Infrastructure renewal, government stimulus spending and the end of the traditional income trusts will drive Canadian private equity deals higher in 2010, according to a top industry player.
Gregory Smith, the president of Canada’s Venture Capital & Private Equity Association (CVCA), told Reuters that buyout firms could participate in as many as 30% more deals this year compared to 2009, helped in part by narrowing spreads between the buy and sell on potential deals.
“I think you’ll see investment activity improve, enhanced investment activity,” Smith said, just weeks ahead of CVCA’s release of 2009 investment figures and its 2010 outlook.
“The difference between January 2010 and January 2009 is that in January 2010 people actually have a view,” he said. “People this year are prepared to make commitments based on their outlook.”
There were some 100 deals done by private equity firms in Canada in 2009, slightly more than in 2008, but well below peak deal volume of 140 before the global economic crisis.
Canadian income trusts will lose their favored tax status 2011, forcing them to reassess strategies from ones aimed at giving investors regular cash payments to ones focused on increasing production and growth.
Larger trusts, many of them oil and gas companies in Western Canada, will mostly opt to become corporations, but smaller companies in manufacturing and food distribution will have to seek other options.
“You probably need a market cap of C$500 million [or $487 million] to effectively get the attention of investors and analysts and have sufficient liquidity,” said Smith, who estimated 50 to 100 companies could fall into that category.
“Less than that and PE provides a compelling alternative,” he said.
Smith said investments related to revamping infrastructure, and stimulus spending announced by the government during the recession, will form the focus of private equity buyout activity this year.
He pointed at recent financing activity in public markets as a sign of a strong market for fund-raising in 2010.
Onex Corp., one of Canada’s best-known buyout companies, said early this month it boosted its stake in a new fund by 60% due to optimism about near-term investment opportunities. Toronto-based Onex, with stakes in sectors as diverse as electronics, health care, cosmetics and movie theaters, said it would boost its stake in Onex Partners III to $800 million from $500 million, bringing the total fund size to $4.3 billion.
“That is indicative of how fund-raising will come back in 2010,” Smith said.
Smith said the outlook for venture capital was poor, predicting investment in the already struggling sector could plunge 30% in 2010, for another dismal year.
He predicted venture capital activity would be worth less than $1 billion in 2009, 30% less than in 2008, when it also had a poor showing. —Pav Jordan, Reuters