Finding Canada’s Hidden (And Not So Hidden) Industries

Canada claims some of the great investment opportunities of the 20th century: the chocolate nut bar, the electric organ, IMAX movies, and more recently, Java Script, Blackberries and Neil Young. Young came to the U.S. looking for a heart of gold. The question is whether private equity firms can find similar riches up there.

While Canada typically gets branded as an economy built on its natural resources, the fact is the Canadian industries ideal for LBOs are almost exactly the same as those found in the U.S. Take the resources out, and Canada has an economy dominated by manufacturing and services.

Many U.S. groups have already taken note. In the last year, Cerberus, ShoreView Industries and Riverside Co. are among those that have been active buying or trying to buy manufacturers, while Berkshire Partners, Advent International and Saunders Karp & Megrue have been active in apparel.

Even Canada’s incumbent players sometimes struggle to find a difference between the two markets. Jeff Belford, a managing director at Calgary-based private equity firm TriWest, notes, “I don’t think that Canadian businesses are that different from U.S. businesses.”

However, while much of the dealmaking in Canada resembles the activity in the U.S., there are definitely angles firms are exploring that are indeed distinctly Canadian.

One of the biggest industries in Canada is oil and gas, which in turn supports a massive oil and gas services industry. While some argue that oil and gas services are tied to commodities – a turn off to most LBO investors – not everyone agrees. It’s this group of investors that are finding an angle to the sector that others may be missing.

Ron Hymers, a director in the corporate finance group for Calgary-based Tamarack Capital Advisors, is one investor looking for deals in oil and gas services, where “it’s all in play right now.” Though there is still not a great deal of LBO activity, “The oil and gas services sector has become more popular [with LBO firms]. Five years ago when oil was at five bucks a barrel, they probably wouldn’t have looked at it.”

TriWest’s Belford also notes that many oil and gas services companies aren’t as tied to commodity prices as they may appear. For example, in April TriWest bought Royal Camp Services, which provides catering services to drilling, construction and forestry companies. The company posts relatively regular cash flow in spite of swings in commodities prices, said Belford.

Elsewhere, Belford says the strong Canadian dollar, currently at 91 cents to the American dollar, helps export-related businesses. He cites Canadian travel companies as one example. Another area Belford likes is infrastructure—which is “absolutely booming.” His firm recently bought Con-Force, a leader in Canada’s precast concrete industry serving Western Canada and the Northwestern U.S.

Call centers are another niche industry that is growing quickly in Canada, and that growth has fueled M&A activity in the space. One company that is currently up for sale is Minacs Worldwide.

But the biggest opportunity of all may be closer to the Arctic. Called by some the largest reserve of oil in the world, the extraction of oil from the sands of Alberta are in full swing. Oil sands are very heavy oil mixed with sand, covering an area about the size of Florida. Much of the investment opportunity here lies with creating and manufacturing the technology to extract the oil. It’s an extremely large-scale undertaking that could yield a multitude of opportunities.

Greg Stringham, a vice president at the Canadian Association of Petroleum Producers, says there is a strong drive to both develop and produce technology in this area where there are numerous multibillion extraction projects. “You’re talking about 150 years worth of reserves for each of these projects,” Stringham said.

He added that already these projects have comparable margins to oil and gas exploration companies. and the improved technologies aspire to simplify the process and make that margin fatter.

Finding the “overlooked” doesn’t only apply to industries in Canada either. Up North, there are entire regions that would qualify.

By land mass, Canada is the second largest nation in the world. But population-wise it looks more like Chile—one long skinny strip that is crowded along the U.S. border. As far as the country’s private equity activity, that has been typically confined to the Southeast.

Sanford Riley, a managing director with Richardson Capital, based in Winnipeg, Manitoba, said ever since The Canada-U.S. free trade agreement of 1989 and then NAFTA in 1994, Canadian industry has spreading out across the country. And with free access to the U.S., manufacturing has expanded across Alberta, British Columbia and Saskatchewan, which are closer to delivery endpoints in Denver or Minneapolis.

Other opportunities surely lurk in Canada, but not everyone is interested in tipping their hand. One director at a Canadian based private equity firm, when asked for some unusual spots to invest noted coyly, “I’ve got some ideas but I’m not sure I want to tell my competitors.”

The pro was presented with a chance to call Canada’s next big thing, to which he responded, “I’d rather be rich.”