Private equity investors are planning for the possibility that Canada’s economy will struggle to emerge from recession, even if the situation improves, money managers said last week.
Canada’s economy has proven to be one of the most resilient in the developed world to the global economic crisis, and the
But private equity investors are not convinced and prefer to plan their investment strategy with a more cautious outlook with the possibility of a double dip on the horizon.
“I think people are planning for things to get worse,” Steve Dent, a partner at
“I think this really is a year for being cautious. It’s difficult to make revenue assumptions,” Dent said.
Private equity buyout activity has suffered in the global economic crisis, and investors are still hesitant to commit to ventures until valuations stabilize.
Buyout investment was just over $2 billion in Canada in the first nine months of the year, less than one-fourth the $8.5 billion in the first nine months of 2008, according to the CVCA.
The third quarter, however, was the strongest for private equity buyouts in Canada so far this year, fueled mostly by the acquisition of Nortel Networks’ enterprise solutions business unit. The unit was acquired by Avaya Inc., a portfolio company of U.S. firms Warburg Pincus, Silver Lake Partners and TPG Partners for $900 million in the largest Canadian private equity buyout of the year.
Still, industry leaders said last week that a stabilization may take some time as the spread between bid and asking prices remains wide, even as businesses line up in front of private equity investors, seeking to sell before the next dip in the economy.
“We’re having a hard time understanding where the economy is going. It is still a market in our view where you need to be cautious and careful,” said Michael Lay, a managing partner at ONCAP, the fund established by Onex Corp. to invest in North American small-cap companies.
Some private equity partners say concern the economy will dip again is leading them to shelve IPO plans for their portfolio companies until the outlook points to a sustained recovery.
Earlier this month, Bank of Canada Governor Mark Carney said the economy performed worse than expected in the third quarter and, while recovering, risks further setbacks due to the sharp rise of the Canadian dollar.
Erol Uzumeri, senior vice-president for private capital for the
“I think there is a tremendous amount of opportunity in areas where people have over-leveraged,” he said, warning of a herd mentality among private equity investors.
“I think there is going to be a tremendous amount of opportunity actually for people with capital and people who are creative. I think the key is not following the herd,” he added.