Although 2018 was marked with economic and trade uncertainty, not least due to NAFTA negotiations and Brexit withdrawal proposals, private equity (PE) investment in Canada remained high at $22.3 billion over 543 transactions.[1] These 2018 figures, although shy of the record-breaking aggregate dollar value and number of deals seen in 2017, still outpaced every other year going back as far as 2006. By contrast, 2019 got off to a slower start, with deal values at a fraction of what they were relative to last year at the same time; while Q2 saw an uptick relative to Q1, the $3B of investment during the quarter still lagged behind the Q2 figure of 2018 significantly.

In response to these shifting and uncertain times, the following developments and trends have been solidified throughout 2019 in the Canadian private equity marketplace:

  1. Sector-Focus: The number of sector-focused funds in the market has grown significantly since the economy began its recovery from the now decade-old financial crisis. By sticking to what is known, specialized funds allow a General Partner (GP) and its investors to be more comfortable in areas within which the firm has deeper expertise. Specialization has become increasingly attractive as the market for deals has become tighter. In particular, funds are looking to the healthcare and technology sectors as areas that have demonstrated both superior historical returns and recession resistance.[2]

Tapping into industry expertise, through the use of industry-focused advisors and operating partners, will continue to grow throughout the remainder of 2019.

  1. Fund Structures: PE has seen a nascent but visible surge of GPs raising long-dated or long‑hold funds in recent years. Throughout 2018, some of the largest players launched significant funds that look beyond the typical five-to-seven-year fund structure.[3] Long-hold funds reduce the need to exit assets within a more restricted time horizon, thereby allowing for a more generous runway for growth while also avoiding the inhibiting impacts of economic cycles. Additionally, private equity funds are trending to a diversification of asset class, moving away from the pure private equity model and into investing by way of venture capital and private debt.

While long-hold funds still only represent a minority of activity, their presence is growing steadily and is expected to continue.

  1. Technological Presence: Throughout the deal lifecycle, technology continues to be an important solution in the private equity fund toolkit - whether applied in the back office or at the portfolio level. Use of technology continues to permeate deal evaluation, sourcing and due diligence processes, and reporting on financial and other key performance indicators.

Understanding how technology can both reduce costs and streamline processes, both at the private equity and portfolio level, have been and will continue to be key factors to success.

These trends each represent a challenge and an opportunity for private equity in 2019. Gowling WLG's expert private equity team has broad fund formation and investment expertise; we deliver bespoke advice at every phase of the private equity life cycle. For more information on how we can help, contact Edward Johnston, National Leader, Investment Funds and Private Equity at edward.johnston@gowlingwlg.com.

[1] Canadian Venture Capital and private Equity Association, "VC & PE Canadian Market Overview 2018"