OTTAWA, Nov. 26, 2013 /CNW/ - Canadian business owners are often unaware
of private equity until they stumble across it while searching for new
investment for their firms. Although there are some pitfalls, private
equity rated well with company owners once they succeeded in tapping
into this source of capital, according to a Conference Board of Canada
report, The Private Equity Experience of Canadian Business.
"It's fair to say that many, if not most, Canadians are unfamiliar with
private equity. Yet millions of Canadians are, effectively, private
equity investors. Institutional investors, such as the pension plans
that manage Canadians' pension savings, fund private equity," said
Michael Grant, author of the report.
The report is largely based on structured interviews with 35 senior
executives of companies that have worked with private equity funds. The
report provides a detailed understanding of the process of private
equity investments. The interview selection and engagement method means
the findings cannot be generalized to all private equity deals.
Thirty-five owners and senior managers of portfolio companies -- the
recipients of the investments -- who were interviewed in depth, gave
high scores in terms of the overall experience they had with private
Private equity made two main contributions: strategic focus and finance.
Private equity can be a good fit as a source of investment capital for
Increased investment in Canadian firms is crucial to improve Canada's
lagging productivity and competitiveness.
Private equity is a specialized form of investment, and currently
amounts to just a fraction of the overall Canadian equity market.
Private equity investments are distinguished by their relatively high
risk and long-term (typically seven to ten years) investment horizon.
Canada has a large pool of privately-held enterprises, many of them
family-owned. The long-term focus of private equity appeals to many of
these company owners. In addition, private equity is closer to the
existing governance structure of privately-held firms than a
publicly-traded firm would be.
The report also points out some downsides of private equity
investments. Some private equity firms may use excessive leverage in
executing private equity deals, which constrains cash flow. Other
interviewees pointed out instances of high management fees or
undisclosed management fees. Prospective portfolio companies also need
to be aware that private equity is an actively-managed form of
investing that involves relinquishment of senior management control.
Despite the challenges, respondents were highly favourable toward
private equity. Funders did indeed deliver on their value proposition.
The key to success is for the private equity company and the portfolio
company to be on the same strategic page. In successful cases, there
is alignment between private equity objectives and portfolio company
objectives. Portfolio companies are given clear direction and are
largely left to control the day-to-day management of the company.
The report provides a detailed look at three private equity deals: MEG
Energy Corp., Bluewave Energy Inc. and Knowlton Development
Corporation. Financial support for the research was provided by
Canada's Venture Capital and Private Equity Association (CVCA).
SOURCE: Conference Board of Canada
For further information:
Yvonne Squires, Media Relations, Tel.: 613- 526-3090 ext. 221