Canada: Legal Trends 2016: Private Equity


Between June 2014 and December 2015, the price of a barrel of oil was cut roughly in half, resulting in a significant downturn in the earnings of companies with businesses connected to the oil industry. Private equity (PE) firms with portfolio companies that have operations in or exposure to Alberta and Canada's energy economy will have already spent considerable time and attention on those companies and, in many cases, will have already had some difficult discussions with lenders. Through 2016, PE firms will continue to work with the executives of their oilpatch portfolio companies to reduce costs, drive revenue and weather the storm.

The downturn in the oilpatch may also create opportunities for PE firms. Strategics looking to divest non-core assets to improve their balance sheets and the relative depressed valuations of energy companies should combine to open the door for increased PE activity in Canada's energy sector and specifically for energy-focused PE funds. (For more on this, see item three below.)


In 2015, we witnessed a considerable decline in the value of the Canadian dollar relative to its U.S. counterpart. By early December 2015, the loonie had dropped by more than 17 per cent, with most commentators attributing the decline to depressed prices for key Canadian exports such as crude oil, the proposed rate-raising activities of the U.S. Federal Reserve and the U.S. dollar being a safe haven in times of international economic uncertainty. As a result, U.S.-based PE buyers should have a greater ability to pay higher prices for Canadian-based target companies relative to Canadian PE firms. Equally, the depressed Canadian dollar could operate to reduce valuations of Canadian-based target companies (particularly companies whose operations cannot capitalize on a weaker Canadian dollar), making PE investment into Canada that much more attractive. 


With Canada's significant inventory of resource-focused companies and a maturing public-private partnership industry that has generated a number of high-quality infrastructure projects, along with a robust apparel and specialty-foods sector, increasing numbers of foreign PE funds focused on mining, infrastructure and consumer products have looked to Canada. Mining-data provider Preqin estimates that private equity funds have access to US$4.4-billion of capital for mining investments, and lower valuations in mining and energy companies should fuel those funds' appetite for investment. Infrastructure investors will also find that Canada's secondary market is becoming increasingly buoyant as more projects are being built and more of the original equity participants in those projects are willing to sell some or all of their equity interests for the right price. On the consumer products side, 2015 saw a spate of deals in multiple sectors, including food and health products and apparel, and there's no sign of slowing.


Canadian pension funds have continued to invest directly and look beyond our borders to find investments of a size and scale that can justify the deployment of significant capital. In 2015, direct investments by Canadian pension funds were made in a variety of industries, including technology, infrastructure and private lending. We expect to see this kind of direct deal activity to continue, and perhaps increase, in 2016. Intriguingly, the Ontario government suggested in 2015 that it may abolish the "30 per cent rule" for Ontario-based pension plans. The 30 per cent rule prohibits pension funds investing in securities of a company if the investment carries with it the right to control 30 per cent or more of the votes that elect the directors of the company. While pension funds and their advisers have developed investment structures in order to comply with this restriction, the abolition of the 30 per cent rule will certainly be welcome news to the pension funds and should spur even greater amounts of direct investment.

As investors in PE funds, Canadian pension funds have also been increasingly vocal with PE fund general partners regarding the need to be presented with opportunities to directly invest alongside the general partner. Given the importance of pension funds as PE fund investors, we expect that such requests will continue into 2016 and that pension funds will increasingly negotiate for greater co-investment rights as part of the PE fundraising process.


A final development that may gather momentum in 2016 is Canadian PE funds' use of so-called unitrancheloans — that is, a loan that blends traditional senior and mezzanine debt into one debt instrument — to fund new acquisitions or to refinance the loans of existing portfolio companies. While not commonplace in Canada, U.S. lenders have been vocal about the advantages of unitranche loans, which include (among others) the desirability of negotiating a single loan document and the ease of administering a unitranche loan over its lifetime, versus traditional senior and mezzanine debt. At least some Canadian PE funds are paying attention.​​

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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