Canadian VC strong while PE sluggish in Q1 2017

BY Fraser Tennant

Canadian venture capital (VC) was strong in Q1 2017 while private equity (PE) was sluggish, according to a report published this week by the Canadian Venture Capital Association (CVCA).

In ‘Q1 2017 VC & PE Canadian Market Overview’ the CVCA reveals that VC saw $905m invested across 98 deals (Q1 2016 saw $956m invested over 128 deals). In comparison, PE continued at a slower pace in Q1, with $2.8bn invested over 105 deals.

Among its key findings, the report confirms that the average VC deal spiked to $9.2m in Q1 – 84 percent higher than the quarterly average deal size of $5m for the period of 2013 to 2016. Furthermore, the top 10 deals in Q1 accounted for 68 percent of all VC dollars invested, with the quarter also marking an acceleration of VC exits totalling $255m – nearly one-third of the number of deals and half the dollar amount of all 2016 VC exits.

“Canadian VC experienced a robust first quarter in 2017 – the second-best quarter since 2013,” said Darrell Pinto, research director at CVCA. “The pace of investment is reflective of healthy deal flow across all industry sectors. Another sign of a heath is the long-awaited turnaround trend in VC-backed exits – 10 exits totalling $179m in Q1 (compared to 31 exits in all of 2016) – and by all indications this will continue in Q2.”

Turning to PE performance, almost half of PE investments came from the two largest deals in Q1: the $723m Manitoba-based Arctic Glacier acquisition by The Carlyle Group from H.I.G. Capital and the $575m sale of British Columbia-based Performance Sports Group’s assets to Antares Capital and Fairfax Financial. The Arctic Glacier acquisition propelled Manitoba to the top-ranked provincial share of PE dollars invested (26 percent). This was followed by Quebec on 24 percent and British Columbia on 21 percent.

“PE remained flat in Q1,” confirms Mr Pinto. “As depressed global oil prices continue to put downward pressure on Canadian PE activity, investors have been finding alternate investment targets in non-traditional sectors like consumer and retail and cleantech. However, a bright spot was the PE exits environment, with 31 exits totalling $1.5m – already half the number of 2016 PE exits. This included the first PE-backed IPO since 2015: the $445m Canada Goose listing on both TSX and NYSE.” 

Progressing in a balanced fashion, Canadian VC and PE investment is showing results.

Report: VC & PE Canadian Market Overview Q1 2017

KKR to buy Calsonic in $4.5bn deal

BY Richard Summerfield

Private equity firm KKR & Co has agreed to acquire auto parts maker Calsonic Kansei Corp from the company’s majority shareholder Nissan, for around $4.5bn. The deal represents KKR’s biggest ever deal in Japan.

According to a statement announcing the deal, KKR will pay 1860 yen per Calsonic share held - a 28.3 percent premium over the company’s closing price on Tuesday, the day before the deal was announced. The firm beat competition from a number of other rival private equity firms, including Bain Capital and MBK Partners.

Calsonic’s main customer is Nissan, Japan’s second largest car maker, which accounts for 85 percent of its business. However, the company also supplies parts to a number of other car manufacturers including Renault, Isuzu, Daimler and General Motors.

Yasuhiro Yamauchi, chief competitive officer of Nissan, said in a statement: "This agreement was reached because we share common interests and goals. Nissan is hoping to further increase the competitiveness of Calsonic Kansei – one of our most important partners – and KKR recognises the company's potential. This is also the best choice for Calsonic Kansei and its shareholders."

The acquisition of Calsonic will come from KKR Asian Fund II. The firm has been active in Japan through its pan-regional private equity funds since 2010. Though the country has been a key market for KKR, the deal for Calsonic is a rare one in Japan. Multibillion dollar deals in Japan have been hard to come by in recent years; many Japanese companies often unwilling to divest their units through drastic restructuring.

Once the deal for Calsonic is complete, it will become the fourth KKR owned firm operating in Japan. The firm has previously acquired human resources services company Intelligence Ltd, Pioneer DJ, the DJ equipment business which Pioneer Corporation divested in early 2015, and Panasonic Healthcare, which was carved-out of the Panasonic Corporation for $1.67bn in 2013.

Hiro Hirano, a member of KKR and CEO of KKR Japan, said: "Calsonic Kansei is a best-in-class auto-parts manufacturer that supplies high-quality products to the world's largest automotive brands. As a partner to Calsonic Kansei's management team, we aim to assist the company in achieving its growth ambitions and make available our international network and industry expertise to continue Calsonic Kansei's success globally."

News: KKR to buy Nissan-backed supplier Calsonic for up to $4.5 billion

Apollo Global Management to acquire Rackspace Hosting in $4.3bn deal

BY Fraser Tennant

In a boost to its investments in the technology sector, private equity firm Apollo Global Management LLC has announced its intention to acquire cloud services provider Rackspace Hosting Inc in a deal with a total value of $4.3bn.

The definitive agreement, which will see Rackspace become a privately held company and its stockholders receive $32.00 per share in cash, also includes the assumption of $43m of net cash.

"We are tremendously excited about the opportunity for our managed funds to acquire Rackspace," said David Sambur, a partner at Apollo. "We have great respect for the company's talented employees and their commitment to deliver expertise and exceptional service for the world's leading cloud platforms.”

Founded in 1998, Rackspace provides businesses with expertise and exceptional customer service for the world's leading cloud platforms, including AWS, Microsoft and OpenStack (the open-source cloud platform that Rackspace co-founded in 2010, along with NASA). In 2015, the company reported revenue of $2bn.

