Too much money chasing too few deals.
That was a message heard repeatedly at this year’s Capital Connection conference of corporate deal makers organized by the Vancouver chapter of the Association for Corporate Growth.
Thomas Miele, managing director of capital markets for GE Capital, noted, “There’s so much liquidity in the markets now that there’s not enough yield to satisfy demand.”
Added Christine Cooper, regional vice-president at BMO Corporate Finance: “There’s a lot of capital out there. It’s a good time to be a borrower.”
Competition among the financiers has lowered borrowing rates to the point that they’re “probably the best we’ve seen,” said Michael Berkson, a partner at Vancouver’s Fulcrum Capital Partners. “From that perspective, it’s a good market to be in if you’re looking to get debt capital.”
Companies with more than $10 million in earnings so far have the best access to capital, especially for those looking to expand their businesses through acquisition.
Nevertheless, M&A deals have remained near record lows. Miele noted, “Last year, about 70% of all the deal volume done in the U.S. was in refinancing and recapitalizations. The M&A component, which is really the bread and butter of a healthy market, just didn’t show up. As a result, what you’re finding are more aggressive investors.”
That has generally translated into higher valuations for businesses on the market, especially those in B.C. that attract U.S. interest.
Berkson noted valuations for Canadian businesses have generally been around five to six times earnings (EBITDA). But it’s usually been higher for businesses that attract a U.S. buyer.
“The take-away for Canadian business owners is that, if possible, they should position their business so it’s attractive to U.S. investors. Because, across the board, we’re seeing at least a one-time EBITDA value bump if you ultimately sell to a U.S. player.”
Whether the liquidity taps will remain open, however, will depend on whether the global economy shows clear signs that the ripple effects of the global financial crisis are subsiding. That has yet to be the case as new sovereign debt issues emerge from Europe and the world’s largest economies continue to face uncertainty.
“Everyone keeps their eye on the U.S. because depending on how things go there, that will drive what will happen in Canada,” said Cooper. “Hopefully we’ll see continued stability in the market, but there is a bit of fragility. We’re keeping a close eye on the U.S. and Europe as well.” •
Knowing your partner key to attracting private equity
Business owners looking for capital should be doing their homework when it comes to potential private equity partners.
At this year’s Capital Connections conference organized by the Vancouver chapter of the Association for Corporate Growth, Cody Church, senior managing director of Calgary’s TriWest Capital Partners, noted, “[Private equity] has become a large term that has become lost because it can mean many, many different things and different styles.”
Yuri Fulmer, president and CEO of FDC Capital, said that in Western Canada, private equity is “usually an investor who doesn’t intend to operate the [target] business. That ranges from folks like Cody, right through to small groups of retired executives who have pooled some money and go out and make investments in small-cap businesses.”
He said business owners should realize that private equity can operate differently from other types of financiers. “If you’re an entrepreneur with a view to running your own show, the world will change. It can be a good change, but if you’re a serial entrepreneur, it’s a tough fence to jump over.”
Nuheat Industries Ltd. received private equity capital from Fulcrum Capital Partners. According to Nuheat CEO John Rose: “So often, a company is trying to show off their wares, saying ‘Pick me; pick me; we’re a company that you should invest in.’ As opposed to, ‘Is there a culture fit with this company? How much do they want to get involved in the business? There are a lot of things as a company you need to do in your research when choosing the best partner.”
Added Fulmer, “The next question is if the value that a private equity firm claims to bring to the table is interesting to you. If they have expertise in entering the U.S. market, is that something you are going to do meaningfully any time soon, or is it just a nice thing to have? Does the private equity firm verify that it does add value? That due diligence is critical.”
