The Lexpert Guides to the Leading US/Canada Cross-Border Corporate and Litigation Lawyers in Canada profiles leading business lawyers and features articles for attorneys and in-house counsel in the US about business law issues in Canada.
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www.lexpert.ca/usguide-corporate/ | LEXPERT • June 2015 | 15 us with a very eclectic business mix, including deals in the food industry, health care, pharmaceuticals and manufacturing." PE investors are also starting to look at more regulated indus- tries, such as those that have a Canadian ownership content quotient, as well as the professions, like law, where the poten- tial emergence of alternative business structures may allow non-professionals into the sector. "You've got to be more creative in the Canadian market, but smart private-equity players are fi nding ways to make deals," Akkawi says. ey're also fi nding ways to compete against strategic buyers, sometimes by buying an industry platform that allows them to compete with strategic players for other, smaller assets that are also in that sector. "Funds using the platform approach eff ectively amount to a strategic buyer with private-equity backing," Arnone says. WHAT MUST BE remembered, however, is that in pure deal volume, the small market is still the largest PE market by deal volume in Canada. "Some 75 per cent of private-equity deals have an enterprise value of C$24 million or less," says David Brown of Stikeman Elliott LLP in Vancouver. Perhaps seeing something that their Canadian counterparts have long realized, even large US PE fi rms have emerged as signif- icant players, not only in the Canadian mid-market but also in the small market, in both cases partly because the pricing there is more attractive and less competitive than on larger transactions. "One of my US clients has done six add-on deals in Canada, three of which were less than C$20 million each," says Leopold. One potential hotbed for PE may be in the Maritimes, where Victor Chu, a major international investor from China who is Chairman and CEO of First Eastern Investment Group, announced in late January that he was creating a C$50 million PE fi rm focused on Nova Scotia companies with expansion potential into the Asian market. New Brunswick, where tech giants like IBM, Salesforce.com and LiveOps have in the last few years bought out companies that started with seed capital from local investors, also has consider- able potential for PE investment largely due to the vibrancy of its venture capital market and strong government support. "We've gained an enormous amount of momentum in the last fi ve years," says Arthur Doyle in Cox & Palmer's Saint John, New Brunswick offi ce. e province has one of the most competitive small business investor tax credits anywhere and recently expanded the credits for qualifying corporations and trusts. "Our investor tax creditor system is unique to New Brunswick," Doyle says. Still, the past is hardly the defi nitive indicator of the future. So there are no guarantees that 2015, with its shaky economic begin- nings, will continue the trend of steady growth in the Canadian PE market. But there appears to be no shortage of optimists around. "If we get caught in a downdra , I think it will be a short cycle," says Norton Rose's Caruso. Julius Melnitzer is a legal affairs writer in Toronto. experienced management teams in the industry. "Private-equity companies used to stay away from commodity price risks, but that's not necessarily the case anymore," Arnone at Blakes says. Among other things, the Canadian currency's devaluation of late should be an additional attraction for American funds. " e relative pricing for US funds is cheaper than it otherwise might be because these funds have raised capital in US dollars and will be doing business in Canadian dollars," says Akkawi's partner in Toronto, David Seville. Jeff rey Read of Borden Ladner Gervais LLP in Vancouver also sees continuing demand for service companies in the extractive industries. Other investors see opportunities in the crunch that low prices are putting on certain aspects of the energy market. "So long as oil prices remain low, Canadian companies will need support," says Michael Caruso, a partner with Norton Rose Fulbright Canada LLP in Toronto. "And private equity is a good place to fi nd that support because investors are sitting on a lot of dry powder." In January 2015, New York-based Riverstone Holdings, which specializes in the energy and power sectors, launched Riverstone Credit Opportunities, L.P., which plans to invest C$375 million in energy by way of "capital relief " opportunities. Apollo Global Management, LLC, also in New York, is reportedly setting up a new fund to buy the debt of oil and gas companies under pressure. As it turns out, the invasion of US private-equity fi rms is a relatively recent phenomenon. "Historically, it was all Canadian fi rms, but about fi ve years ago two changes to the Income Tax Act made it much more viable for non-Canadian private-equity fi rms to invest in Canada," Read says. " e fi rst change was the elimination of the section 116 clearance certifi cate for tax-exempt gains by non-residents on Canadian property," Read says. " at was problematic because it took so long, especially because the private-equity fi rms had to account for up to 50 limited partners on any given transaction." e second boost to investment was the elimination of withholding tax on interest payments between Canada and the US, including interest on non-arm's length loans. With the opening so widened, US fi rms poured in, altering the PE dynamics. " e US has about eight times the concentra- tion of private-equity players in Canada, and they generally have a much better understanding of specifi c niches than is the case with Canadian fi rms," Read says. "We've had steady growth for fi ve years, and during that time US private equity has approached "The [Investment Canada Act] process is now more than ever a material risk factor for consideration, and could certainly affect the valuation of targets." Subrata Bhattacharjee Borden Ladner Gervais LLP PRIVATE EQUITY »