Canada’s institutional investors plan to pour more money into private equity this year, in part to get a stake in the next Airbnb , DoorDash or Nuvei before these tech companies go public, according to a new study from law firm Torys LLP.
A survey of more than 100 executives at institutions such as pension plans found that 76 per cent of investors plan to increase or maintain the amount of capital they put into private equity funds in 2021. Torys’s survey, conducted by research company Ipsos in November and December, found most fund managers had an optimistic view on the sector’s prospects. That upbeat view was in contrast with investors’ concerns over putting more money into public companies that command lofty valuations.
“The majority of respondents believe the relative outlook for 2021 will be much improved,” the private equity survey found. “More transaction volumes, better debt-financing terms and heightened [mergers and acquisitions] activity are all expected, and year over year, twice as many respondents also anticipate it will be easier to raise new funds in 2021.”
Globally, the private equity industry is expected to continue growing rapidly, as institutional investors earmark more capital for a sector that provides better risk-weighted returns than public markets. In a study released in November, Deloitte predicted private equity fund managers will have US$5.8-trillion of assets under management by 2025, compared with US$4.5-billion at the end 2019.
The Torys survey also found that 34 per cent of money managers expect the tech sector to offer the best investment opportunities. In contrast, just 17 per cent of the investors who took part in a Torys study the previous year said the tech held the greatest promise. “Technology remains the sector of choice for deal-making opportunities in 2021,” Torys said.
The increased interest in tech comes after many domestic funds earned stellar returns from being early-stage backers of businesses that went public in 2020. For example, at Nuvei Corp., long-time backers at the Caisse de dépôt et placement du Québec and Novacap, along with the company’s founder, hold a stake in the payment-processing company worth more than $7-billion after the stock price more than doubled after its initial public offering in September.
“During the pandemic, the tech sector showed enormous resiliency, with strong performance from both public and private companies,” said Guy Berman, a Torys partner who specializes in advising private equity funds. “For investors, that experience strengthens conviction on this theme.”
The study also found private equity funds expect to put more money into businesses tied to agriculture – which includes pet care – entertainment and personal services. The study said: “These shifts in sectors of focus can be partly attributed to changes in consumer behaviour driven by the ongoing pandemic.”
Canadian institutional investors have been investing directly in tech companies and in venture capital funds for decades. In the past two years, pension funds such as the Ontario Municipal Employees Retirement System and the CPP Investment Board deepened their ties to U.S. players in the tech sector by opening offices in Silicon Valley. Mr. Berman said Canadian funds now have strong relationships with both tech entrepreneurs and fund managers, and frequently make use of what are known as co-investment opportunities to put additional capital into investments, without incurring additional fees.
The prospect of more money chasing private businesses raised concerns that funds may end up overpaying on acquisitions, with 82 per cent of executives surveyed by Torys saying they are concerned that deals playing out this year will overvalue companies. Torys also said: “Although our survey results reflect the resilience and optimism in Canadian private equity, the pandemic crisis is not over yet, and most respondents identified it as the top challenge for 2021.”
Private equity executives say after helping the business they own cope with the impact of COVID-19 over the past year, they are better positioned to deal with whatever the pandemic brings in the future. “I think we’re more prepared for a second wave over all in our businesses than we would have been in March. We have the protocols and plans in place,” Bobby Le Blanc, president of Onex Corp., said in a recent call with analysts. “Hopefully, the wave isn’t that big. … But if it is, I think we’ll be more prepared.”
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Andrew Willis
Jaren Kerr