Lexpert US Guides

36 | LEXPERT • June 2014 | www.lexpert.ca « PRIVATE-EQUITY FUNDS buyers and sellers has rapidly grown in recent years. Of the esti- mated 1,500 RWI policies issued worldwide over the last decade, approximately 45 percent were issued in 2012, according to the Aon Transaction Solutions Brochure (www.aon.ca). " is trend continued in 2013, with a leading global insurer having issued more than twice as many RWI policies in 2013 in Canada and the US than in 2011. In absolute terms, Aon's North American team placed more than $3 billion of RWI coverage for 60 transactions in 2013, but this still represented a relatively small percentage of overall M&A volume. Aon estimates that RWI insurance was obtained for between just 6 to 8 percent of US transactions in 2013 and only 1 to 2 percent of deals in Canada. We expect further growth in RWI use in Canada as the market becomes more familiar with its benefi ts. IMPROVED FUNDRAISING CLIMATE Canadian private-equity funds reported record-breaking fundraising activity in 2013, surpassing strong fundraising in 2012 by more than three times. New capital totaling C$16.1 billion was committed to 35 PE funds during 2013, with C$10 billion raised in Q4 alone, ac- cording to a March 4, 2014 news release from Canada's Venture Capi- tal & Private Equity Association, "Canada's Buyout Market in 2013: Moderate Growth, Record Breaking Fundraising." " is follows on the heels of the industry's successful fundraising eff orts in 2012, when a total of C$4.6 billion was committed to 27 domestic funds, up 24 percent from 2011. Given this abundance of "dry powder," we expect private-equity funds to actively seek opportunities to invest this capi- tal in 2014. EXIT OPPORTUNITIES IN 2014 Following a strong performance in 2012, the total number of PE fund realizations of Canadian portfolio companies slowed by approximate- ly 16 percent through the fi rst three quarters of 2013. Fortunately, a strong showing in the fourth quarter resulted in PE fund exits ulti- mately only being down by 5 percent year-over-year. Amidst an overall slowdown in the Canadian IPO market, the "du- al-track process" (where a seller simultaneously explores both an IPO and a negotiated M&A auction) has been followed less frequently by PE sellers, in part because IPO exits for Canadian private-equity- backed companies have been relatively infrequent and typically only partial exits. Since 2009, there have been only nine instances where a PE fund exited its investment by way of a Canadian IPO (see "Pitch- book 2013 Canada Private Capital Breakdown," May 22, 2013; online at www.pitchbook.com). " is diff ers from the United States, where 57 PE-backed companies went public in 2013 alone – the highest number since 2006 – unlocking the second-highest amount of capital on record ($21.5 billion) (see Pitchbook Annual Report, "PE Break- down 2014 Annual Report U.S. Edition," January 9, 2014; online at www.pitchbook.com). Balanced against this slight slowdown in exits is the structural pressure on private-equity funds to realize on aging assets and return capital to their LPs. Many boom-era vintage funds are reaching the end of their terms. With each additional quarter, IRRs on many in- vestments made before the global fi nancial crisis are coming under downward pressure, even as valuations have started to increase. " is has further enhanced the desire of PE funds to sell. PE funds are in- creasingly considering an exit from their investments through a sale to other PE funds, rather than selling to a strategic acquirer — the more traditional exit route. While sales to strategic acquirers still accounted for a plurality of Canadian PE exits, with more than 40 percent of the total in 2013, this method of exit was down from 2012, when it constituted approxi- mately 53 percent of the realizations (see " omson Reuters for Cana- da's Venture Capital & Private Equity Association, "Canada's Buyout & Private Equity Market in 2013"; online at www.cvca.ca). Making up a portion of the diff erence were sales by PE funds to other fi nancial investors, which increased from approximately 11 percent in 2012 to 18 percent in 2013. Global secondary buyout activity remained essentially unchanged in 2013, both in terms of the number of overall deals (481 in 2012 versus 480 in 2013) and realized investments ($77.5 billion in 2012 versus $78 billion in 2013), according to Pitchbook, "PE Capital In- vested Jumps 13% in 2013" ( January 7, 2014); online at www.pitch- book.com. A er a particularly strong 2012, the pace of US second- ary buyouts slowed in 2013, with overall deal value falling to $79.8 billion, a 7.6 percent drop from 2012 ($86.4 billion). " e substantial number of PE fund exits into the buoyant US IPO market in 2013 likely accounts for some of this reduction. While the Canadian pri- vate-equity market has lagged the US in secondary buyout exits (as noted above, only 18 percent of Canadian PE exits were to fi nancial buyers in 2013), the combination of (i) newer funds having access to substantial amounts of capital, (ii) older funds reaching the ends of their terms, and (iii) the US market trends suggest that secondary buyouts may become increasingly common in Canada in 2014. USE OF SANDBAGGING PROVISIONS " e volume of private M&A activity in the United States dwarfs that in Canada, with the result that certain deal points o en take longer to become "market" in Canada. One of these points is whether or not to include "sandbagging" provisions in purchase agreements. " ese provisions address the impact that a buyer's knowledge of a breach will have on its ability to assert a post-closing indemnity claim against a seller. A "pro-sandbagging" provision generally provides that a buyer's knowledge of a breach will not aff ect its right to seek indemnifi cation and is obviously more favorable to the buyer. Sellers, on the other hand, would prefer an "anti-sandbagging" clause, which prohibits buyers from making claims if they had pre-closing knowl- edge of the breach. " e inclusion of pro-sandbagging provisions has held relatively constant in the US over the last several years (according to the 2013 ABA Private Target M&A Deal Points Study, 41 percent of private M&A transactions surveyed included such a provision), but only re- cently have a signifi cant number of Canadian agreements followed suit. " e 2012 ABA Canadian Private Target M&A Deal Points Study indicates that 24 percent of the surveyed transactions included a pro-sandbagging provision, more than twice the percentage disclosed "Canadian private-equity funds reported record-breaking fundraising activity in 2013, surpassing strong fundraising in 2012 by more than three times."

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