Private equity financial buyers on both sides of the border are poised to emerge from their long slumber. Financial buyers have been forced to the sidelines in the last two years, largely as a result of the scarcity of debt financing. There are strong signs that the Canadian and U.S. debt markets are back, and private equity players have begun to secure loans for their portfolio company acquisitions. Rates are higher and the quantity of debt may be reduced, but debt is now available to facilitate completion of deals. Given the more pronounced easing of credit conditions in Canada, coupled with the relatively stable state of the Canadian economy, we expect that Canadian targets will be of particular interest to both Canadian and U.S. private equity buyers in 2010.
Against this positive backdrop, the private equity buyout market continues to face headwinds. For many companies that don’t need to sell, there remains a disconnect between seller and buyer on the most important deal term: valuation. Sellers regard the recent stock market and economic rebound as a sign that the “good ol’ days” are back and have used that performance to convince themselves that their businesses should now command premiums near those available in 2007 (the top of the cycle). Private equity buyers are taking a more cautious approach and are very concerned about earnings visibility; they don’t want to buy an earnings stream that is fraught with uncertainties, and they are particularly worried that the current recovery may be transitory. This disconnect could either result in the use of mechanisms (such as earnouts, multiple-stage closings or guaranteed exit mechanisms) to bridge the gap or slow the re-emergence of private equity buyers until convincing evidence appears to resolve the debate.