Torys in 10

Private equity in 2020: what are industry leaders saying?

March 11, 2020 Torys LLP
Torys in 10
Private equity in 2020: what are industry leaders saying?
Show Notes Transcript

In this episode of Torys in 10, private equity partners Mike Akkawi and Guy Berman discuss some of the findings from PE Pulse, Torys’ private equity sentiment survey, the first survey of its kind in the Canadian market. In the podcast, the pair focus on two main takeaways from the survey, which took the opinions and market sentiments of over 100 private equity and pension fund players in Canada. 

The first takeaway is the large deal sizes the PE market saw in 2019 and the reported expectations that these deal sizes will stay the same or increase moving forward. The second is fundraising and how pension fund survey respondents said their allocation of private equity will either stay the same or increase throughout the year—this is in spite of the fact that many respondents said it was going to be more difficult to raise capital. Tune in for Mike and Guy’s full analysis on the survey.  

You can get all of the findings and commentary in PE Pulse here: https://www.torys.com/insights/publications/2020/02/pe-pulse-2020.

Music: Stratosphere - www.adamvitovsky.com.

Speaker 1:

Welcome to Tori's in 10 where we explore important legal and business developments in just 10 minutes and discuss how they may affect your organization.

Speaker 2:

Okay, so this is the first podcast by uh, the private equity group at Tory's on our Tories and 10. I am Mike[inaudible]. I'm a partner in the private equity group and I'm here with my partner guy Berman. Uh, also a lawyer in our private equity group. We started about the same time we both been at the firm for 20 years or more guy 20 years plus 20 years plus. Uh, which takes us to the, uh, topic that we have here for you today. It is on the private equity pulse 2020 Canadian private equity survey. Uh, now that's a survey that we conducted at our firm, uh, working with Ipsos and uh, reached out to a number of private equity sponsors and a number of investment professionals at, uh, the pension funds and other clients of ours who are directly in the private equity space. Uh, we got a response by over a hundred afar clients and contacts. And we wanted to chat about this. The first, you know, uh, the inaugural private equity survey in Canada. We don't believe there's anything else, uh, similar to it. And just very quickly you can access it, uh, the survey that is on our website, tories.com, uh, go either to my link, Michael[inaudible] or to my colleagues here at guy Berman and you'll find you'll find the survey guy over to you to set up what we're going to talk about.

Speaker 3:

Excellent. Thanks Mike. Um, so when you guys have had a chance to, to read our survey, you'll see that it's, it's rich in data and, and showing where, um, our private equity clients and pension non-clients think we're, we're going in the, in the future. Um, there were a couple things that surprised us and we wanted to, to focus more on those topics, uh, for this podcast. And the first one is the large deal sizes, um, and client's expectations that deal sizes will, um, continue to stay the same or increase. And why is that surprising? Um, in 2018, the average deal size by a private equity buyer in Canada was 292 million. And that more than doubled to over 600 million in 2019. And what we saw was 91% of our private equity clients thought deal sizes would stay the same or increase. And you know, ultimately Canada is a mid-market, uh, country with mid market companies. And you know, we would've expected that deal sizes will kind of revert to the meme and be a bit lower. Now, that doesn't mean that there isn't good rationales for why deal sizes are higher. And I think that's what we want to dive into here. Um, so the, the first one is in, I'll call this in the pure mathematics category. Um, 2019, there were a whole bunch really large cap deals and that obviously skews a deal sizes higher. We saw Onyx by WestJet for, you know, almost Oh for over six and a half billion dollars. Blackstone brought a dream global for almost$6 billion. Again, that has, that really increases average deal sizes. Um, but there are some other, um, trends that we've seen in the marketplace. Um, debt is really, really cheap now, which obviously helps with, um, with, with valuations and doing deals. Um, there is a lot of competition in the marketplace. Um, we have funds with all time. All our pension fund or private equity funds have more capital than they've ever had. There are new entrants in the private equity market. Uh, pension funds are very active, have a lot of dry powder, and all of that leads to more capital chasing deals. Um, and what we're seeing is that it seems like almost every year now, for the last five years, we hear that valuations are at an all time high. And so over the last five years, um, our clients that whether they're corporate clients or private equity clients, if they have assets they want to sell, they always think it's the best time to sell at the, at the peak. And they've been selling over the last five years. And I think what's really happened is that there are fewer and fewer great assets coming to market. And when those assets come to market, um, there is a lot of interest and, uh, inevitably we see lots of auctions with, um, with, with high valuations for those top assets. I mean Mike, we're seeing, we're seeing with deal terms.

