U.S. private equity funds searching for investments and capital are now just starting to go north — to Canada.
Changes last year in Canadian law now allow that country’s pension plans to invest more money outside Canada, giving U.S. private equity firms new sources of investment dollars. At the same time, some of Canada’s large pension plans, including the C$102.4 billion (US$88.4 billion) Caisse de Depot et Placement du Quebec, are no longer competing with private equity firms for deals. Instead, they are investing in private equity funds and co-investing alongside those funds, instead of investing themselves.
The changes could result in billions of dollars crossing the border from Canada into the hands of U.S.-based private equity managers in the next 12 to 24 months.
Last spring, the Canadian government lifted the restriction that pension funds could only invest 30% of total assets outside of Canada.
“We are open and ready for business,” said Henri-Paul Rousseau, president and chief executive officer of Montreal-based Caisse de Depot, at the North American Venture Capital Summit meeting in November.
The Caisse de Depot took the lead by announcing late last year a strategy for its C$868 million venture capital investments, increasing its investment in “best venture capital firms” aimed at increasing returns. The Caisse expects to invest between C$350 million and C$400 million in first-quartile non-Canadian funds. This does not mean fund officials are ignoring the home front — the Caisse also plans to invest C$75 million in private equity and venture capital funds and another C$50 million in co-investments in Quebec.
The Caisse has a C$10.7 billion total allocation to private equity; a combined C$8 billion was invested in 2004 and 2005.
Indirect investments
Other government entities with substantial private equity holdings are also investing indirectly through fund managers rather than directly on deals, said Alain Proux, director for economics at the Quebec Government office in Boston. One example is the C$2.6 billion Societe Generale de Financement du Quebec, an economic development agency, which on Dec. 9 unveiled a proposal to invest between C$200 million and C$300 million annually with non-Canadian investment firms for industrial projects in Quebec.
This is a continuation of its current strategy to invest in private equity funds and not directly in companies. “We think that now the market is very wide open for the U.S. venture capitalists and we are trying to promote that,” Mr. Proux said.
Going to where the investment dollars are is just one reason Grand Banks Capital Inc. is investing in Canada, said Charles R. Lax, managing general partner in the Newton Center, Mass.-based venture capital firm. (Caisse is an investor in its funds.)
“We like Canada because the engineering talent is terrific,” he said. “What Canada lacks is managerial talent to grow companies to become substantive companies. Canada does not have a lot of high-tech successes that would generate management talent.”
Plus, he added, venture capitalists are able to make investments at a lower cost. Canadian companies have lower valuations and there are fewer competitors for deals, keeping prices lower.
Also, investors in Canadian companies get a cash rebate from the government for research and development in Canada. “We are able to invest in a company and get 10% to 15% coverage on overhead,” Mr. Lax said. This lowers expenses and raises internal rates of returns, he noted.
Good opportunities
Executives at the C$87 billion (US$75 billion) Canada Pension Plan Investment Board, Toronto, see good opportunities in the small-end of the Canadian private equity and venture capital market. On Nov. 15, the CPP Investment Board committed C$400 million to private equity and venture capital, with C$250 million committed to Canadian small and middle-market buyout funds of funds and C$150 million to Canadian venture capital funds of funds. TD Capital Private Equity Investors is managing both investments.
“We continue to be very bullish as an institution on Canadian private equity markets,” said Mark Wiseman, vice president-private investments. Even so, CPP Investment Board executives are taking a cautious view of the private equity markets generally because there is too much money chasing to few opportunities, Mr. Wiseman noted.
However, he added, “CPP Investment Board has commitments with three other funds-of-funds managers: Standard Life for European midmarket buyout; Credit Suisse First Boston for U.S. midmarket buyout; and Performance Equity Management for U.S. venture capital.”
“We have a global mandate and we will invest money where we can make the best return,” he said.
