The Canadian Private Equity Advantage
Kensington has been actively involved in the Canadian private equity sector for over 25 years. Throughout the years, meetings with global institutional investors have uncovered some interesting assumptions about investing in Canada. They include:
- Canada is too small — at only 1.2% of the global GDP it is not worth spending time on identifying and monitoring investments.
- The Canadian economy is less efficient and heavily dependent on the U.S. economy so it is smarter to invest in the U.S.
- Fewer investment opportunities in Canada compared to the U.S., Europe, or Asia.
The comments are understandable when coming from large capital allocators who manage global portfolios. But for most investors, the challenge is finding reliable, repeatable private equity investment returns that align with their expectations.
Much has been written about the pros and cons of private equity in a portfolio. However, seasoned investors with significant allocations in the private equity market generally expect the private equity portion of their portfolio to provide both stability and 300–500 bps of outperformance compared to the public markets over the long term.
The challenge lies in finding and maintaining that performance premium — this is where we believe the Canadian Private Equity advantage applies.
For many reasons, including those highlighted earlier as factors that deter large institutions from investing in Canada, we find that Canadian businesses can be acquired at lower earnings multiples than their American counterparts. By strategically expanding sales into the U.S. and other international markets, these Canadian businesses can be sold at multiples of earnings that approach or even match U.S. levels.
Given the approximately 50% higher valuation multiples that American companies typically command, the rewards for generating revenue beyond Canada’s borders are significant. This valuation arbitrage has been consistently in place for decades and we see no sign of it changing.
Recent examples in Kensington’s portfolio illustrate this phenomenon. For instance:
- A leader in autonomous robotics, Clearpath Robotics, after achieving consistent sales in the U.S. and gaining recognition among American customers, was acquired by Rockwell International. The valuation multiple on this sale far exceeded the carrying value based on standard Canadian valuation metrics.
- Similarly, a key player in the premium pet food industry, Champion Petfoods successfully built its brand beginning in Canada and expanded successfully into the U.S., Europe and Asia. Mars Inc. acquired Champion Petfoods at a valuation that reflects its global brand status as opposed to its original Canadian status.
In summary, we enjoy the often overlooked potential of the Canadian private equity space and the consistency of the multiple arbitrage that has stood the test of time.
Visit us at www.kcpl.ca for more information. Follow us on Twitter @kensingtonfunds.
