In 2024, the Canadian private equity (PE) market experienced a year of contrasts due to the ongoing effects of geopolitical unrest and economic uncertainty. A substantial rise in aggregate deal value in comparison to 2023 suggests that PE firms are successfully adapting to changing market conditions, buoyed further by declining interest rates. At this year's webinar, McCarthy Tétrault's PE professionals once again weighed in with observations on 2024 and predictions on what investors and firms can expect for 2025.
Takeaway 1: Soaring Deal Value Amidst Increasing Deal Volume
The number of PE-involved transactions increased in 2024, but aggregate deal value skyrocketed. Continuing the momentum of H2 2023, PE deal flow in Canada experienced a robust year in 2024 with a total of 599 transactions, marking an 8.3% increase over the previous year, although the number of deals was still below the 2021 peak of 655. The aggregate value of these deals reached a record high of C$42.2 billion Canadian dollars, driven by several large transactions, including significant take-privates in the technology, financial, and real estate sectors.[1] Despite this, the number of mid-market deals in the C$100 to 500 million range declined noticeably from previous years, while increased numbers of small and add-on transactions lifted overall deal count. The information technology sector dominated in terms of deal value, while B2B services led in deal count, with energy, B2C services, financial services, and healthcare sectors also active. Corporate buyer exits were almost evenly matched with sales to other sponsors, at 52%, with no PE exits through public listings due to a stagnant IPO market. Looking forward, despite some uncertainty arising from geopolitical issues and impending domestic political changes, there is optimism for healthy M&A activity in 2025 supported by recent interest rate cuts and reserves of dry powder still to be deployed, with early 2025 deal activity showing continued momentum in B2B and B2C services and information technology.
Takeaway 2: Adapting to Trade Tension: PE Strategy Shifting Amidst U.S Tariff Impacts
The impact of U.S. tariffs on PE has prompted several key adaptations within the industry. PE firms are increasingly investing in sectors less vulnerable to tariffs, such as service-based businesses or those with a domestic presence, including healthcare, and domestic transportation and logistics. These areas, often characterized by local operations, stand in contrast to goods-based sectors in the broad economy, such as industrials, consumer goods, and life sciences, which have extensive international supply chains operations and are thus more vulnerable to tariff-related disruptions. The trend within PE is to favour sectors that rely on intellectual capital, such as IT and financial services, which have less reliance on physical imports and the distribution of goods. As a result, diversified PE portfolios are generally better shielded from tariff risks and are more effective at managing the impacts of supply chain disruptions.
Tariffs have also affected cross-border supply chains, for example, influencing valuations and deal activities. This has triggered a surprising side effect: potential valuation increase of companies with production facilities domiciled within the United States (or Canada, depending on the goods and tariffs involved). In this way, domestic manufacturing might be a driver for increased interest in a particular target. Simultaneously, publicly traded companies experiencing valuation decline as a consequence of tariffs might find themselves more vulnerable to activist investors or unsolicited acquisition attempts. Accordingly, these trade tensions are prompting changes in deal structuring, due diligence, and exit strategies, with a focus on minimizing tariff exposure. This could lead to quicker exits or holding periods being extended for assets that are highly tariff-exposed. The uncertainty created by tariffs could lead to subdued M&A activity, affect transfer pricing, and cause market volatility. Investors are consequently paying closer attention to industry exposures within their portfolios and are bracing for market volatility and potential undervaluation, as some deals are delayed in anticipation of clearer policy directions.
Given the likelihood that tariff-related uncertainties will persist, the due diligence process has evolved to become more comprehensive. PE investors should now examine not only the direct impact of tariffs on their investments' primary suppliers, but also the broader implications across secondary and tertiary supply chain levels. This in-depth approach is key to fully understanding exposure risks. For assets that are significantly affected by tariffs, investors may consider lengthening the holding period, and adjusting exit strategies to ensure the best possible return while mitigating the effects of a challenging tariff environment.
Takeaway 3: Canada's AI Investment Boom Meets New Regulatory Horizons
Canada has a strong and growing artificial intelligence (AI) ecosystem, supported by increasing venture capital (VC) and PE interest. In 2024, Canada's federal budget included C$2.4 billion to secure the country's AI advantage, reflecting a commitment to becoming a leader in AI research and commercialization. As such, the private sector in Canada has seen a steady increase in AI-related deals and investment, positioning Canada third among G7 countries for per capita VC investments in AI. However, PE firms should be vigilant about regulatory compliance, in light of the rapidly changing political and legislative landscape in the U.S. and Canada. The recent prorogation of the Canadian federal government resulted in, among other things, the Artificial Intelligence and Data Act (which was part of Bill C-27 and which aimed to regulate the responsible development and use of AI systems in the private sector), dying on the Order Paper. There is no timeline for when or if this legislation or similar legislation may be re-introduced. PE firms looking to invest in AI-driven businesses in Canada should focus on scalability and unique market positioning, ensuring that these businesses possess unique technology and/or stand out in a saturated market.
Takeaway 4: PE Dominates Take-Private Market with Tech Sector Boost
PE firms played a significant role in the 2024 Canadian take-private market, and this trend is expected to persist into 2025. Nearly 100 take-private deals were announced or closed from September 2023 to August 2024, with a combined deal value of around C$50 billion. The most active sectors for these transactions were metals and mining, technology, energy and power. PE backed deals constituted about 40% of the total deal count and value, with technology being the most targeted sector by PE buyers. The success rate for announced take-privates was high, with fewer than 8% failing. The vast majority of transactions were friendly and executed through a court-approved plan of arrangement.
