Canadian pension funds helped to lift the country’s private equity market to new heights in 2007, resulting in a banner year, according to a report.
McKinsey & Company’s sixth annual Private Equity Canada 2007 report outlines the year’s record-breaking activity in fundraising and investments, particularly with regard to pension funds, as well as the dramatic collapse in debt markets and the growing importance of sovereign wealth funds.
Last year was one of the most active years in the history of buyout investment in North America, says the report, with disclosed deal values up 42% to reach their highest ever level. The Canadian scene exhibited similar results, exemplified by the announced purchase of telecom giant BCE by a consortium led by Teachers’ Private Capital for $51.7 billion. If finalized, it will be the largest private equity buyout ever, anywhere in the world.
Kirk Falconer, director of research and analysis at Thomson Reuters, suggests performance values are behind the recent surge of pension plan merger and acquisition (M&A) activity. “What I think has happened is those pension funds in Canada such as Teachers’ and OMERS that already had a significant private equity allocation have been ratcheting up their allocations,” he says. “In addition, I think what the performance numbers of the buyout side have been doing is getting some Canadian pension funds to reconsider the asset class and in some cases has prompted some to join in.”
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Despite the market slowdown since late 2007 due to the credit crunch, Falconer says he expects M&A activity to continue well into 2008. “My sense is that this is a bit of a turning point for private equity for a lot of Canadian pension funds that heretofore have stayed away from the asset class,” he explains. “I think there’s a growing awareness in the Canadian pension fund community that this is an asset class that continues to grow and grow, and if you don’t like the opportunities you’re seeing in North America, then try Europe, or Asia, or try market segments that other people aren’t doing.”
According to the report, top pension funds and other institutional investors in Canada have gained an international reputation as sophisticated direct investors in private equity deals. This reputation was reinforced in 2007, as CDP Capital – Private Equity Group, Manulife Capital, OMERS Capital Partners, Teachers’ Private Capital and others raised activity to new heights, both at home and abroad.
As a result, dollars managed inside Canadian institutional captive funds rose to $24.6 billion, or close to one-third of the overall pool.
Pension funds comprised 37% of new capital for buyout and mezzanine partnerships in 2007, second only to banks and other financial institutions at 38%. Sources of venture capital comprised mostly of individuals (65%), with pensions and foreign sources tied for second at 12%.
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