When Steve Nicolle was looking for growth funding for Halifax-based pharmaceutical services company STI Technologies Ltd. in 2013, he decided the founding source that made the most sense was private equity.
STI was transitioning from a startup to a growth company, and Nicolle, then the CEO, wanted to partner with a company that could help it grow.
“We were looking for investors aligned with where we’re going instead of where we’ve been,” said Nicolle, now retired and on several boards, including that of STI. “I was surprised at how many (firms) there were, how much money they had and how interested they were in deploying their capital.”
Toronto-based private equity firm Imperial Capital ended up investing $17 million in STI and bought out the company’s venture capital investors.
Imperial-STI was one deal that made the past half-decade a busy time for private equity in Atlantic Canada. What’s more, 2015 is on track to be the busiest yet.
Private equity is like the big brother of venture capital. Instead of investing a few million or less, with the expectation of a potential 20-fold return, private equity firms can put up $50 million to $100 million, often for a majority stake. Private equity firms tend to be active managers, unlocking value through financial or organizational restructuring.
This funding source became popular in Canada in the 1990s and is newer still on the East Coast. Gavin Penny, Thomson Reuters’ resident expert on private equity in Canada, said the region’s smaller sample size makes it harder to examine trends, but overall PE is on the uptick.
“As for buyout deals this quarter, we’ve seen $6 billion invested across Canada — the best [first quarter] we’ve ever seen,” Penny said in an interview. That’s good news for Atlantic Canada, because it tends to move in unison with national PE trends.
“We already have two deals on file for Atlantic Canada [in the first quarter],” he said. “It’s not a lot but it’s still on pace to be the best year on record for Atlantic Canada just in terms of deal count.”
There have been more than $100 million in disclosed private equity deals in Atlantic Canada almost every year in this decade – even though that mark was breached only three times between 1995 and 2009. It’s gaining acceptance in the region
“Research study after research study shows that these PE-backed companies tend to outperform, compared to public companies or companies that are financed in other ways,” said Kirk Falconer, editor of PE Hub Canada.
Falconer, who co-authored a 2013 Conference Board of Canada report on the private equity in the country, says Canada has seen an expansion of private equity activity coast-to-coast.
“It’s a result of there being more Canadian PE firms than there ever were before, the fact that they’ve got more capital under management than they’ve ever had before, and the fact that U.S. private equity investors and other international investors are taking an increasingly strong interest in Canada,” Falconer said.
St. John’s-based Killick Capital was founded in 2004 by Mark Dobbin (See page 7) to invest in Atlantic Canadian businesses and the aerospace sector. And Halifax-based SeaFort Capital was founded in 2012 by a group including members of the McCain and Sobey families. It prefers “old economy” companies with a strong tangible asset base.
In April, SeaFort closed a leveraged buyout of Dartmouth trucking company Jardine Transport Ltd.
“In a way that wasn’t possible 10, 15, 20 years ago, you’re seeing a good match between companies and private equity investors,” Falconer said.
The fact that come-from-away firms like Imperial are increasingly taking notice of Atlantic Canadian companies is a good thing, but it means local companies will have to step up their game, said Nicolle.
“Let’s not get caught up in the hype of yet another startup challenge weekend and yet another accelerator and incubator without holding ourselves accountable,” Nicolle said. “I think we need to hold ourselves to a higher standard. Who are the top 10 investors in my sector globally? Why wouldn’t I pitch to them?”