June 28, 2012
June 6, 2012
May 9, 2012
April 25, 2012
April 10, 2012
February 15, 2012
November 9, 2011
October 31, 2011
October 20, 2011
September 20, 2011
August 9, 2011
June 23, 2011
June 15, 2011
June 8, 2011
May 31, 2011
May 19, 2011
March 2, 2011
February 18, 2011
December 14, 2010
December 1, 2010
November 19, 2010
October 21, 2010
October 7, 2010
August 5, 2010 |
November 9, 2011
Canadian Private Equity: Looking Forward, Looking Back
Canadian Private Equity investors have had a strong 2011. From headline transactions such as the multi-billion dollar sale of Skype by CPPIB and its partners, to new funds for veteran firms Birch Hill and ONCAP, to a long and growing list of successful exits by investors across the country, the past 12 months have seen our market transition from recession into recovery, well positioned for continued growth in the year ahead.
The global buyout market peaked in 2006-07, but when financial markets crashed in 2008, private equity stopped in its tracks. These conditions persisted through 2009, and began to recover in the second half of last year. At Kensington, we felt this recovery beginning in September 2010, with a drumbeat of successful exits from our investment portfolio. The inflection point was economic recovery and generous credit markets, setting the stage for buyout funds to sell off mature investments.
Here's what happened: Nobody wants to sell a company in the midst of a deep recession, and this one lasted a long time. With prices falling and confidence failing, the only buyers in the market were turnaround funds looking for distress. So private equity firms holding healthy companies didn't sell in 2008, and didn't sell in 2009. Essentially, they built up a backlog, or inventory, of strong exit candidates waiting for markets to recover. At the same time, their fund LPs were focused on recovering their own portfolios with no room for additional private equity allocations. In many cases, LPs told fund managers to provide returns - exits - if they wanted to see new commitments to their new funds. Fair enough.
This quiet period ended in late 2010, as the exit window opened with a vengeance. The past several quarters have now seen record volumes of exits from private equity firms, as this backlog sells off into a strong exit market of strategic buyers. During the recession, large corporations focused on preserving cash, building up strong war chests to protect them from market turmoil and provide fuel for acquisitions. The lingering recession and weak economic recovery kept their revenues low, and the pressure for top-line growth high, as public markets demanded continued growth every quarter. Growth through acquisition became the preferred strategy, with low interest rates, lots of cash and private equity firms serving up their 3-year backlog of strong performers. A perfect fit.
With exits marching along, LPs are once again seeing returns, leading to the virtuous cycle of new commitments to new funds. As we go to press, it looks like 2011 will be the strongest fundraising year since the 2007 peak, roughly matching 2005 levels. There's no dancing in the streets, but we're on the right track.
In many ways, the continued weak economic growth is helpful for private equity investors. Interest rates remain at historic lows, and vendors are keen to sell at reasonable prices with memories of recession still vivid - fewer auctions, and plenty of time for careful investment decisions. With corporate buyers still under pressure to acquire growth in a weak economy, the exit market should remain strong through 2012.
Of course, a stronger economy would be great, but we don't see it coming any time soon. But that's ok: private equity investors can succeed in the current environment. So long as it continues. The biggest risk is a new global recession, dragging the Canadian economy, and the Canadian private equity market, down with it, and right back to 2008. This risk is real, and represents the biggest threat to our continued growth through the year ahead.
So let's look forward to a slow growth economy, steadily moving up. As long as we can avoid a new downturn, the coming year should be a good one for Canadian private equity investors. |
