Novacap, a long-time specialist in sector-focused investing, created a dedicated financial services strategy to gain access to deal flow often overlooked by private equity firms.
Novacap this month announced the launch of an inaugural financial services fund with a target of C$500 million ($380 million) and hard cap of C$600 million. The vehicle recently raised an initial C$260 million, the Montreal-based firm said in a statement.
Novacap Financial Services I is now expected to secure an additional C$100 million to C$150 million in a second close in Q1 2020, Managing Partner Marcel Larochelle, who leads the new sector group, told Buyouts. The fund is likely to wrap up later in the year, he said.
A range of limited partners committed initial capital, Larochelle said, including 10 institutions and several family offices and high-net-wealth investors. Some are first-time investors in Novacap offerings.
First-close LPs are based in Canada, Larochelle said. They possibly include Caisse de dépôt et placement du Québec, Canada’s second-largest pension fund with net assets of C$327 billion, which has backed every prior Novacap fund. Larochelle declined to comment.
Fund I will make control investments in mid-market financial services companies across North America. Target businesses, the majority of which are expected to be Canadian, will typically have Ebitda of more than $3 million and enterprise values of $50 million to $350 million.
Novacap has identified four verticals of interest to Fund I: specialty insurance and distribution, asset and wealth management, alternative lending and financial infrastructure. They were singled out, Larochelle said, because they reflect strong potential for “aggressive” organic and acquisition-led growth.
The brokerage industry, for example, suggests “a lot of consolidation potential,” Larochelle said. Wealth management and non-bank lending are also expected to show outsized expansion relative to other verticals.
In all cases, Novacap will partner with owner-operators to build financial services companies at the local level into national or global leaders in their niche markets, Larochelle said.
Over its 38-year history, Novacap has invested primarily through two sector strategies: industries – manufacturing of consumer and industrial goods, business services and distribution – and technology, media and telecommunications. The firm closed a fifth industries fund in 2019, raising C$940 million, and a fifth TMT fund two years ago, raising C$840 million.
Over time, Novacap increasingly encountered financial services opportunities, Larochelle said. A key example is Nuvei, a Montreal-based payment tech provider. First backed by Novacap and CDPQ in 2017, Nuvei in November closed a high-profile acquisition of Britain’s SafeCharge for $889 million.
Larochelle said Novacap’s encounters with companies like Nuvei indicated there was a “big ecosystem” with considerable deal flow that was going largely unnoticed by PE investors. This prompted the firm to further explore the space and eventually set up a third sector strategy.
Like Novacap’s industries and TMT strategies, financial services is overseen by a team with domain knowledge and operating experience obtained through industry careers.
Larochelle formerly held executive positions in the asset management sector. They include his role as executive vice president and CFO of Fiera Capital Corp and president and CEO of UBS Global Asset Management (Canada). Immediately before joining Novacap in 2018, Larochelle was an angel investor.
Other team members include Senior Partner Rajiv Bahl, recruited in 2017 from Scotia Capital’s FIG Group, where he was a managing director and head of structured products, investment banking. Bahl previously held a similar job with RBC Dominion Securities.
In addition, Senior Partner Alain Miquelon came onboard last year after serving on TMX Group’s executive committee as president and CEO of Montreal Exchange and head of derivatives and fixed income markets.
Along with raising Fund I, Larochelle, Bahl and Miquelon are adding to the team, which will leverage Novacap infrastructure and investment professionals to source opportunities and do deals. A debut platform investment is expected in early 2020.
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