I joined the CVCA a year ago with limited knowledge of private capital. I had been exposed to venture investing, to some degree, as the multinational I spent the last decade working for made some of investments in early-stage, Canadian businesses. My learning curve was steep, but extremely energizing. My expectation on assuming the role was that I would be joining a vibrant industry dedicated to growth. I was not disappointed.
Canada’s private capital industry is healthy, and the dollars required to fund and grow startups has reached an all-time high, although there is much more room to grow. What I did not expect, was that private equity (PE) would be as exciting as venture capital. Indeed, my biggest take away from 2019 is the role of private equity in our country’s prosperity. If the backbone of Canada’s economy is small and medium size enterprises (SMEs); private equity is the engine that fuels the growth of SMEs and the bridge that ensures survival in times of transition.
A 2018 report from the Canadian Federation of Independent Business (CFIB) says 47 per cent of SME owners intend to exit their business within the next five years, and 72 per cent plan to exit within a decade. What’s more, findings from a joint Business Development Canada (BDC) and CVCA 2019 roundtable report indicate that one in four of those business owners intend to sell their companies to non-family members in the next five years. This is an increase of 50 per cent since 2011, when only one in six owners had this expectation.
Many iconic Canadian brands have been built with the help of private equity; these include Roots, Canada Goose, Lululemon, Goodlife Fitness, Sleep Country, Sunquest, Mark’s Work Wearhouse (now known as Mark’s), and Cirque du Soleil to name but a few. But while these big names capture attention, 90% of Canadian businesses are small to medium-sized and many will rely on private capital as a significant source for their growth. So, why the growing popularity of private equity as an option for SME owners?
In 2018, PE firms invested in 399 Canadian companies in the $25 million and under category. In communities from coast-to-coast, these investments assist entrepreneurs in expanding their businesses and enabling them to compete in a global market. This partnership is more than a simple injection of capital. For it to be successful, it must be based on a joint vision for growth that includes both the strategy and the dollars required to reach that goal. While private equity firms are not business operators, they bring perspective, industry expertise, strategic insights, governance and have enough distance to see the bigger picture, while being close enough to oversee operations and how the strategic plan is implemented. Like any relationship, the coming together of an independent business with a private equity firm must be based on a deep understanding and common agreement on the business direction.
Unlike their publicly traded counterparts, privately held companies lend themselves to more patient capital that is willing to take a longer term view to business investment, as they do not have the quarterly pressure of short-term performance and having to impress analysts to ensure earnings and thus stock prices do not fluctuate downwards.
Privately-held companies have the ability to focus entirely on making their businesses better. For the public, these companies often go unnoticed, as reporting on their performance is limited to their directors and shareholders.
As I crisscrossed the country and sat down with CVCA members last year, I was blown away by the benefits accruing to companies and communities. Growth capital injected in Canadian companies drives job creation and, ultimately, support to Canadian communities: PE backed companies are a key factor in our country’s GDP growth and in increased productivity.
Last year, the C.D. Howe institute published an e-brief on private capital, showcasing “the positive and complementary role of private equity in the Canadian economy.” The brief concludes that “an increase in the stock of private equity capital causes a positive response in the overall economy. The analysis shows that the increase in real GDP is driven by gains in business investment, exports and, ultimately, productivity and jobs.”
While C.D. Howe’s findings are relatively new for Canada, these determinations about private equity’s impact aren’t all that new. A 2018 study, by EY, showed that PE-owned companies raise competitive standards that cause entire industries to become productive. The study concludes that greater PE investment in an industry results in measurable employment growth, profitability growth and labour productivity growth when an industry sees greater PE investment.
It’s a great time for Canadian private capital. In the coming months, I look forward to speaking personally with those in our ecosystem about their experiences with private equity, and how we can continue to sustain, evolve and grow to the benefit of Canadians across the country.
In addition, CVCA will be showcasing a number of these companies over the next year, their growth trajectory and their economic impact. My hope is that at this time next year, your big take away will be how crucial the presence of private equity is to our economy and how its importance will only increase as the number of SME’s looking for succession continues to grow.