What lies ahead for private equity in 2016? Our annual report covers how private equity M&A activity in 2015 has set the stage for this year's transactions at three levels of focus: in the markets, in the deals and in the terms.
In the Markets - changing deal strategies in the current environment.
Private equity investors continue to face competition not only from pension funds and strategic buyers, but also international investors who are increasingly pursuing investment opportunities in Canada. In this competitive environment, and in the face of persisting economic uncertainties, investors are focusing more on deal-sourcing strategies while managing effective sales processes to maximize returns on exit.
In the Deals - more "public-company style" deals in private-company auctions.
This seller's market is causing some sellers in private-company auctions to attempt the sale of their business "public-company style"—that is, without offering buyers a post-closing indemnity for representation and warranty breaches. This approach has been especially pursued in dual-track processes where the target has been preparing for an IPO in parallel to an auction. For buyers, an important question will be: is representation and warranty insurance an adequate indemnity substitute?
In the Terms - U.S.-Canada private equity debt terms and the drive for greater fund transparency.
With current market conditions expected to draw more U.S.-based investors to Canada in the year ahead, U.S. sponsors seeking Canadian debt financing to fund acquisitions may need to adjust their expectations as to what's market in private equity leverage terms in Canada. While some aspects of U.S. leverage terms are similar to those in Canada, there are notable differences. With respect to private equity fundraising, one trend is consistent on both sides of the Canada-U.S. border: increased transparency of fees and expenses is in store for 2016.
These trends are developing against a broader backdrop of global market turns which are fostering favourable conditions for investors to pursue new opportunities, including in the increasingly distressed oil and gas industry in Canada. The current environment is set to sustain private equity dealmaking in the year ahead—whether expectations around price between buyers and sellers will align remains to be seen.
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