5 questions with Rick Nathan

The Canadian Venture Capital & Private Equity Association (CVCA) last week reported on fund-raising and deal activity in the Great White North for the first quarter. Among the highlights is that buyout deals are on pace for a record year in Canada.

So PE Week Managing Editor Alastair Goldfisher posed five questions to CVCA President Rick Nathan.

Q. Buyouts of Canadian companies by private equity investors are on track for a record year, according to the latest Q1 numbers. Is this just a mirror of the U.S. industry?

A. The increase in Canadian buyout activity is partly from Canada’s participation in the global buyout boom, which is led by the U.S. market. But the Canadian market has developed more recently—most of the major players are on their second or third fund—and so the rate of growth has accelerated quickly in the current cycle because we started from a much lower base. Another important factor has been the strong performance experience in the Canadian market, with average returns in our buyout sector in the 20% range.

Q. Even with the growth spurt, Canada’s buyout industry represents a fraction of the U.S. market. I don’t think anyone expects Canada to close that gap, but should Canada be keeping better pace?

A. This is not an issue that anybody worries about. The growth in our market has been strong and has generally more than doubled each year. The main difference is the relative absence of the mega-deals. We had two buyouts in Canada last quarter valued at more than $1 billion, with the largest at $2.1 billion, which is typical for the Canadian buyout market. To date, we have not seen any of the $10 billion-plus deals that are now common in the United States.

That may change soon, with all of the public discussion about a possible bid for BCE Inc., which would set a new standard for the Canadian buyout market and likely lead others to follow.

Q. While buyout deals are up, fund-raising appears to have slowed. Why is that?

A. Last year was a peak year for buyout fund-raising in Canada, with most of the largest and established Canadian buyout firms raising new capital. We do not expect to see these firms coming back to market again this year, and so it is unlikely that we will approach similar levels.

However, 2007 should still be a strong year, likely surpassing all years prior to 2006. So I would caution reading too much into the relatively soft results seen in Q1.

Q. On the VC side of things, the latest Q1 data shows that U.S. investors continue to dominate the landscape in Canada. Why is that?

A. Historically, U.S. investors have represented roughly 25% of Canadian VC activity, which we saw move up to 32% in 2006. So the Q1 level of 51% is drawing a lot of attention. Most U.S. venture investment in Canada is concentrated at the later stages, and since we had an increase in the number of larger later stage investments last quarter, we saw growth in the U.S. share in our market.

Q. Henry Kravis is scheduled to keynote at the annual CVCA conference [which is scheduled to run from May 28-30 in Halifax, Nova Scotia]. The theme of the conference is “Capital Without Borders.” What investment strategies has the Canadian PE industry adopted to help with global collaboration?

A. Canadians have always been free traders. We are a relatively small country which depends on exports for our economic growth, so global collaboration comes naturally. And this is also true in our private equity markets.

Canadians know that strong international relationships are important for success, and more and more Canadian funds are expanding their foreign investment activity. For example, the Q1 buyout data show that Canadian investors deployed about half of their total invested capital outside of Canada during the quarter, and that roughly half of the investments made in Canadian companies by buyout firms came from non-Canadian sources. This is a sign of a healthy market with the right balance between domestic and international investing, and a clear strategy aimed at global collaboration.