U.S. investors see a healthy crop of opportunities and attractive valuations in the Canadian private equity (PE) market, says a new study.
According to the report commissioned by Canadian business law firm Bennett Jones, Due North: U.S. Private Equity Sets Sights on Canada, U.S. investment firms will continue to dedicate resources to sourcing opportunities in Canada, drawn by a perception of lower valuations and the opportunity to deploy meaningful capital, all while remaining relatively close to home.
The report, conducted by Mergermarket, an Acuris company, is based on a survey of Canadian and U.S. PE executives, as well as Canadian portfolio company executives.
It finds the top sectors for investment in Canada are consumer goods (24%), industrials and chemicals (22%), oil and gas (14%) and technology (14%).
In terms of attracting U.S. investors, the report finds that 68% of executive surveyed say Canada’s economic expansion is the top factor, and 60% cite the smaller number of potential buyers and lower valuations compared to the U.S.
Consumer spending has been a strong driver of PE interest, and 36% of respondents believe that consumer spending growth “will be a crucial enticement for investors over the next one to two years— especially since the consumer sector is an attractive one for PE buyers.”
Indeed, the top sector for PE investment is consumer goods (24%), the survey finds, followed by industrials and chemicals (22%), oil and gas (14%) and technology (14%).
“Our survey suggests that Canada will remain an attractive destination for PE investment over the coming years, thanks to both anticipated growth in the Canadian economy and pressure on PE firms to seek out new territory amid intense competition for acquisitions worldwide,” the report states.
“U.S. firms will continue to examine potential investment targets in Canada, drawn by lower valuations—at least for now—and the opportunity to diversify their assets without straying too far from home,” it adds.
Canada/U.S. trade relations and impacts from the overhauled U.S. tax code present potential challenges to dealmakers’ optimism. 48% of survey respondents say they are very concerned about the effects of trade uncertainty and 36% say U.S. tax reform will make Canadian targets less attractive on the whole. However, some respondents say there may be a silver lining to recent trade tensions, as Canadian companies may start looking to diversify even further geographically as a result.
For Canadian PE firms, large PE funds “may benefit from a slight home-field advantage, which includes a better cultural fit and greater access to domestic connections,” the report states. In contrast, smaller funds may be “increasingly squeezed by foreign players with greater access to capital and superior infrastructure.”