Speaker 2:

Yup. You're, you're, you're right. Um, we're seeing as, as I think the market is predicted for a number of years, but it's really become a far more common these days. And in other words, we've hit there, uh, where, where most of our deals, uh, or many of our auctions for good assets is, as you said, guy are done on almost, uh, you know, public company terms, uh, obviously backed up by rep and warranty insurance to, to deal with the risk. Um, I, I agree with you. I think competition is really the base reason for why deal sizes are, uh, maybe, uh, out of whack a little bit over the last couple of years. And I look at it as we've seen our clients move into different sectors, uh, you know, focusing in areas that you have not seen private equity, uh, um, uh, make investments in. And this is almost like its own new sector, you know, the large cap, uh, sector. Um, and only some of our clients can play in that field. Some of the, you know, private equity shops in the country. When you add in, as you said, um, you know, cheap debt, um, on good terms and also lots of co-invest demand, they can, they can play in that market and get opportunities that, um, that are maybe dwindling or, or, or less common these days in the mid market where they're, they're used to playing. That's a good point. A lot of mid market players are using co-investor money to T to

Speaker 3:

do larger deals. And the other thing we see, we've seen all our are the Canadian private equity funds are raising larger and larger funds. Um, and as a result they have to deploy more capital and it's easier to do that by doing larger deals than, than smaller deals. So we're seeing a bit of a self fulfilling prophecy here. Um, the other thing that's it's of note is, um, we, we've all seen the number of IPOs over the last 10 plus years really decrease but, but in the last five years and, and we've seen the stories a lot where, um, we have these dual track processes where clients are either going to IPO or sell as a private sale. And you know, in almost every single one of those dual tracks, we ended up having a private sale cause the private company multiples are now approaching the IPO. We're surpassing IPO multiples. Right.

Speaker 2:

Uh, I think, I think that's exactly right. And you know, also why, why create the headache of getting into the public markets and all the complexity that surrounds securities laws, which luckily neither one of us, uh, focuses on.

Speaker 3:

Yeah. But we do have colleagues at the office who are experts in that field and would love to take your call. There you go. Oh, that's a really good segue for our next topic, which focuses on fundraising. Um, so we just talked about how there's a ton of dry powder in the marketplace. Um, private equity funds are raising more and more capital. And what we saw was our pension fund clients, 79% of them said that their allocation to private equity will either stay the same or increase, which is a reflection of what a great asset class private equity is. And so despite all of that, what we found surprising was that more than double our respondents thought that in the coming years it was going to be more difficult to raise capital, um, 43% of our respondents that it was more difficult to raise capital in 2020 and beyond for, for their next fundraise. And I, Mike, I found this surprising, I know you did as well. What do you think led to that?

Speaker 2:

Yeah, so, so I agree. I think it's a surprising stat and maybe, maybe the quickest, easiest answer or explanation is that, you know, none of our, our contacts want to go out there and say it's just going to be easy. Uh, it's, it may be better to be a bit conservative in responding to your prospects of raising a new fund. Um, and so that's just more of a, um, a feeling than a, than an answer based on the survey. Uh, an answer based on the survey though is that a lot of our respondents came back and said that they expect, um, you know, geopolitical or macro economic, uh, risks and concerns, uh, to be their biggest concern looking forward. So they're probably tying obviously that into, um, the fact that they may not be able to raise capital as easily.

Speaker 3:

Did they go on that? It was, um, I think it was almost 30% when we asked them what the, what your biggest challenge in the future. Um, almost 30% said it was some kind of macro issue. So 12% identified an economic downturn or recession, 8%, um, identified geopolitical uncertainty and 7% identified, um, uncertainty in the macro environment. We didn't give them, it wasn't a multiple choice list. This is what they identified.

Speaker 2:

Right. And, and this was actually maybe from a timing perspective, worth mentioning that the survey was just before the COBIT 19 outbreak. So those numbers may, may look worse today. And you know, especially since, uh, we've seen what's happened in the public markets. But, um, in addition to, to, you know, these possibilities, one, one other trend that we've been seeing that would have an effect on, uh, on fund side fund size is the, uh, the co investment strategy or maybe more generally the investment private equity investment strategy of some of the pension funds out there. Um, many still, uh, have a large fund investment strategy, but that's often now tied together with, um, an interest in a toe investment, um, strategy and access to two co-investments from their underlying funds. So in order to do that more effectively, we've seen a lot of our clients, uh, on the pension fund side, narrow their relationships, reduce the number of, of contacts that they have with sponsors to build deeper, uh, relationships with those sponsors and to, in order to get more access to co-invest opportunities. And similarly, sponsors have, um, you know, have reciprocated with, with various of their investors. And so from that perspective alone, and we can reinforce this point by looking at the number of secondary transactions we've seen in the market where pension funds have sold entire portfolios of, of private equity investments, investments in private equity funds in order to limit their relationships. But that could be another reason, uh, that we're, we're looking at an environment and our clients are looking at an environment where, uh, the pension funds are being more selective in, uh, the number of relationships they have and who they have them with. And so that's creating a little bit of a uncertainty on the side of, uh, of the sponsors and in looking forward to their next fund.

Speaker 3:

And so from a pension fund perspective, they're not reducing their allocation of sponsors, but they're reducing the number of sponsor they invest in. So we'll probably see some winners who get lots of the money from, from the sponsors, but as a result, there'll be some losers. And for those guys it will be harder to raise capital. And maybe that, maybe that's

Speaker 2:

the explanation did that that would be a good sophisticated explanation for what's happening. Um, if we don't rely on our first two answers, which were also, I paid him to say good and well. So I think that's it. Uh, we covered again, two topics that we thought were very interesting in our, which you can access as we mentioned earlier on the podcast at Tory's dot com and you can also reach out to guy or me, um, on any of these topics. And thank you very much for listening. Thanks and see you soon.

Speaker 1:

Thanks for listening. You can find more insights from our lawyers on Tori's dot com.