Calgary, Canada, November 11, 2013 --(PR.com
)-- While it is probably not newsworthy that baby boomers entrepreneurs must sell their businesses to fund retirement, it may surprise many people to know that there is a currently a limited of dedicated capital in the market for these assets. This supply/demand mismatch is a financial issue that has received limited media attention to date, however, Equicapita believes it could be poised to become one of the most pressing economic challenges facing the Canadian economy.
According to CIBC data quoted in a recent CBC article it is estimated that “$1.9 trillion in business assets are poised to change hands in five years — the biggest transfer of Canadian business control on record... by 2022, this number will mushroom to at least $3.7 trillion as 550,000 owners exit their businesses.”
The importance of a smooth transfer of these assets cannot be overstated as baby boomer companies “that will see a change ownership in the next five years currently employ close to two million people and account for at least 15 per cent of gross domestic product.”
The scope of the challenge is large - while private equity transactions are measured in billions of dollars annually in Canada, the estimates above are for trillions of dollars of assets to be seeking buyers over the next decade. This supply/demand mismatch is particularly pronounced for businesses with values in the $2 million to $20 million range, employing typically between 50 to 500 people – the nano-gap. These businesses are commonly described as small & medium enterprises (“SMEs”). Even though SMEs are a critical part of the Canadian economy there is limited amount of PE funds targeting this deal size.
The solution in part will come from an increase in capital in funds dedicated to the SME private equity space and perhaps over time from pension funds seeking avenues to invest into the SME space attracted by higher potential rates of return and as part of a growing allocation to alternatives in general. A recent Mercer survey showed that in 2013 38% of pension plans indicated they are investing in alternatives versus 25% in 2010; and 8% of plan assets were in alternatives, versus 15% in 2010.
Greg Tooth, a partner at private equity buy-out firm Equicapita reports, "The alternative market in Canada allows retail investors to add private equity offerings directly into their investment portfolios. While this market tends to be focused onreal estate offerings there are a growing number of more traditional private equity vehicles such as Equicapita raising capital in this universe. We created Equicapita to be RRSP eligible with a low minimum to allow qualified investors access to SME investments that are difficult to reach through traditional channels. Because of the compelling mismatch between the amount of business owners seeking exits in relation to the amount of dedicated SME private equity capital we believe this space could provide superior returns over the next decade while the imbalance is rectified and the demographic pressures begin to ease.”
Equicapita is a Calgary-based buy-out fund focusing on acquiring Canadian private businesses that can generate strong, sustainable cash flow from their operations in niche markets. Equicapita generally seeks to acquire businesses:
- at what it believes are reasonable prices;
- with a demonstrated history of cash flow greater than $1 million per annum;
- with a durable competitive advantage;
- that operate in industries that Equicapita believes have sound long-term macro prospects;
- with ongoing participation of senior personnel;
- with the ability to maintain the cash flow without disproportionate amounts of new capital
- to be held for the long term;
- where there is some potential to grow sustainable free cash flow, but where that growth is not essential to generate suitable returns.”
This news release may contain certain information that is forward looking and, by its nature, such forward-looking information is subject to important risks and uncertainties. The words "anticipate," "expect," "may," "should" "estimate," "project," "outlook," "forecast" or other similar words are used to identify such forward looking information. Those forward-looking statements herein made by Equicapita, if any, reflect Equicapita's beliefs and assumptions based on information available at the time the statements were made. Actual results or events may differ from those anticipated or predicted in these forward-looking statements, and the differences may be material. Factors which could cause actual results or events to differ materially from current expectations include, among other things: risks associated with the ownership and operation of businesses, including fluctuations in interest rates; general economic conditions; supply and demand for businesses; competition for available businesses; changes in legislation and the regulatory environment; and international trade and global political conditions. Readers are cautioned not to place undue reliance on any forward-looking information contained in this news release (if any), which is given as of the date it is expressed herein. Equicapita undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise.