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Barriers to Private Equity Investment in Small and Medium-Sized Businesses Summary of Discussions

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Barriers to Private Equity Investment in Small and Medium-Sized Businesses Summary of Discussions Barriers to Private Equity Investment in Small and Medium-sized Businesses Summary of discussions April 2019 Table of contents 1. Context 2 A strong increase in the number of ownership transitions 3 Is there a shortage of capital for small private equity deals? 6 Questions discussed at the roundtables 7 2. Summaries of roundtable discussions 8 To what extent is there a shortage of institutional capital for small PE funds? 8 Is demand for small PE investments rising due to ownership transitions? 8 Are there unmet needs at the lower end of the PE market? 9 Are pledge funds and search funds a default solution or the right answer? 9 How important are investment readiness and matchmaking? 11 Could minority investments be part of the solution? 11 Are there different needs for capital between regions? 11 Appendix 1: Roundtables participants 12 1. Context In the summer of 2018, BDC partnered with the Canadian Venture Capital & Private Equity Association (CVCA) to organize three industry roundtables to assess unmet needs for private equity (PE) investments among small and medium-sized businesses and how BDC might help to address these needs. The meetings in Calgary, Toronto and Montreal were held in the context of demographic and industry trends that may be leading to a shortage of PE for small to medium-sized businesses. Over the last two decades, the Canadian private equity (PE) market for growth capital and buyouts has grown appreciably in terms of number of deals, amounts invested and the number of active Canadian and foreign funds (See Graph 1). Returns from this asset class have been very positive,1 leading to a steady increase in fund size and number of funds raised. Graph 1: PE investment activity in Canada, 2001–2017 Graphique 1 : Activité du marché canadien $ in billions, number of PE deals du capital-investissement (CI), 2001-2017 en milliards de $, nombre de transactions de CI 35 Deal value 33.7 31.1 Deal count 500 450 35 Valeur de la transaction 33,7 31,1 Nombre de 500 30 28.2 transactions 400 450 30 28,2 25 24.2 350 400 24,2 300 25 350 20 18.6 15.9 17.7 300 250 20 18,6 15,9 15 12.8 17,7 12.8 200 250 10.0 11.8 10.9 10.5 15 12,8 12,8 200 10 150 10,0 11,8 7.9 10,9 10,5 6.0 100 150 5.3 10 7,9 5 3.4 50 5,3 6,0 100 5 3,4 0 0 50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Note: Canadian PE includes the following types of deals: control stake, minority stake, add-on, mezzanine, private investment in public equity, restructuring and other. The number of PE deals Remarque : Le capital-investissement (CI) canadien comprend notamment les types de transaction suivants : includes disclosed and undisclosed deals. participation de contrôle, participation minoritaire, acquisition, mezzanine, investissement privé dans des Source: Thomson Reuters. sociétés ouvertes, restructuration. Le nombre de transactions de CI comprend les transactions divulguées et les transactions non divulguées. Source : Thomson Reuters. While the global financial crisis of 2008–10 badly hurt the PE market, it has recovered well in recent years with the numberGraph of deals 2: Age and distribution amounts invested of SME increasing owners insignificantly Canada, 2014 between 2013 andGraphique 2017. 2 : Répartition par âge des propriétaires Despite this strengthening,% of survey some respondents observers believe there continues to be unmet needs for PEde at PMEthe au Canada, 2014 lower end of the market due to the following factors. % des répondants au sondage 47.5% > An expected strong increase in ownership transitions should raise demand for growth equity and 47,5 % buyout investments, especially among small businesses. > Institutional investors appear to be withdrawing 26.1%from smaller PE funds because these investments 26,1 % are not large enough to meet their requirements. This may be reducing the supply of capital for 12.7% 11.8% smaller deals. 12,7 % 11,8 % 1.9% 1,9 % <30 30-39 40-49 50-64 ≥65 <30 30-39 40-49 50-64 ≥65 Source: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises (Ottawa: Statistics Canada, 2014). Source : Statistique Canada, Enquête sur le financement et la croissance des petites et moyennes entreprises (Ottawa : Statistique Canada, 2014). 1 According to the latest available data from Thomson Reuters, as of June 30, 2013, the 10-year horizon return was 14.8% for Canadian private independent buyout and mezzanine funds, and 10.9% for U.S. buyout and mezzanine funds. 