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Investors Looking North to Canada?

the-flag-above-the-peace-tower-and-other-buildings-on-parliIt appears that it might not just be adventure-seekeing outdoorsmen who are heading north to Canada this summer. Investors also may be seeking increased opportunity there.

According to Mark Mandel, an M&A partner in the Canada and Private Equity practice groups at Milbank in New York, “There has been tremendous PE interest in Canadian assets for a long time. Canada is a superlative place to do business. With the drop in oil prices, there is also increased hedge fund interest in distressed Canadian assets. Cross-border Canada-U.S. M&A and financing deals were quiet in Q-1 2015 but restructurings, particularly in the oil patch, were busy. Q-2 2015 has been very busy in all three areas. 2015 is shaping up to be a very busy year for investment into Canada.”

Said Chris Porter, Director of BDO Canada, in an in-house interview with Lee Duran, BDO USA’s Private Equity practice leader: “Overall, the investment environment is favorable, especially for U.S. investors. Our team has conducted extensive research into the Canadian investment climate, which revealed that, during the past five years, there have been almost 600 investments by U.S. PE funds into Canada, particularly in the middle and lower mid-markets. For the transactions where deal value was available, about 60 percent of the deals were valued at $100 million or less.”

Porter outlines some reasons for the move north, particularly post-recession:

  • “First, funds have significant capital to invest, and lower Canadian multiples have also spurred deal activity. Lower multiples can be partially attributed to Canada’s fiscal conservatism.”
  • “We have also seen growth and maturity in terms of the types of investors coming into Canada, especially from the United States. A few years ago, foreign investors did not offer services and expertise that distinguished them from Canadian investors. Now, U.S. funds understand the market better, and many are in the position to be industry specialists in a way that is unique. Many Canadian investors simply can’t compete in market specialization due to the smaller size of the economy.”

Indeed, according to Canada’s Lexpert: “Canadian companies should expect more inbound investment M&A activity, in particular from the US, where they have a currency advantage, strong balance sheets and private equity sitting on piles of dry powder, says Emmanuel Pressman, a Toronto partner and Co-chair of the Corporate Department at Osler, Hoskin & Harcourt LLP.”

And there’s more. John Leopold, a senior partner at Stikeman Elliott LLP in Montréal and Co-chair of the firm’s Mergers & Acquisitions Group told Lexpert that “an important trend is the increasing role of US private-equity funds in Canadian middle-market deals. He says there has been a material increase in the number of Canadian middle-market deals involving US private-equity funds because pricing in Canada for deals in this space is generally less expensive than equivalent deals in the US market.”

In terms of activity, the middle-market seems to be a place to watch.  Cameron Belsher, an M&A partner in the Business Law Group at McCarthy Tétrault LLP in Vancouver told Lexpert that an increase in these types of deals has occurred with U.S. private equity firms “because pricing in Canada for deals in this space is generally less expensive than equivalent deals in the US market.” Belsher also notes that “Another quickly growing trend is M&A deals between baby boomers looking to exit their companies and US private equity with money ready to deploy,”

So which Canadian industries may appear attractive? BDO’s Porter says that even with the recent downturn, “oil and gas services continue to be an attractive sector for investors. Even with lower gas prices and reduced exploration initiatives, oil and gas production still needs to be pumped and serviced.” Further, “manufacturing also provides a range of investment opportunities. With the Canadian dollar significantly declining in value, the price of business and resources has dropped. As such, it is now easier and cheaper to export to the United States – and manufacturers are capitalizing on this opportunity.”

Porter also outlines several trends, based on geography and industry:

  • “There is impressive growth in regions like Saskatchewan and Manitoba, places that are often overlooked for more well-known hubs like Toronto. In these areas, there are opportunities in agriculture and food & beverage operations that are particularly attractive.”
  • “Technology is also geography-agnostic, so there are opportunities there, as well. Green technology will likely be a promising sector in the coming year.”
  • “Mining and the oil sands are hot topics of conversation, and the remediation and containment of oil production will become increasingly important (and likely profitable) for the right type of investor.”