How Does Private Equity Work?
The active management that a private equity partnership brings to its portfolio companies helps them to become more successful businesses with stronger, more sustainable futures.
Canadian Private Equity At Work
On December 1, 2020, CVCA shared the results of a new study on the economic impact of private equity in Canada. The Study was based on findings from PwC Canada and was commissioned by the CVCA. The study demonstrates that, in partnership with founders and management teams, PE funds have a significant positive impact on investee companies, particularly through employment growth, capital investment and productivity gains.
According to CVCA Intelligence, over 65% of PE transactions in Canada are under CAD $25M, highlighting the direct connection between Canadian PE investment and Small and Medium-Sized Enterprises (SMEs). SMEs are the backbone of the Canadian economy and according to Statistics Canada, supports over 85% of all new jobs across the country.
The majority of investors in private equity funds are pension plans and other institutional investors. The success of these investments provides income security and supports the retirement ambitions of Canada’s middle-class which include Canadian teachers, first responders, and autoworkers.
Private Equity’s Impact: Key Findings
The PwC Canada study demonstrates that private equity is a long-term partnership with the aim of making Canada’s small and medium-sized companies bigger, stronger and more profitable. Private equity partners with companies with a strong track record of revenue growth, but lower profitability and capital spend levels that provide headroom to increase.
Following the private equity investment:
- Employment Growth: The investee companies experience employment that significantly exceeds those seen in benchmarks.
- Capital Investment: Investee companies tend to increase capital spending.
- Revenue Growth: PE-backed companies maintain strong levels of growth in revenue.
- Profitability: Non-PE-backed companies fared worse than PE-backed companies; pre and post-deal.
- Productivity: PE-backed companies encounter strong growth in productivity post-investment.
EMPLOYMENT GROWTH
Employment growth at PE-backed companies was three times greater than non-PE backed equivalents. On a cumulative basis, the typical PE-backed company added almost one quarter (24%) to its headcount in the three years post-investment.
CAPITAL INVESTMENT
Capital investment, as a share of revenue, rose by 75% in PE-backed companies post-deal, significantly faster than non-PE backed benchmarks.
REVENUE
Revenue in PE backed companies maintained double digit growth post-investment (averaging 10.9% per annum), which is significantly higher than non-PE backed benchmark companies.
PROFITABILITY
Profitability in PE-backed companies was higher than equivalent-sized companies listed on the TSX
PRODUCTIVITY
Productivity in PE-backed companies experienced over twice the rate of productivity growth in the 3 years following the initial PE investment.
Private Equity: A Significant Driver of Growth For Canadian SMEs
The full report contains background, key findings along with data tables, case studies, and detailed methodology.
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