2 Graph 3: Intention of Canadian SME owners Graphique 3 : Intention des propriétaires canadiens to exit their business within 5 years, 2004–2017 de PME de quitter leur entreprise d’ici 5 ans, 2011-2017 % of survey respondents % des répondants au sondage 49,3 % 49,3 % 37,7 % +11.6% 37,7 % +11,6 % 2011 2017 2011 2017 Note: Exit is defined as selling, transferring or winding down a business. Remarque : « Quitter » signifie vendre, transférer ou fermer l’entreprise. Sources: CFIB, Passing on the Business to the Next Generation (Ottawa: CFIB, November 2012); Sources : FCEI, Transfert de l’entreprise à la prochaine génération (Ottawa : FCEI, novembre 2012); BDC, The Coming Wave of Business Transitions in Canada (Montreal: BDC, 2017); and BDC, What Do Buyers BDC, Vague de transferts d’entreprise en vue au Canada (Montréal : BDC, 2017); BDC, Que recherchent les Look for When Purchasing a Business? (Montreal: BDC, 2017). acheteurs de PME canadiennes? (Montréal : BDC, 2017). Graph 4: Intention of Canadian SME owners to sell Graphique 4 : Intention des propriétaires canadiens de PME their business to non-family members, 2004–2017 de vendre leur entreprise à des personnes extérieures % of survey respondents à leur famille, 2011-2017 % des répondants au sondage 52,2 % 48,1 % +4.1% 52,2 % 48,1 % +4,1 % 2011 2017 Sources: CIBC, Are Canadian Entrepreneurs Ready for Retirement? (Toronto: CIBC World Markets, 2005); 2011 2017 CFIB, Passing on the Business to the Next Generation (Ottawa: CFIB, November 2012); BDC, The Coming Wave of Business Transitions in Canada (Montreal: BDC, 2017); and BDC, What Do Buyers Look for When Sources : CIBC, Are Canadian Entrepreneurs Ready for Retirement? (Toronto : CIBC World Markets, 2005); Purchasing a Business? (Montreal: BDC, 2017). FCEI, Transfert de l’entreprise à la prochaine génération (Ottawa : FCEI, novembre 2012); BDC, Vague de transferts d’entreprise en vue au Canada (Montréal : BDC, 2017); BDC, Que recherchent les acheteurs de PME canadiennes? (Montréal : BDC, 2017). Graph 5: Business transition strategies of Canadian Graphique 5 : Stratégies de transfert d’entreprise SME owners, 2017 des propriétaires canadiens de PME, 2017 % of survey respondents % des répondants au sondage 8.3% 8,3 % 33.1% 33,1 % 32.3% 32,3 % 20.8% 20,8 % 59.4% 59,4 % 46.1% 46,1 % <5 ≥5 <5 ≥5 employees employees employés employés Wind down/sell assets Fermeture/vente des actifs Family succession Relève familiale Sale/transfer outside family Vente/transfert à l’extérieur de la famille Sources: BDC, The Coming Wave of Business Transitions in Canada (Montreal: BDC, 2017); and BDC, Sources : BDC, Vague de transferts d’entreprise en vue au Canada (Montréal : BDC, 2017); What Do BuyersLook for When Purchasing a Business? (Montreal: BDC, 2017). BDC, Que recherchent les acheteurs de PME canadiennes? (Montréal : BDC, 2017). Graph 6: Average yearly growth in sales/revenues Graphique 6 : Augmentation annuelle moyenne for Canadian SMEs, by age of owner, 2014 du chiffre d’affaires des PME canadiennes, selon l’âge % of survey respondents du propriétaire, 2014 % des répondants au sondage 10.0% 7.7% 5.8% 16.3% 26.8% 10,0 % 7,7 % 5,8 % 16,3 % 26,8 % 55.7% 59.7% 65.0% 55,7 % 62.7% 59,7 % 49.1% 65,0 % 62,7 % 49,1 % 38.5% 32.7% 24.0% 21.0% 25.0% 38,5 % 32,7 % 24,0 % 21,0 % 25,0 % <30 30-39 40-49 50-64 ≥65 High growth (≥ 20%) <30 30-39 40-49 50-64 ≥65 Sustained growth (19% to 1%) Croissance élevée (≥20 %) Weak growth (<1% or negative) Croissance soutenue (de 1 % à 19 %) Note: The growth rate shown is the average annual revenue growth rate over the preceding three-year period. Faible croissance (<1 % ou négative) Source: Statistics Canada, Survey on Financing and Growth of Small and Medium Enterprises Remarque : Le taux de croissance indiqué est le taux de croissance annuel moyen du chiffre d’affaires (Ottawa: Statistics Canada, 2014). par rapport à la période précédente de trois ans. Source : Statistique Canada, Enquête sur le financement et la croissance des petites et moyennes entreprises (Ottawa : Statistique Canada, 2014). Graph 7: Canadian PE fundraising, by size, 2006–2016 Graphique 7 : Taille des levées de fonds pour % of number of funds raised les fonds de CI canadiens, 2006-2017 % du nombre de fonds 7% 9% 7% 8% 8% 14% 13% 11% 7% 17% 7 % 9 % 7 % 8 % 8 % 8% 8% 27% 14 % 13 % 11 % 31% 7% 11% 7 % 17 % 18% 8 % 8 % 14% 27 % 31 % 7 % 11 % 17% 17% 18 % 14 % 38% 53% 27% 33% 22% 17 % 17 % 14% 18% 38 % 53 % 27 % 33 % 22 % 17% 14 % 18 % 31% 17 % 31 % 13% 27% 73% 25% 13 % 13% 67% 44% 27 % 57% 73 % 25 % 53% 50% 13 % 67 % 44 % 9% 57 % 38% 38% 53 % 50 % 9 % 27% 25% 38 % 38 % 18% 11% 27 % 25 % 18 % 11 % 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 ≥$5 billion $250 million to $499 million 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $1 billion to $5 billion $100 million to $249 million ≥5 milliards $ De 250 à 499 millions $ $500 million to $999 million <$100 million De 1 à 5 milliards $ De 100 à 249 millions $ Source: PitchBook, 1H 2018 Canadian PE & VC FactBook (Seattle: PitchBook, 2018).
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