Once completed, Rackspace expects the deal with Apollo to provide it with additional flexibility to deliver the multi-cloud services that its customers are looking for.

"This transaction is the result of diligent analysis and thoughtful strategic deliberations by our board over many months", commented Graham Weston, co-founder and chairman of the board of Rackspace. “Our board, with the assistance of independent advisors, determined that this transaction, upon closing, will deliver immediate, significant and certain cash value to our stockholders.

“We are also excited that this transaction will provide Rackspace with more flexibility to manage the business for long-term growth and enhance our product offerings. We are confident that as a private company, Rackspace will be best positioned to capitalize on our early leadership of the fast-growing managed cloud services industry."

Having unanimously approved the agreement with Apollo, the Rackspace board of directors has recommended that Rackspace stockholders vote in favour of the transaction.

Recognising a significant opportunity, Taylor Rhodes, president and CEO of Rackspace, said: “We are presented with a significant opportunity today as mainstream companies move their computing out of corporate data centres and into multi-cloud models.

“Apollo and its partners take a patient, value-oriented approach to their funds' investments, and value our strategy and unique culture. This is an exciting transaction and we look forward to working closely together."

The Apollo/Rackspace transaction is expected to close in the fourth quarter of 2016 and is subject to applicable antitrust waiting periods, stockholder approval and other customary closing conditions.

News: Rackspace Confirms Its Sale to Apollo Global Management

PE managers optimistic that deal and exit activity will expand in H2 2016 and beyond

BY Fraser Tennant

Private equity (PE) fund managers are predicting an increase in growth across the industry over the next 12 months, including an uptick in investor interest and exit activity, according to a new survey released this week by Preqin. 

The survey, a snapshot of the views of 187 PE fund managers by Preqin, found that two-thirds of those surveyed expect to see investors commit significantly more to the asset class over the next year.

Conversely, only 4 percent of survey respondents expect total assets under management to decrease during this time.

Additional survey finding include: (i) 47 percent of fund managers reported an increased appetite from investors in Europe, with significant interest also observed in North America (45 percent) and Asia (40 percent); (ii) respondents reported an increased appetite from family offices (58 percent) and public pension funds (41 percent) compared to 12 months ago, while there has also been increased interest shown by private pension funds and sovereign wealth funds; and (iii) valuations remain the biggest concern for PE fund managers in the present climate, with 48 percent believing that the biggest challenge facing the industry is deal pricing.  

“This latest survey shows that private equity fund managers are still seeing growing appetite from investors,” said Christopher Elvin, head of private equity products at Preqin. “The portfolio diversification and record returns provided by the industry as of late have continued to attract investors to the asset class. Although the fundraising market remains ever-more competitive, recent high fundraising levels indicate that capital is continuing to flow into the market.”

In terms of the investment by region analysis, the survey reveals that a higher proportion of PE fund managers based outside of North America and Europe are planning to put more capital to work in the coming year - with 43 percent indicating an intention to deploy significantly more capital and 35 percent planning to marginally increase their investments.

Mr Elvin concluded: “Given the positive fundraising environment and an expected uptick in exit activity, fund managers are predicting industry assets under management will continue to grow over the next 12 months. Although perennial concerns over pricing and deal valuations remain prominent, managers are confident of putting more capital to work over the next 12 months as they attempt to find well-priced assets.”

Report: Private Equity Spotlight - August 2016

Emerging market PE and VC investments outperform non-US developed counterpart in Q4 2015

BY Fraser Tennant

Emerging market private equity (PE) and venture capital (VC) investments outperformed their non-US developed market counterparts during the final quarter of 2015, according to a report released this week by Cambridge Associates.

The report, one of Cambridge Associates’ quarterly benchmarks indexes, attributes the strong performance of emerging markets to strong exit environments in both the European and Asian regions. The index also highlights a weak euro as being a factor in bringing down non-US developed market returns (when measured in US dollars).

"In Q4 2015, investors in emerging market PE and VC funds enjoyed the fourth-largest quarterly distribution in the history of the index," said Vish Ramaswami, managing director at Cambridge Associates. “2015 saw the index's second-highest full-year distribution. And although the index returned less last year than in 2014, strong performance by media and IT companies drove solid returns for private investors in emerging markets.”

Drilling down, the Cambridge Associates Emerging Markets PE and VC Index increased 5.1 percent for the quarter and 8.5 percent for the year, a drop of almost 6 percent from its double-digit 2014 year-end result. In comparison, the Global ex US (non-US developed) Markets PE and VC Index’ returned 2 percent in US dollar terms in Q4, bringing the return for the year to 5.7 percent, a marginal improvement over 2014.

"Distributions to investors in non-US developed market PE and VC funds outpaced contributions for the fifth consecutive year in 2015, reaching a record high,” said Andrea Auerbach, head of global investment research at Cambridge Associates. “These payouts largely benefited investors in funds launched in 2005 through 2008, 2010 and 2012, who received over 80 percent of distributions."

Media was by far the best-performing sector in emerging markets PE/VC in 4Q 2015, returning 30.2 percent for the quarter and 55.8 percent for the year to investors. The second-best performer (for the quarter) was found to be manufacturing with a 7.5 percent return, while IT posted a 21.2 percent return for the year. As far as jurisdictional sway is concerned, China dominates emerging markets PE and VC at present.

Cambridge Associates derives its emerging markets and non-US developed PE/VC indexes from data compiled from institutional quality funds raised between 1986 and 2015.

Report: Global ex US PE/VC Benchmark Commentary - Quarter and Year Ending December 31, 2015