Closing Drive to exit For Canadian PE investors at the ready, current exit opportunities are among the best in years By Kirk Falconer pportunities to sell portfolio assets have been richer for private equity funds over the past year and a half. Indeed, in the still-uncertain global market of today, growth in PE-backed acquisitions, initial public offerings and other exits has perhaps provided the surest sign of recovery from the post-2007 slowdown. exit comeback In the United States, Thomson data show combined sales of PE fund investments increased 71 per cent in 2010, compared to the year before. Canadianbased portfolio realizations were just as healthy, with buyout and related PE exits rising 117 per cent year over year, and VC exits, 28 per cent. North American liquidity events totalled 429 at the end of June 2011, or nearly half of the number in 2010 as a whole, indicating a potential second year of robust activity. They have also continued to show higher values. Consistent with this overall direction, Canadian exits have kept a solid, post-slowdown pace, while domestic PE funds have scored major realizations abroad, suggested by exit from Skype, Ltd., following its US$8.5 -billion sale to Microsoft Corp. Strategics at the fore A key driver of exit trends has been strategic buyers. In 2010, the improved macro-economic environment spurred corporations to open up their cheque books and begin acquiring assets of strategic value. Over time, the potential windfall for selling PE funds is enormous, as globally active businesses built up huge cash reserves over 2008-2009. One estimate of these reserves (UNCTAD, 2011) put the total at US$4 trillion-plus. Last year, half of Canadian buyout exits were strategic acquisitions. Among these was Private sale of its stake in CTVglobalmedia Inc. to BCE Fall 2011 Private Capital Inc., for $3.2 billion, the largest PE-backed acquisition in North America. And thanks to technology-intensive strategics, such as Google Inc., Open Text Corp., Research in Motion Ltd. and Twitter Inc., over 90 per cent of Canadian VC exits in 2010 took this form. increased, though volatility in IPO activity has made this exit avenue a challenging one. Market conditions appeared more stable in early 2011, however, producing a string of major IPOs in the United States, including the historic US$3.8 billion offering of HCA Inc. In the first half of 2011, strategic sales proved just as influential, accounting for 70 per cent of buyout portfolio realizations, illustrated by Target $1.8-billion buy of Zellers Inc. from NRDC Equity Partners, and Chemtrade Logistics Income $420-million buy of Marsulex Inc. from Birch Hill Equity Partners. Almost all VC exits involved strategics, such as Salesforce.com, which bought Radian6 Technologies Inc. from lead investor Summerhill Venture Partners, BDC Venture Capital and Brightspark Ventures, for US$371 million, the largest IT-related acquisition since 2004. IPOs involving Canadian portfolio companies have been comparatively few since the beginning of the market recovery. Those of note included the outstanding US$660 million offering of SMART Technologies Inc. in 2010, which gave realizations to both buyout and VC funds. In addition, Canadian hockey equipment icon, Bauer Performance Sports Ltd., was one of several PE-backed companies that completed IPOs in the first half of 2011. Financials another good bet Another fruitful source of exits, especially for buyout funds, has been financial (or sponsor-to-sponsor) sales. Like strategics, most PE shops kept their powder dry over the slowdown, focusing instead on survival strategies for portfolio companies. When they were ready to deploy un-invested capital to new deals, buying PE funds often turned to selling PE funds. While comprising a small share of total Canadian liquidity events, financial sales have been prominent. For example, the largest buyout deal done to date in 2011, OMERS Private and Berkshire purchase of Husky International Ltd. for US$2.1 billion, is also the largest exit, as prior owner was Onex Corp. IPOs fewer, but pack a punch Opportunities for selling PE assets to public market investors have also Wanted: Top-quality assets General partners have plenty of incentive to take advantage of exit trends, though not everyone is able to do so. Bain Insights (2011) argues that the massive backlog of unrealized PE investments contains many businesses unready for exit. And, for their own reasons, buyers of PE assets are exercising care, picking only the ripest cherries. This suggests the vital link between liquidity events and PE-backed businesses that have been actively managed. Many portfolio companies that are currently attracting new owners are those that GPs guided with particular success through the post-2007 slowdown. Examples from Canadian experience underscore this point. Referring to acquisition of Bolton, Husky in 2007, managing director Seth Mersky noted the optics of buying capital-goods manufacturer on the precipice of one of great However, during term of ownership, its investment team developed and implemented an operational plan, in partnership with president and CEO John Galt and his management team, that