Takeaway 5: PE Fundraising Plummets in 2024 Despite Steady Deal Activity
Challenges achieving liquidity slowed the return of capital to investors in 2024. The PE fundraising landscape has become challenging since the peak of 2021, with a notable decline in funds raised and extended fundraising periods. This is partly due to a lower distribution to paid-in capital (DPI) ratio of 0.8x in recent years, which hinders Limited Partners (LPs) from reinvesting capital, and the over-allocation by some institutional investors coupled with strong public market performance. However, private wealth investors are emerging as a vital source of new capital, attracted by private funds' historical outperformance and lower volatility compared to volatile public markets. This trend is reinforced by fewer IPOs and more take-private transactions. In response, collaborations between fund managers and private wealth managers are increasingly more common. Furthermore, Canadian regulators are contemplating new regulations to facilitate retail investors' access to private funds, indicating a significant shift toward individual investor involvement in PE fundraising.
Takeaway 6: New Competition Challenges for PE Mergers
Recent comprehensive reforms to Canada's Competition Act, specifically Bill C-59, will have significant implications for PE firms, particularly in terms of merger control. The amendments introduce three major changes: (1) inclusion of sales "into Canada" when calculating merger notification thresholds, which means more transactions involving cross-border business may require pre-merger notification to the Canadian Competition Bureau; (2) an expanded look-back period from one to three years for non-reportable transactions, increasing the likelihood of post-closing scrutiny of non-notified transactions, and affecting serial roll-up acquisition strategies by PE firms; and (3) the introduction of a structural presumption that transactions resulting in market shares over 30% or certain concentration levels are presumed to be anti-competitive, leading to lengthier, more complex reviews and potentially a chilling effect on such transactions. These changes signal a shift toward stricter enforcement of competition laws in Canada, meaning PE firms may need to be more strategic in their transaction planning, cadence and closing timelines, taking into account the implications of the new regulations, which could present challenges for PE investments in 2025 and beyond.
Takeaway 7: PE Scores Big – The Rise of Private Equity in North American Sports
PE investment in the North American sports industry is expected to significantly increase with all major North American sports leagues now allowing PE firms to acquire minority stakes in their franchises. This loosening of investment restrictions is creating substantial opportunities for owners seeking liquidity and buyers seeking diversification. Soaring valuations and a Superbowl victory by the NFL's most valuable PE-backed franchise suggests PE firms will be active players in 2025 and beyond. While attractive returns create plenty of opportunity, investment in the sports industry is still limited to passive, minority stakes that provide buyers limited governance rights. Combined with extended hold periods, often exceeding 10 years, and complex exits due to league restrictions and the relatively narrow market for resale, PE buyers should tread cautiously despite the promises for impressive returns. Despite these challenges, the Canadian sports industry presents untapped potential for PE investments in both franchises and the related sports ecosystem.
Takeaway 8: Potential Canadian Tax Disclosure for PE Deals
Canada has implemented new mandatory disclosure rules (MDR) requiring the reporting of certain reportable transactions to the Canada Revenue Agency (CRA). A reportable transaction includes an "avoidance transaction" that also involves one or more hallmarks, such as contractual protection. An avoidance transaction is generally triggered where one of the main purposes of the transaction (or a series of transactions) is to obtain a tax benefit. Contractual protections are generally triggered through insurance, representations, and indemnities common in many PE transactions. Subject to relieving CRA administrative guidance, which is intended to shelter many generic tax protections arising in common PE transactions, PE investors need to carefully consider the construction of tax related and tax specific indemnities, insurance and other protections in their transactions.
The spotlight on the tax treatment of carried interest (Carry) could come to Canada. The tax treatment of Carry in both the U.S. and the U.K. continues to evolve, with certain proposals suggesting higher taxation for Carry in those jurisdictions. Canada has recently deferred its proposals to increase capital gains inclusion rates (from 1/2 inclusion to 2/3 inclusion), which would affect the treatment of Carry in many Canadian sponsored PE transactions. While that proposed increase is now highly uncertain given the anticipated Canadian federal election, the landscape continues to shift. PE sponsors will need to continue to focus on structuring for Carry, including the jurisdiction in which such Carry is taxed.
Takeaway 9: Expanding Horizons, PE Opens to New Investor Classes
The PE fundraising landscape is evolving to include a broader range of investors beyond traditional institutional investors. This includes high-net-worth individuals, family offices, and possibly retail investors. PE firms have responded to this new landscape by creating new fund vehicles that allow for lower investment minimums and more flexible exit options, addressing the liquidity concerns of these new investor types. Consequently, new semi-liquid and evergreen fund structures have emerged to cater to the preferences of individual investors and family offices, including mechanisms for withdrawal or repurchase of investments, although these come with certain restrictions. As digital platforms and regulatory changes make PE investments more accessible to the individual investor, this evolution of the PE landscape and a broader range of investors may lead to new investment models and offerings tailored to individuals resulting in substantial amounts of new capital in the PE market.
Takeaway 10: A New Frontier in Ethical Business – The Fight Against Forced and Child Labour
PE Firms can contribute to the fight against forced and child labour in various ways. On January 1, 2024, the Canadian Fighting Against Forced Labour and Child Labour in Supply Chains Act (Act) came into force, establishing mandatory annual reporting obligations for certain entities to address and mitigate the risks of forced and child labour in their supply chains. This legislation applies to entities meeting specific criteria related to their presence in Canada, financial thresholds, and activities within supply chains. Although guidance has been provided, there are complexities and ambiguities in determining which entities are subject to the Act, particularly for PE firms. The Act is a significant step in promoting ethical business practices and aligns with Canada's commitment to eradicating forced and child labour, presenting both challenges and opportunities for businesses to demonstrate their ethical commitments and potentially face new due diligence requirements into 2025 and beyond.
Discover how our national Private Equity Group can guide you through 2025 by contacting our presenters below or by reading our latest report, On Target: 2025 Private Equity Outlook.
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