“A private equity firm breaks itself down into finders, minders, and grinders,” said Miriam Varadi at the April 26, 2012 seminar, “Private Equity: The Colour And The Controversy” held at the new Adelaide Street offices of the CFA Toronto Society. The “finders” look for quality buyout deals, the “minders” deal with the executives and sit on the board of the bought-out companies, and the “grinders” are, in her words, “essentially apprentice minders.”
In 2006, Varadi found herself caught up in a dramatic scramble of the $52 billion buyout of Bell Canada Enterprise (BCE). BCE had been mismanaged for years which was why Teachers tried to buy it with private equity partners. The financial crisis, however, killed the deal. Varadi lived to tell—and write about—the tale. She published Private Equity in Canada: the Colour and the Controversy to positive reviews in 2009.
It was a fascinating time to be at the table. Varadi asked herself how private equity was able to compete with public markets on a multi-billion dollar scale, given that private equity was scarcely known in Canada until the 1990s. Once the dust settled from the BCE fracas, she resolved to learn more about this little-known facet of Canadian business. She drew on readings, research, her own experience, and most notably, in-depth interviews with some of the most central figures in Canadian private equity.
Varadi posits there are three primary drivers of private equity deals: favourable tax rates, interest rates, and the business cycle. The Canadian scene is coming back to life, she told seminar participants, largely due to far-sighted pension funds seeking to avert the “impending crisis of boomer retirement.” Pension funds such as CPPIB, Teachers, OMERS, Caisse, and AIMCO have all provided large pools of capital for Canadian private equity firms. Varadi noted that the stodgy reputation of Canadian financial markets began to look so attractive Stateside that a US conference was organized explictly around the theme of doing private equity deals in Canada.
Varadi contrasted the venture capital world with buyouts of mature, revenue-producing companies. “Both are private equity but they have an interesting rivalry.” The ratio of successful start-ups is a sobering 1 in 10, and the private equity partner may have to step in with management capabilities, not just funds. On the other hand, the buyout of an existing company involves an actual change in ownership, not just a “partnering.” The goal of a buyout is to borrow on the collateral of the investee company. Pension funds own the target company with little risk and the company works extra hard to pay back the debt.
Individual investors seldom have the opportunity to invest in private equity funds, although they can buy stock in companies such as Onex or Clairvest, for example. These firms went public earlier than many American counterparts simply because that was the only way to raise sufficient capital.
Audience members asked if the future of private equity funds would include heavier covenants, and/or a more limited upside. Varadi agreed that previously, leveraging was used more, whereas now a private equity fund must “put more skin in the game.” Since mega-deals are largely off the table during these uncertain economic times, she foresees more mid-size deals. She predicts that private equity will grow because the retirement of baby boomers is putting more pressure on the pension funds, which are concurrently building up more expertise. Additionally, she noted that as the baby boom generation retires, more sizeable private businesses will come up for sale.
With private equity on the upswing, CFA Society members would do well to educate themselves more about issues affecting private equity. Below are links to some highly informative short videos. ª
The book by Miriam Varadi is: Private Equity in Canada: the Colour and the Controversy
Miriam Varadi interviews some players in private equity at: