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Executive Summaries Mar 6, 2020

Private Equity: Fueling Canada’s Growth

It is broadly known that Canada’s private capital is healthy, namely via venture capital, to fund and grow our startups, but the fact that private equity plays an equally important role in our country’s prosperity is not.

Indeed, to fuel the growth of the small and medium enterprises (“SMEs”), private equity is the engine and more importantly, in so many different situations, the only means to ensure growth and even survival of the businesses as well as exits, as initial public offerings, have been quite rare in Canada in the past three years.

The Canadian Federation of Independent Business (“CFIB") issued a report stating that 47% of SME owners intend to exit their business within the next five years, and 72% within a decade. Hence the fact that business succession becomes a major concern not only to create jobs and keep local communities prosperous and healthy, but to ensure Canada’s ongoing competitiveness and economic prosperity.

Unfortunately, even if according to this report, 81% of the business owners intend to sell their business to enable their retirement, most (51%) have no plan at all. The main question is then:who would be a suitable successor or buyer? And furthermore, are the next and younger generations ready? Probably not and at least, in many instances, only with the private equity players. The CFIB’s recommendations entitled “Getting the transition right” (November 2018) is certainly worth the read in that respect!

It is clear that many iconic Canadian brands have been built with the help of private equity. To name a few:Roots, Canada Goose, Lululemon and Cirque du Soleil. But these are not necessarily representative of our market as; 90% of Canadian businesses are small to medium sized and would not really rely on other sources than private capital for their growth. So why has private equity grown in popularity as an option for SME owners?

The 2018 VC & PE Canadian Market Overview tells an important story and explains how the private equity firms play a strategic role and why a partnership with them is much more than a simple injection of capital. This report demonstrates that in 2018, private equity firms invested in 399 Canadian companies in the $25 million and under category. The private equity players have demonstrated they bring perspective, industry expertise and governance and have proven to provide strategic insights as well. This growth capital drives jobs and support the Canadian communities as private equity backed companies are a key factor in Canada’s GDP growth.

Last but not least, the C.D.Howe Institute e-brief also brings up a very important question when addressing:does private equity lead to more foreign exists? Indeed, it indicates that because private equity looks to support companies beyond the venture stage, i.e. in the growth and expansion phase, indeed one of the consequences is therefore that for private equity exits, there is a near 50-50 split between the number of foreign buyers and the number of either Canadian private equity firms or stock exchanges. On the other hand, it states that 80% of buyers in venture capital exits were foreign.

This certainly indicates the major role of Private Equity in Canada’s growth and helping sustain, evolve and grow our economy. Although the latest YTD Q3 2019 CVCA report indicated the private equity deals 64% lower than the same period in 2018, private equity-backed exits continued with 94 deals. Let’s hope the trend picks back-up in support of our growth!

For more on which growth strategies to choose when dealing with foreign investors, register to our Strategic Forum on Foreign Investment.
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