With the IPO market dormant and income trusts in disarray, Canadian law firms are competing madly for the private-equity work that has dominated market activity recently.
But there’s so much cash around that the competition for the good deals among the private-equity firms themselves is equally competitive.
“This is an industry that watches every cent,” says Stephen Donovan of Torys LLP. “So if a deal doesn’t get done, you kind of have to take a partnership approach with the client and work out something that involves the next deal that gets done.”
In other words, no big bucks if a deal falls apart after you’ve put hours into it. Most of the time, though, the payoff’s worth the wait.
“It’s a very lucrative area because it’s so hot, the timelines are so tight, and there are both public and private considerations,” says Perry Dellelce of Wildeboer Dellelce LLP, a Toronto corporate-finance and M&A boutique, “Frequently, there are also cross-border issues, taxation problems, employment considerations, and the prospect of litigation.”
According to Rick Nathan, a managing director of Kensington Capital Partners and president of the Canadian Venture Capital Association (CVCA), there are three sources of private-equity deal flow in Canada: megadeals, mid-market, and Canadian subsidiaries of U.S. companies that want independence from their parents.
“The biggest and most important source of deal flow is the mid-market,” says Nathan.
Crosbie & Co., which publishes general Canadian M&A statistics, defines the mid-market as transactions up to $100 million. While these occupy 70 per cent of deal totals, they engage only 10 per cent of total deal value. Megadeals over $1 billion are a mere three per cent of deals, but 67 per cent of deal value. Deals in the $100- to $500-million range account for 10 per cent of deal totals and 24 per cent of deal value.
While Crosbie’s numbers reflect the overall M&A market, the private-equity figures are probably in line. CVCA’s figures indicate that 73 per cent of buyout investments came from U.S. funds in 2006. Because the megadeals tend to be funded abroad, this statistic suggests that the overall 67-per-cent proportion of megadeals for M&A in general is not far off the mark for private equity.
The megadeals, Nathan notes, are as always the province of the major firms. In this regard, Thomson Financial’s 2006 ranking of law firms by reported Canadian private-equity transactions is instructive.
Among Canadian firms, McCarthy Tétrault LLP ranked first in total deal value, with nine deals averaging $1.23 billion. “We have 40 lawyers across Canada who spend a good portion of their time in the private equity space,” says Ian Palm of the firm’s Toronto office.
Goodmans LLP was first in average deal value and second in total deal value, with six transactions averaging $1.43 billion. Blake Cassels & Graydon LLP and Stikeman Elliott LLP tied for first in number of transactions at 11, with Blakes average deal at $685 million compared to Stikeman Elliott’s $633 million. Davies Ward Phillips & Vineberg LLP acted on five transactions that averaged $655 million. Goodman & Carr LLP and Ogilvy Renault LLP each had one transaction, with values of $4.74 billion and $2.16 billion, respectively.
In total, Canadian firms had 44 mandates worth $44.4 billion, for an average transaction value of $1 billion. All but the now-defunct Goodman & Carr are major M&A firms.
If G&C’s single $4.74-billion deal is removed from the mix, the average falls to $922 million. A fair inference from the figures is that most of the mandates exceeded $500 million in value, and that transactions upward of that figure represent the high-end of the market for lawyers interested in their fair share of fees from the public equity bonanza.
But the 44 deals in Thomson’s survey falls significantly short of the 90 private-equity buyouts, with a total value of $10.9 billion recorded in Canada in 2006 - which means there are a fair number of deals in the mid-market range.
So which law firms are profiting from the mid-market deals?
“The winners in private equity are not limited to the usual suspects,” says Nathan. “Some of the mid-size firms are strongly positioned and have a whole network of relationships with the types of business looking to be bought out.”
Among them are Aird & Berlis LLP, Cassels Brock & Blackwell LLP, and WeirFoulds LLP.
“The heart of the private equity sector is in the mid-market, which is in the range of $100 million of transaction value,” says Tony Gioia of Aird & Berlis. “That’s been our focus for a long time and we’ve had at least 20-per-cent growth since the beginning of 2004.”
To some extent, however, these firms face a conundrum: they may not be competing with the megafirms, but the megafirms are starting to compete with them.
“We’re seeing more and more of these large firms in the mid-market, even though they claim not to compete with us,” Gioia says. “What this tells me is that the megadeals don’t put numbers up on a recurrent basis. It also tells me the big firms realize that this sector is still in the greenfields stage and that it has a big future.”
Donovan sees the mid-market as an economic necessity. “There just aren’t enough big deals to sustain the deal flow a large Canadian firm needs,” he says.
And John Leopold of Stikeman Elliott LLP is even more emphatic. “The Canadian mid-market is $100 million to $400 million. “That’s where the big activity is and that’s where our sweet spot is, even though we get a large chunk of the megadeals.”
Not all mid-market transactions are appealing to the large firms, however.
“Private transactions are very sophisticated transactions where the bills can add up very quickly,” says Leopold. “So we look at mandates on a case-by-case basis, and we won’t do it where it doesn’t make economic sense for us or the client.”
But they may make economic sense to Aird & Berlis, or national firms like Heenan Blaikie LLP or Gowlings, whose M&A departments don’t have quite the reputation shared by the top-tier business law firms.
“On virtually all private equity deals in the mid-cap range, you see a mid-size firm on for the target and you might also see them on the buy side where the acquisition money is Canadian,” says Mark Trachuk, head of Osler Hoskin & Harcourt LLP’s corporate group. “Smaller firms are going to be more active in this market because deals under $500 million are their bread and butter.”