Business Adviser

Capital, Growth and Financing in the current market

By Neil Blair
Partner, KPMG Enterprise/Toronto

Tim Prince
Senior Manager, KPMG Enterprise/Toronto

Despite recent market turbulence, Canada’s transaction environment remains strong with Canadian dealmakers confident that activity will remain healthy. While markets fluctuate as conflicting economic indicators have investors bullish one day and bearish the next, fundamentals still point to transaction activity.

On the buy-side, dealmakers point to a number of positive signs. Notwithstanding the constantly changing economic landscape, both at home and internationally, company balance sheets are much healthier than they were a few years ago with many companies sitting on significant cash piles. Additionally, the lending market is operating much more efficiently with a return to liquidity in the banking sector and more appetite from less traditional lenders to provide innovative products such as high yield debt. Equity investors are also back and many have a requirement to deploy capital before fund expiration which is driving activity.

The sell-side is no different with numerous positive indicators pointing to M&A activity. Companies are starting to target growth and this often leads to a focus on core activities and raising capital for acquisitions. Dealmakers expect this to result in a number of companies undertaking non-core disposals of assets and business units. Private Equity investors are also feeling the pressure to realize investments and return capital to their LPs. This is especially important for those private equity groups looking to raise a new fund in the next 18 months. Additionally, the long awaited boom in transaction activity among ‘baby boomers’ as they look to exit private enterprises is building momentum as the appeal of retirement increases and the opportunity to realize value returns.

While these indicators exist across North America, Canada is particularly well positioned for activity given its relatively strong economic performance. In fact, many commentators believe that there has never been a better time for Canadian companies to transact.

From a sellers perspective, Canadian purchasers tend to have weathered the economic downturn better and are starting to look to consolidate market share. Additionally, Canada is attracting significantly more investment from international companies. While the headlines focus on the mega deals in the resources space, there has been and is expected to be significant activity across a broad range of sectors. Much of this activity can be attributed to companies viewing Canada as a stable yet growing economy where the acquisition of a good business can bring a combination of geographic growth and world class expertise to their operations. The activity is not limited to companies though, with US private equity particularly active north of the border. While the US economy remains somewhat uncertain, there have been a large number of US equity houses shopping for companies in Canada.

Canadian private companies and investors are also in a strong position to drive growth through acquisition. In addition to many Canadian private companies being in better shape than their International competitors, the Canadian dollar is strong, giving Canadian private companies a relative pricing advantage when acquiring cross-border. While internationally there are opportunities, the domestic market is equally likely to provide opportunities given the reasons outlined above.

While the signs point to activity, the process to realize value still takes time and significant expertise. No doubt there is a lot of capital in the market and there is a will to invest but the pain over the last few years is not yet a memory. Investors are cautious and top valuations are only evident for exceptional companies and strong growth stories. That being said, value can be created for both buyers and sellers through detailed preparation and structuring on the sell-side and thorough due diligence and integration planning on the buy-side – now may be the time to capitalize on the opportunities.

Business Adviser is published by KPMG Enterprise™ specifically for owners and executives of private companies. KPMG Enterprise is devoted exclusively to serving the needs of private companies in Canada. For further information about how KPMG Enterprise can help private companies, visit kpmg.ca/enterprise.