Content Limit Removal Could Alter Canadian PE –

Canadian private equity got a shot in the arm in February when the government pledged to do away with the 30% ceiling on the foreign assets held in pension funds. And given that limited partnerships have always been treated as foreign content by the government, Canadian pensions have typically been reluctant to make disbursements to indigenous firms.

The private equity industry has been particularly affected by this ruling in the past. The pensions have been able to gain access to other assets through the use of swaps, derivatives and other synthetic securities, albeit at a higher cost than just investing direct. PE firms, though, have not had the luxury of such a loophole. Today, according to published reports, fewer than 5% of Canadian pension plans currently invest in private equity.

Theres been a lot of enthusiasm surrounding this [initiative]. By elim- inating the content limits, you theoreti-cally open the door for more commitments to Canadian private equity firms, Thomson Macdonalds Kirk Falconer says. It will certainly increase institutional investment outside of Canada, but hopefully well see an increase in commitments to funds in Canada as well.

While this ruling could make fundraising easier for Canadian buyout shops, not everybody thinks it will necessarily translate into an opening of the floodgates. James Leech, a senior vice president at Teachers Private Capital says, It will take away a number of investment constraints, but if people are expecting that a tidal wave of new money will enter marketplace, they shouldnt get too carried away.

Even if the new ruling does not equate to a deluge of new capital heading directly into private equity coffers, there will likely be other shifts in the Canadian economy that could serve buyout shops there. Public companies in Canada have been the primary beneficiaries of the content limits. If and when the caps are removed, there could be a whole new generation of public orphans. Institutions such as [Teachers] have had to invest 70% of their capital in Canada, Leech says. Theres been no other place to go. The people that will feel the real pinch from the removal of the 30% cap will be our public [companies].

The only roadblock to the passage of this bill could come if the Liberal government gets ousted from power. Accusations of corruption have dogged Canadian Prime Minister Paul Martin and the ruling Liberal party, and as Buyouts went to press, Martin was facing a vote of non-confidence in Parliament that could potentially trigger new elections. Even as this calls into doubt the passing of the new budget, most expect the content limits will be removed no matter who is in power.

The Conservatives have publicly stated that they would introduce the bill as well, so I think its only a timing issue at this point, Leech says. It could either happen over the summer, or [if there is a new election] later this year.