High net worth investors looking for exposure to something other than stocks and bonds have a new place to park their money: asset manager Connor, Clark & Lunn is building a mid-market private equity practice that allows its clients to own portions of the companies it buys.
This affiliate, Banyan Capital Partners, acquires small-to-medium-sized firms using CC&L's balance sheet, and then offers up slices of the deals to clients who have over $1-million in investable assets. In Canada, these clients are exempt from the securities commission rules that prevent retail investors from dabbling in riskier assets.
At Banyan, ideal buyout companies have annual earnings before interest, taxes, depreciation and amortization between $2-million and $10-million, and the equity cheque the company likes to write is between $3-million and $20-million. Its previous deals include the purchase of Party Packagers in 2010, which was later sold to Party City, almost doubling Banyan's money, as well as the more recent acquisitions of G.W. Anglin Manufacturing and Purity Life Health Products, which distributes things like dietary supplements and vitamins.
But while high-net-worth clients are legally allowed to make their own decisions to invest directly in companies that have minimal public disclosure, Banyan and CC&L have set up a structure that offers clients some comfort. Most importantly, in any deal offered to retail clients, CC&L will always be the largest investor. If clients lose money, the firm will too.
Banyan also limits the fees it charges to clients. Typically, retail investors looking for exposure to private equity must invest in buyout funds that charge fees on committed capital, forcing them to pay even if their money isn’t deployed. Investors in these funds also have no say in what companies are purchased.
“In traditional private equity, you are investing in a team and a track record, but it’s essentially a blind pool,” says Banyan managing director Jeff Wigle.
At Banyan, retail clients are given the opportunity to invest in individual deals, allowing them to evaluate the merits of each takeover target. Fees on committed capital also do not exist. Because investors are allowed to invest on a deal-by-deal basis, they are only charged for invested capital.
For now, Banyan doesn’t have too much competition in the mid-market space. Private equity players such as Birch Hill and Torquest who used to invest in smaller companies have grown over the past decade and now target bigger companies. Still, it hasn't been easy to close transactions. Banyan's private equity team was formed in 2008, and it has only closed a handful of deals since. Like most shops, Banyan's team hopes the market stabilizes‑which should help boost deal volumes ‑ because so far the portions of deals offered to retail clients have been heavily oversubscribed, demonstrating just how much demand there is for a structure like this.