Boom For Canadian Private Equity?

Pav Jordan of Reuters reports, Mood upbeat for Canada private equity conference:

A resilient Canadian economy is drawing levels of private equity investment not seen since 2008 and attracting global technology giants like Google, Groupon and Microsoft.

Experts say technological innovation is blurring the traditional lines between venture capital, which typically invests in early stage technologies, and private equity, which is crossing increasingly into the sector that in Canada helped give birth to companies like Research In Motion, maker of the BlackBerry smartphone.

"When you have the major large-cap, technology companies in North America sitting on $500 billion in cash reserves, and with very aggressive growth plans for their own businesses, in an environment that is changing at light speed, they can't get there just by their own research and corporate development efforts, so they need to get there through acquisitions," said Steve Hnatiuk, chairman of the Canadian Venture Capital and Private Equity Association's annual conference.

The CVCA's meeting in Vancouver this week is attracting a record 600-plus participants, who between them represent hundreds of billions of dollars in investment capital.

This year's participants will for the first time include U.S. technology and social networking giants that are looking to Canada to buy technologies they cannot develop in-house, as well as the Canadian pension funds that were some of the world's largest private equity investors in recent years.

The Canada Pension Plan Investment Board, the country's second-largest pension fund administrator, will be a big winner when Microsoft buys Internet phone service Skype for $8.5 billion in its biggest-ever acquisition, placing a rich bet on mobile and the Internet to try to best rivals such as Google.

Private equity firm Silver Lake, eBay Inc and investors including CPPIB are seen making $5 billion on the deal, tripling their investment.

BOOMING LIQUIDITY

Google, Microsoft and RIM, have all announced acquisitions in Canada over the past year, quietly creeping into the country's venture capital landscape.

One CVCA panel will focus on the rise of Internet companies like Zynga, Facebook, Amazon, Google, Groupon and PayPal PAPXX.O, which have become multibillion-dollar operations in recent years even as traditional media companies decline.

But industry players say new business models that address the changing investing landscape mean problems, pitfalls and opportunities in private equity and venture capital.

"The venture community and even the PE (private equity) community are going through some structural change, and have been for the last three years," said Ross Bricker, chief executive of the AVAC venture capital fund from Calgary, Alberta.

"Over the last year and a half, we've seen a cautious return to investment," said Bricker, who has about 55 venture companies in his portfolio.

Canada's famed recession-era resilience has also made it a magnet for private equity and venture investors.

Soaring liquidity, backed by corporate players with stock valuations that have recovered from crisis-lows, and a budding appetite for initial public offerings, are creating a dealmaking environment not seen since 2008.

"The last 12 months or so have seen an obvious and clear uptick in the market generally, and I think what we'll see this week is an entirely different mood among the investment community," said Rick Nathan, managing director at Kensington Capital Partners, a Toronto-based firm with some C$500 million ($510 million) in capital under management.

"I know just from my own schedule that there's a lot of people that I want to meet with and who want to meet with me, and that's great," said Nathan, who is moderating a panel on Thursday on asset allocations.

The conference is also one of the largest of its kind in North America and attracts global and regional investors, including some of the world's largest venture capital players.

In related news, Takeover Chatter reports that CVCA-OMERS aims to build private equity portfolio:

OMERS, one of Canada's largest pension fund administrators, aims to bolster its private equity portfolio as it builds on a strategy of buying companies and working with existing management to enhance value, a senior OMERS executives said. OMERS, or Ontario Municipal Employees Retirement System, will look for deals in the C$100 million ($102 million) to C$500 million range, the size at which it usually targets acquisitions, Jim Orlando, managing director for private equity, told Reuters in an interview. "Net-net, we will be buyers, and net-net, we intend to increase the number of portfolio companies we have under management," Orlando said ahead of the annual Canadian Venture Capital and Private Equity Association conference in Vancouver. Teaming with private equity firm Berkshire Partners LLC, OMERS earlier this month said it would purchase Husky International from Canadian takeover shop Onex Corp (OCX.TO) for $2.1 billion. It was the latest in a recent flurry of secondary buyouts -- where one private equity firm sells to rival buyout firm.

Onex made money off the Husky deal, but what remains to be seen is how OMERS will turn around and sell it a higher price. I exchanged thoughts with a senior pension fund manager who commented the following on OMERS:

They have big ambitions, bigger than we have. We are trying to make a profit, not a relative percentage, and don't care how we execute. There are many clever ways to transact, direct is just one option. If they have staying power, no reason why they are destined to fail. I see more deal makers than investors over there, so we shall see how it goes. Looks like mostly co-investing so far, which is no bad thing, so not sure what they are doing is worthy of much attention. They still have the largest part of their portfolio in funds, as do OTPP and CPPIB, so unless they disclose their direct performance and separate club and co-investment from their own deals, one will never really know where the true portfolio attribution lies.

I also think it's mostly co-investing, which as this person says, is not a bad thing. More and more Canadian pensions are bringing assets internally but the truth is they do not disclose the performance of direct deals or internal absolute return strategies in public markets. Why? Because of reputation risk. If things are going well, no problem, but if someone loses billions, they send him or her away with a nice cushy package and hush it all up.

How do I know this? I've seen senior managers lose billions, get fired with a cushy severance and it's all covered up so that the media doesn't get a whiff of it. I'm telling you, I can write a book on the stuff I've seen in the pension industry, and it's not all pretty. Every single pension fund has skeletons they want to keep hidden from the public. To be fair, you can say the same of any large organization, but I hold public pension funds to a higher standard.

Getting back to the initial article on the Canadian economy drawing levels of private equity investment not seen since 2008, that makes me very nervous. Why? Because typically PE activity picks up strongly at the top of the market. The Canadian economy is firing on all cylinders but the Canada bubble fueled by Canada's mortgage monster will eventually burst, and when it does, Canadian private equity will get clobbered.