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Private Equity – What and Why

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According to the Canadian Venture Capital and Private Equity Association (CVCA), $194.6 billion in private equity dollars have been invested into 3,138 Canadian companies since 2013. That has a significant impact on our economy. Private capital boosts productivity, incentivizes competition, and produces quality, high-paying jobs, reinforcing a solid economy. As we emerge from a global pandemic that stressed every industry worldwide, we need more of this growth.

Private equity (PE) is a type of financing whereby an investment is made by a PE firm into a company in the form of patient capital.  This drives growth, new jobs and thereby increases the business’ value and positions the PE firm, founders, and management to exit in the future at the appropriate time. It’s a win-win scenario.

Grant Kook is the founder, president and CEO of Westcap Mgt. Ltd., a venture capital and private equity fund manager that has invested in more than 200 growth companies over the past three decades. He notes, “Private equity is more than investing valuable capital into a company, it is also adding the expertise that will help management teams to enhance productivity, drive innovation and growth, and create new positions and jobs.” 

PE firms create a fund by raising capital through investments from limited partners (LPs), which are accredited institutional investors—such as pension funds, credit unions or banks—and high-net-worth individuals. Once the PE firm has raised the pre-determined fund amount, that capital is invested into a portfolio of promising companies using various flexible investment strategies that meet each company’s needs. 

Whereas venture capital targets promising start-ups, PE firms aim for more established companies with potential for significant growth through new sales channels, product expansion, or consolidation. “Private equity money goes towards these activities, and then we layer on top of that expertise of the private equity firm, its high-net-worth investors and leadership teams from the fund’s total portfolio,” says Kook. “We don’t run the companies we invest in. We support the management teams. We invest in people.”

The goal of PE investment is achieving a positive return on investment (ROI) after several years (between five to 12, typically), and having an aligned exit strategy with management that creates a profit for the investors and succession timelines for the founders of the business. 

A 2021 report by Deloitte estimates that globally, PE assets under management will reach $5.8 trillion by 2025. PE offers an effective growth vehicle for businesses, particularly small and mid-sized enterprises (SMEs) and contributes to job creation overall. Kook points out that, “Private equity capital is fueling job growth as over sixty-five percent of all private equity deals in Canada are under $25 million, directly impacting small and medium-size enterprises. These small and medium-size enterprises make up ninety percent of Canadian businesses and furthermore support eighty-five percent of all job growth in Canada.” 

In 2021, the CVCA also released that PE investment across Canada totaled $18.1 billion and included 799 total deals. Six were made in Manitoba, accounting for $96 million. Since 2013, 82 companies in the province have received $1.7 billion in PE dollars.  Although there is private equity activity in Manitoba, it ranks the lowest in Western Canada.

To understand the bigger picture, Kook explains that the development of a province’s capital ecosystem is very important. “You must have an ecosystem that covers investment at all stages—including entrepreneurial training, early-stage, venture growth and private equity funds investing—or the ecosystem breaks down. This takes time and a commitment by government, but it can happen.”

In its Spring 2022 Provincial Budget, the Manitoba government announced $50 million to privately managed venture capital funds and incentivized further venture capital investments in the province with enhancements to the Small Business Venture Capital Tax Credit. While the rollout of this has yet to occur, this policy will dramatically influence the province’s overall private capital investment scene. Kook agrees. “Manitoba appears focused on building this capital ecosystem right now. They recognize it is important and there are gaps to be filled. It’s the right thing to do.”

The Conference Board of Canada predicts Manitoba’s economy will expand by 5.4 percent in 2022 and by another 3.0 percent in 2023. It also notes that with current employment at pre-pandemic level, this will likely rise as more industries gain traction. Increased investment in Manitoba such as this, including venture and private equity capital, will further drive positive impact to Manitoba’s businesses and in turn job growth into the future.

Grant Kook, founder, president, CEO and chair of Westcap Mgt. Ltd. Photo by Shane Luhning.

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