Private equity: intriguing surprise for business owners

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.

HIGHLIGHTS

• 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 equity.
  
• Private equity made two main contributions: strategic focus and finance.
  
• Private equity can be a good fit as a source of investment capital for family-owned firms.
  
• 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

Yvonne Squires, Media Relations, Tel.: [phone] ext. 221
E-mail: [email protected]