Braham Moondi:
Hello, everyone.
Welcome to our inaugural episode of Market Pulse, where we invite a leader in the private equity ecosystem to share their thoughts on current market activity. I'm your host, Braham Moondi, national leader of BDO Canada’s private equity practice and assurance. I have the pleasure of being joined today by a well-known name in the PE community, Kim Furlong. Kim is the CEO of CVCA and has had a distinguished career offering a unique combination of government, corporate, and trade association experience. Kim is an advocate for the best investment policy environment, and I'm delighted to have her here today to share her thoughts on what is top of mind in the PE community. So welcome, Kim.
Kim Furlong:
Hello, friend. Thanks for having me.
Braham Moondi:
It's a pleasure. We'll jump right into the questions here. I know I have a couple burning ones myself. There’s been a lot of conversation about market uncertainty, the impact of rising interest rates, etc. And of course, the results of this were highlighted in CVCA’s H1 2023 report as well. What are your thoughts on the PE deal activity at the moment? Are you worried?
Kim Furlong:
I'm not worried. I'm not worried because every market has opportunities and downsides. This market, even though we saw definitely a slowdown in the number of deals that took place in the first half of this year, when you look at 2021 and 2022, it was... you’re a service firm so you know how busy it was. The amount of activity in the two previous years was unparalleled. So I think we're going back to kind of a sense of normal, potentially even below a normalcy line. People are holding onto their capital. There was a sense at the beginning of the year that they wanted to see a readjustment evaluation. And I think that's currently happening. So for the people that have funds right now and are sitting on capital, they’re waiting for some opportunities. And what you don’t see in our H1 report is the amount of capital that they are putting into their current holdings. So reinvesting in current assets that they have in their portfolio. So all around, I see a lot of activities. I speak to a lot of people in the industry. People are less busy and they’re, you know, to a certain extent happy about that, but very positive about the opportunities ahead of them. Now we can talk about the economy, but in terms of opportunities, they’re very bullish that there are great companies to be partnering with.
Braham Moondi:
No, I totally, totally agree with you. The 2021-2022 vintage was completely unprecedented. But I don’t think that's the right comparison.
So as a follow-up, you mentioned that firms are waiting, holding onto and looking for some good assets, but outside of deal flow, what do you see PE firms focusing their efforts on during this time?
Kim Furlong:
I think people are looking at their current portfolios. They’re looking at acquisition opportunities. I always like to think that, you know, when there’s a period where there’s going to be a lot of M&A, we should be the ones buying and not the bought. So creating some scale in the holdings that they have in their PE portfolios. They’re looking at efficiencies. They’re certainly looking at operational efficiencies as we anticipate a continued slowdown in the economy as the interest rates have their impact and is felt by the real economy. It takes about 14 months every time the Bank of Canada increases the rates for the real economy to feel the impact at that rate. So everyone is cautious and everyone is really focused. Laser focused on their operations.
Kim Furlong:
Exactly. Not a bad thing at all. In terms of any sectors that are coming up as perhaps the winners in terms of deal flow and activity. Any comments to share there? What are your thoughts in terms of trends?
Kim Furlong:
Well, the trend that really has taken off in the last three years is a displacement of manufacturing as the top asset and top vertical and where PE’s putting dollars, and it’s been displaced by ICT throughout 2021, 2022, and this year, clean tech has seen some significant investment. So if your audience goes to the CVCA reports, they’ll see that clean tech and ICT lead the pack followed by manufacturing. And you know, that’s not surprising because there’s great opportunities in those sectors.
Braham Moondi:
Exactly. And we’re seeing a couple of PE firms specializing or creating special streams for ICT as well, which is what the market is kind of asking for. Now, shifting focus a little bit, a lot of changes are happening in the industry. There’s a lot of changes coming up or being talked about in the regulatory environment as well. Conversations about ESG, perhaps. Any comments? What does it look like for the industry in the next 6 to 12 months?
Kim Furlong:
I think you touched on ESG. ESG is something that was bubbling up five years ago as a trend word and now it’s no longer a trend word. It’s actually actionable, measurable actions that our PEs have to consider in implementing their investments. And the reason that they have to be so mindful of it is DLP. The DLPs that deploy capital into their funds are expecting them to report on significant metrics when it comes to their carbon footprint, governance, and DEI. And that’s part of what CVCA does, helping them, giving them resources. We have the BIPOC internship and really trying to change the landscape of the talent that enters the industry and how they tackle the challenges of reporting because it’s not easy to implement.
Braham Moondi:
No, there’s the data aspect of it, the tracking aspect of it. It’s a huge lift for sure.
So, Kim, we talked a little bit about the regulatory environment, the changes that are coming in, but taking a little bit of a step back and talking about the economy as a whole. There’s been conversation about private equity here and there, but really it’s coming up center in the Canadian economy. Can you talk a little bit about how influential private equity is for the Canadian economy?
Braham Moondi:
Braham, it’s so important and it’s actually, our investors know how important it is, the companies that they invest in know how important it is, and the people that surround the industry understand its importance. But I would argue that a lot of people have misunderstandings about the industry. People will think that it’s about distressed assets or loading a company with debt and trimming the fat. In Canada, 66% of all investments that our members do are below 25 million. They go to small and medium-sized enterprises, where there’s no fat. It’s all growth capital. It is partnering with an entrepreneur who has built a solid business that has room for growth, potentially giving them an avenue for retirement if the kids do not want to take over the family business and choosing the right firm, choosing the right PE investor, that has a joint vision, a shared vision of that growth and in building the company to different sizes, there’s certainly an exit in the horizon. And you spend a lot of time talking to folks in Ottawa, especially, about how important it is to companies across the country, ridings across the country, and supporting communities, creating jobs, productivity gains. So all around, a really important part of Canada’s GDP growth, one that’s not as well understood as I would wish. But hopefully, people will pay a little bit more attention and understand its importance as they dig a little bit deeper into what’s happening in this asset class.
Braham Moondi:
No, for sure, the demystification of private equity is so, so important. I read a stat somewhere that said by 2027, one-third of Canadian GDP is going to be private equity-backed. And that’s a mix of the demographic shift, the wealth transfer shift that’s happening in Canada, and also the enormous amount of dry powder that’s available to private equity.
Kim Furlong:
And I would add, Braham, that it is the backbone of Canadian pensions.
Braham Moondi:
Exactly.
Kim Furlong:
You’re a teacher. If you’re a firefighter, if you have a fully defined pension, private equity is driving the returns that will enable you to retire.
Braham Moondi:
Exactly.
And well, that’s all the time we had for today’s episode, but this was absolutely a pleasure for us. Kim, thank you so much for joining us today. It was amazing. And thank you to all of our viewers today for joining. Tune into our next session in December where we wrap up 2023.
Kim Furlong:
Goodbye.