TD Capital Looks Outside the Box –

In the first of what it hopes will be a series of third-party investment vehicles, Toronto Dominion Capital announced earlier this month that it has secured CDN$635 million (approx. $408 million) for its Canadian Private Equity Partners (CPEP) fund.

The expansion-stage and buyout fund actually held a final close back on Dec. 29, but the official word was delayed while fund management continued discussions with a potential investor that, in the end, chose not to invest this time around.

“They just couldn’t coordinate their board in time,” explained Natalie Townsend, president of TD Capital. “We’re disappointed that we couldn’t bring them in, but we only went out looking for between CDN$300 million to CDN$600 million, and this is a relationship that I’m confident we’ll be able to incorporate into our next fund.”

While that next vehicle may be CPEP II, it could also be TD Capital’s Communications Partners fund, which will be opened up to outside investors later this year. Moreover, TD Capital also recently launched a fund-of-funds that is being pitched with a target capitalization of between CDN$300 million and CDN$500 million. The latter venture is designed to better help TD Capital maintain its stakes in such prominent investment houses as Menlo Ventures, Sprout Group and The Blackstone Group.

“TD Capital has been around for over 30 years, and the time just seemed right to raise outside money for these funds,” Townsend said.

It is important to note, however, that Toronto Dominion has not removed itself from TD Capital’s fund-raising equation. Instead, the bank provided 25% of CPEP’s total committed capital, while company employees pumped in an additional 10%. The remainder was mostly filled up by Canadian and U.S. institutional investors like Ontario Municipal Retirement System, British Columbia Investment Management Corp., Wisconsin State Investment Board, WestAM, Alberta Treasury, Merrill Lynch Ventures and PPM Worldwide. The fund also brought in CDN$10 million from a small group of entrepreneurs.

“It’s the first time we’ve invested in a Canadian fund,” said Jon Vanderploeg, portfolio manager with the Wisconsin State Investment Board. “Natalie and Steve [Dent, managing director of CPEP] certainly have their work cut out for them, but I have a sense that Canada’s private equity culture today is like Europe’s was five or six years ago: ready to really emerge.”

Indeed, the CPEP offering memorandum repeatedly touts available Canadian investment opportunities. More specifically, it argues that the nation is currently home to a significant capital supply/demand imbalance, especially in relation to the U.S. market. As for whether or not CPEP will be able to capitalize on that disparity, the memorandum points to a proven track record and a 37.8% internal rate of return, although that figure was compiled as of March 31, 1999.

In general, the fund’s goal is to create a diversified portfolio by making investments of between CDN$10 million to CDN$75 million in Canadian companies with enterprise values ranging from CDN$30 million to CDN$500 million. It aims to lead most deals and have its limited partners co-invest on a regular basis. It will not, however, encourage alternate TD Capital funds to invest in its portfolio companies. The only exception to that rule could be in the case of a late-stage play when CPEP will provide equity and call upon its sister Mezzanine Partners vehicle to provide some debt financing.

Thus far, the fund has already participated in deals for public refrigerated warehouse operator ACS Freezers Income Trust, vertical market software provider Constellation Software, competitive local exchange carrier XO Canada Communications and Web hosting service provider Q9 Networks.

It plans to invest approximately CDN$150 million per year over the next three to five years. So far in 2001, it has already committed CDN$120 million to the aforementioned four transactions.