Blakes reveals private equity deal study

Bay Street law firm Blake Cassels & Graydon LLP has released what it says is a “one of a kind” study with data based on private equity mergers and acquisitions it has handled over a three-year period.

The Canadian Private Equity Deal Study focuses exclusively on transactions involving Canadian private companies or their assets and is sourced from transactions Blakes was involved in as lead or Canadian counsel.

“The goal was to provide our clients and industry friends with an answer to a question we’re often asked which is ‘What is market?’ We’re hoping that Blakes and our private equity study defines what the market is going forward,’ said Kurt Sarno, partner in the firm’s private equity group, at the launch of the report on May 31.

The 50-page report looks exclusively at private M&A transactions by private equity funds, sponsors or portfolio companies as buyers, sellers, investors or targets. Blakes looked at about 150 deals signed between 2014 and 2017. By reporting on aggregated data, no confidential information was disclosed, according to the report.

“You see the prevalence of industrial goods and services (25 per cent), which is a long staple of Canadian private equity, at least in Ontario, as well as technology (17 per cent) and life sciences (12 per cent),” said Sarno.

Transportation (nine per cent), financial services (eight per cent), retail (seven per cent), oil and gas/energy (six per cent), chemicals and natural resources (six per cent), food and beverage (five per cent), infrastructure (three per cent) and real estate (two per cent) followed in terms of what industries saw private equity deals completed during the period.

Blakes says it will issue the report on a yearly basis from now on. It will look at dynamics between deals involving a founder selling to a private equity company versus a deal where a strategic company is selling to private equity, or private equity selling to private equity.

“We compare and contrast terms between cross-border transactions versus domestic transactions or how upper market transactions differ from mid-market transactions. We can also look at them on an industry-to industry basis,” said Sarno.

The study covers terms negotiated in a private equity buy out or investment transaction including indemnifications, financial terms, qualifiers, closing conditions, representations and warranties and more.

“With rep and warranty insurance we have a very detailed analysis of the various data points available as to where that market is including deductibles, limitations retentions — for that we used our data and worked with brokers and insurers in the Canadian market,” he said. “We looked at rep and warranty insurance and analyzed its impacts on transactions as a whole — not just on monetary limitations for indemnities.”

The study presents a “representative picture” as to who is doing deals in Canada and where that market is likely to go.

“It is remarkable to see that most of the sellers are Canadian and most of the buyers are American and that is a trend that I don’t think is going to slow down anytime soon given the volume of capital that is available for deployment out of the states,” said Sarno.

He adds that about 20 per cent of the deals can be categorized as large market at over $500 million, while the rest is more representative of the Canadian private equity market which — over 30 per cent between $100 and $500 million, and more than 40 per cent were $100 million or less.

According to a recent article in the Globe and Mail, data suggests there is U.S.$1-trillion in capital waiting on “the sidelines” to be deployed by private equity investors around the world and thousands of new funds raising new capital every day.

“That highlights what a force private equity has become around the world and certainly in Canada with the strength of our pension funds and in bigger U.S. funds coming to invest in Canada,” Sarno said.

The project has been a multi-year effort by dozens of lawyers at Blakes across the firm.

“Interestingly, but not surprising, is there is a real lack of private equity data available, especially in Canada,” said Sarno, who points out that the only legal report that looks at Canadian private M&A transactions in any sort of detail is published by the American Bar Association which sources its data from the System for Electronic Document Analysis and Retrieval, or SEDAR, which is the Canadian equivalent of the Securities and Exchange Commission’s EDGAR system for filing securities information.

Blakes also worked with rep and warranty insurance brokers and carriers directly to source data.

“I think this is the first time anyone has looked at this information,” said Sarno. “The only comparable report, which focuses on Canadian private equity transactions, is put out by the ABA. They go to SEDAR where public companies file material agreements and they obtain their transaction documents from publicly available documents. Which means it involves private transactions done by public companies, often involving the shedding of non-core assets, deals that maybe aren’t core to what they do, whereas our study focuses on deals we have done that aren’t public at all and in all cases involve private equity funds, sponsors or portfolio companies and they are in the business of buying and selling assets.”

As it is based exclusively on proprietary data and meant to be a value add for Blakes’ clients and foster discussion with industry players, the report is not being made available electronically.

“Part of the goal is to not only build this data base we can use it for intelligence purposes internally but to give our clients real market advice based on hard data at our disposal,” he says. “We’re in the business of providing value add and I think in some cases that can go beyond just legal terms. This is an analysis of legal terms but presented in a way to help clients make better investment decisions.”