada private equity debt terms and the drive for greater fund transparency
With market conditions expected to draw more U.S.-based investors to Canada in the year ahead, American sponsors seeking Canadian debt financing to fund deals may need to adjust their expectations as to the private equity leverage terms that are most commonly used in Canada. While some aspects of U.S. leverage terms are similar to those in Canada, there are notable differences. With respect to fundraising, one trend is consistent on both sides of the Canada-U.S. border: increased transparency of fees and expenses is in store for 2016.
A broader backdrop
These local trends are developing against a broader backdrop of global market turns, which are fostering favourable conditions for investors to pursue new opportunities—including in Canada’s increasingly distressed oil and gas industry. The current environment is set to sustain private equity deal-making in the year ahead. Whether expectations about price between buyers and sellers will align remains to be seen.
To read more about emerging private equity trends in 2016, we invite you to download a full copy of the Torys’ report. Please do this by visiting Private Equity in Focus.
Michael Akkawi is a partner at Torys, and head of the firm’s Private Equity Group. Sophia Tolias, Torys’ counsel, and focused on M&A and private equity transactions, was a contributor to this article. Both Akkawi and Tolias are based in Toronto.
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