Torys LLP has released a new report that takes an in-depth look at current Canadian private equity deal-making trends.
In Private Equity Markets in Canada: 2013 Breakdown, 2014 Outlook, my Torys’ colleagues Guy Berman, Sophia Tolias and I found last year’s trends provided some key stage-setting dynamics for stronger market activity in 2014.
The data indicate that PE deal-making in Canada grew moderately last year, with volume now practically at the same level as seen in the pre-crisis market of 2007. Activity received a boost in the fourth quarter, when announced transactions hit their highest level since 2011.
We feel the spike in deal volume in late 2013 can be attributed to several factors – greatly intensified fund-raising over the past twelve months, the availability of debt financing on favourable terms, and fund life-cycle variables, such as expiring investment periods and fund terms.
On the buy-side, capital availability in 2013 spurred PE participation in primarily mid-market acquisition transactions, and especially control-stake deals. While strategic players continued to lead the Canadian M&A market, there was perceptible growth in deals driven by financial buyers.
On the sell-side, sponsor-to-sponsor deals increased significantly last year, with close to double the number of sales between financial players as an exit strategy relative to 2012. With PE firms owning more Canadian businesses than ever before, this pace should continue.
Another key factor in 2013 was the greater market presence of U.S. and other foreign investors. We estimate that foreign investment has accounted for nearly half of all Canadian M&A activity over the last four years. Non-residents have been drawn to opportunities in diverse sectors – but most often in natural resources, technology and industrial sectors.
Post-sale indemnification trends in Canadian M&A give some insight into the PE deal environment of 2013. In our work, Torys saw the share of deals with escrow provisions climb to nearly 60% last year. More use of purchase-price escrow provisions to protect the buyer for post-closing claims against the seller vis-à-vis contractual breaches speaks to the sell-side focus of much PE activity.
Another trend of note is growing convergence in transactional terms – such as indemnity caps, baskets and general survival periods. An internal Torys study found that Canadian and U.S. practices were further aligned in 2013 – a natural outcome of the growing role of U.S. buyers in Canadian M&A activity.
Additionally, representation and warranty insurance is more often being used as a strategy to circumvent negotiation of indemnity-related provisions in purchase agreements and to act as an alternative to escrow provisions. This approach is consistent with the rising incidence of sponsor-to-sponsor deals.
Based on the evidence, 2014 is likely to be a strong year for private equity in Canada. My Torys’ colleagues and I believe that some priority will continue to be given to sell-side deals. But 2013 trends also point to greater emphasis of PE-led acquisition transactions. Recent M&A activity suggests that PE investors will intensify their head-to-head competition with strategic investors. And PE shops are likely to search out and find new sector-specific opportunities.
In the coming months, Torys will be keeping a close eye on these trends, and many more besides.
To view the report online, please go to Torys’ website.
Michael Akkawi is a partner at Torys LLP, and head of the firm’s Private Equity Group. Guy Berman is a partner and member of Torys’ M&A and Private Equity groups. Sophia Tolias is an associate focused on M&A and private equity transactions. Akkawi, Berman and Tolias are all based in the firm’s Toronto office.
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