Equicapita Update Canadian Pensions Increase Allocations to Alternatives but Still Lag US Averages
Summary
The Mercer survey also revealed what they believed was insufficient diversification within the alternative universe with Canadian plans focusing on real estate and infrastructure and not as much in hedge funds and private equity.Greg Tooth, a partner at buy-out firm Equicapita reports, "One of the facets of our investment premise is that the generational transfer of ownership of baby boomer businesses far exceeds the amount of capital currently dedicated to this space.The Mercer survey also revealed what they believed was insufficient diversification within the alternative universe with Canadian plans focusing on real estate and infrastructure and not as much in hedge funds and private equity.Greg Tooth, a partner at buy-out firm Equicapita reports, "One of the facets of our investment premise is that the generational transfer of ownership of baby boomer businesses far exceeds the amount of capital currently dedicated to this space.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- where Equicapita can partner with management and align their interest with Equicapita through tools such as earn-outs, vendor take backs and management incentive plans;- 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.”Equicapita believes that there are compelling reasons for making private equity investments in the Canadian SME market which is experiencing one the largest generational transfers of wealth as boomer entrepreneurs retire and sell their businesses.According to CIBC “An estimated $1.9 trillion in business assets are poised to change hands in five years — the biggest transfer of Canadian business control on record.”- Attractive target market: There is a private equity funding gap in the $2 to $20M range is often referred to as the “Nano Gap.” This creates an attractive environment to acquire low cost, stable cash flow streams.- Valuations: Current trailing cash flow valuations are artificially low, incorporating weak 2008-10 operating results post credit crisis.- Buy and hold strategy: Equicapita does not use a traditional PE business model: acquisition, aggressive expansion capital, followed by exit.