Private equity firms have been chasing a new asset: time.
As the amount of capital seeking investments globally climbs, some of the largest and most reputable funds in the U.S. are playing a longer game – rolling out funds geared toward holding investments for more years than they'd usually look to turn a business around. It's one of the ways the industry is seeking to reshape itself at a time of heightened competition, and low interest rates.
The tough deal-making conditions are evident in the most recent Canadian tally from Thomson Reuters, released Wednesday. There was $14.3-billion invested in 229 private equity deals in the first three quarters of the year – a significant decrease in both dollars spent and number of deals over last year. But that pullback comes after a major post-crisis ramp-up in buyouts.
More capital is seeking higher returns from alternative-asset classes such as private equity amid low interest rates, and that has made bargains hard to find. There's no magic solution to sourcing investment opportunities among the high valuations being put on businesses. But firms are trying new strategies to differentiate themselves.
Alternative-asset manager The Carlyle Group said it had raised $3.6-billion (U.S.) for its first long-dated private equity fund earlier this month. The fund was created back in 2014 and has already committed $1.1-billion of equity to four companies. The firm said it saw more opportunities for long-term investing and the fund was "getting excellent traction with investors."
That comes after other big-name managers such as Blackstone Group LP and CVC Capital Partners have amassed their own multibillion-dollar funds with similar mandates.
A longer time horizon eases the pressure to deliver blockbuster turnarounds and returns in a short time frame. It also removes the mandate to sell portfolio companies within the three to seven years usually allotted to boost the value of a business. According to data firm Preqin, holding periods in North America have been stretched out to an average beyond six years.
And nobody likes "patient capital" more than the Canadians. The country's largest pension funds like to tout their long-term investing approach and seemingly unlimited ability to hold on to the assets they invest in. But their investment partnerships often mean they're tied to the same time horizons as others in the industry, unless they buy assets directly, or together.
It's worth keeping an eye on this long-term investment trend, since private equity is one of the areas many of the country's largest pension funds and other investors still see value in external management, often partnering with firms on deals or investing in private-equity funds.
Some of the largest buyout deals done in Canada so far have some from pension funds. Thomson Reuters attributes a $2.1-billion investment in Bombardier Transportation to Caisse de dépôt et placement du Québec, the largest deal so far this year.
As investors tussle over private-equity gains, venture-capital funds continue to be the bright spot in the Canadian private investment landscape, the Thomson Reuters data show.
Canadian businesses secured $774-million worth of investments in the third quarter, bringing the total to $2.5-billion so far in 2016. It's the best year on record since 2001, according to the data. Even deal volumes ticked up a couple of percentage points.
The largest VC deal so far this year – and one of the largest ever in Canada – was struck in the quarter. Kitchener, Ont.-based Thalmic Labs Inc., which makes wearable technology, raised $158.4-million in funding led by Intel Capital, the Amazon Alexa Fund and Fidelity Investments Canada.