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August 30, 2021
 
 
 
 
Ontario Teachers’ Karen Frank on PE in 2022, Goldman Sachs backs Hydrostor with $250m in funding, Sportscene shareholders OK take-private deal
 
 
 
 
Happy Monday! And a belated Happy New Year!

We’re back. The start of a new year is always exciting in the world of private equity, so let’s begin with a senior Canadian LP’s take on what we can expect to see in the market of 2022.

Last year’s PE market was scorching hot, as the pent-up energies of 2020 were unleashed in a post-covid frenzy of investing, Chris Witkowsky and I wrote for a Buyouts feature story this month. Dealmaking hit an all-time high in 2021. GPs competed fiercely for an expanded opportunity set. Fundraising broke records. LPs increased allocations and placed fresh bets, and dry powder rose to unprecedented levels.

Will the next 12 months see more of the same? Or will the spectre of inflation and rate hikes inject uncertainty? Will dealmaking roar on or will GPs instead exercise restraint? Will vigorous fundraising continue or will LPs pull back?

To help answer these questions and get further insights on the road ahead, Buyouts spoke to five prominent members of the PE community, among them Karen Frank, senior managing director and global head of equities at Ontario Teachers’ Pension Plan (pictured above). Below, I’ve provided a brief selection of Karen’s answers. I urge everyone, however, to read the story in full as we obtained terrific feedback from her and the other interviewees. Subscribers can read Buyouts’ story here.

Will PE dealmaking in 2022 match the robustness of last year?

Karen: Last year was a record year in terms of dealmaking, and private equity was a significant portion of that. I don’t see that ending as long as the markets hold out. I think that dry powder needs to go someplace, and so far we have a deal environment that’s very conducive to that. This is also an opportune time for companies and private equity to join into partnership and think about how they navigate the waters going forward. Some with a view to accelerating disruption in areas where they are strong, some with a view to shoring up balance sheets and making sure they’re well suited to weather the storms that may still come.

Will inflation or other economic factors impede dealmaking?

Karen: If you think about it from the pension fund perspective, and you think about the low-to-negative rate environment and now the prospect of inflation, those are both big impetuses for us to stay invested – particularly in real assets and businesses with pricing power that keep pace with inflation. So, I don’t see it necessarily as an abatement to the deal environment. I think the market adapts.

Will asset pricing trends result in GPs working harder to generate returns?

Karen: There’s no doubt that prices are increasing given competitive dynamics in the market. We always revert back to a foundation of value creation, saying we need to be in control and supportive of management and our partners about how we organically create value. One of the ways that we’re different from some funds out there is we’re long-term investors. Sometimes the value creation playbook is going to take longer to execute, sometimes you need to be nimble around that as market conditions change.

What do you expect the interesting deal opportunities will be?

Karen: We’re excited about tech enablement. Rather than looking exclusively at a piece of software or a digitized platform, we’re looking at companies and seeing where we can add those capabilities to take them on their journey and accelerate value creation. We think about technology not just as a standalone area of investment but as something that permeates all the sectors we find interesting.

Will the vigorous PE fundraising of last year continue into 2022?

Karen: As we make commitments to funds, a couple of things are happening. One is the mega-funds – they come back with bigger and bigger equity tickets. The reality for us is that to be able to continue to make those commitments we have to have an expectation of realization on the other side. Funds are also coming back faster and faster. They are segmenting their strategies, returning to the market with special sits, credit, growth, regions, etc. We try to approach that with prudence, saying we have to manage aggregate exposure and build a diversified book on our end.

As private equity supersizes, should it be more transparent?

I think all organizations have a duty of care to their stakeholders. You’re always going to have a bit of friction between seats on the LPAC, between the LPAC and the fund, on transparency of fees and expenses, etc. Historically, we’ve done well to choose our partners thoughtfully, and the way they interact with us is important. We’re on the right track but this idea of continuous improvement – being more transparent and involving us more – will hopefully be embraced.

Will private equity make new inroads on the ESG front in 2022?

Karen: For us, this has become a gatekeeping issue. E, S and G are all important to us. If we don’t have commitments or visibility on how either funds or portfolio companies are leaning in, it gives us real pause for thought. We have a lot of data points to realize that diverse organizations, ones that are aligned with ESG, deliver better and sustainable returns to their shareholders. Not every company, not every situation, will be on the same trajectory, but we expect positive movement toward each of these goals.

Is private equity doing enough to ensure diversity in its own ranks?

Karen: I joined an organization where I’ve been pleased at the commitment to diversity. Women, for example, are well represented on the board, the executive team, in asset group leadership and on the investment team. Private equity has been focused on getting bigger intake but has yet to see all forms of diversity, including at the leadership level. That will be something important for us to break through on a more industry-wide basis.

Will the energy transition be a larger priority in 2022?

Karen: We recently announced our commitment to net zero [in the portfolio by 2050, with 2025 and 2030 interim targets]. For us, it’s not about carbon-dumping. Some of the more recent investments we’ve made involved backing companies and management teams to help get to that transition. In terms of the ability of private markets to put weight behind the technologies and capabilities that will help us crack this problem, I think there is a real opportunity. The industry is evolving very quickly. The way private equity will engage in climate and energy transition is probably going to accelerate because those opportunities are becoming more clear and more accessible.

Canadian VC deal of the week: That would be the US$250 million ($316 million) preferred equity financing of Hydrostor, a Toronto-based provider of long-duration energy storage solutions. The funds raised, which will back development and construction of advanced compressed air energy storage projects in Australia and California and help grow Hydrostar's global project development pipeline, came from a high-profile source: Goldman Sachs. Three senior Goldman Sachs investment professionals will take board seats.

Hydrostor previously tapped venture capital funding from several investors, among them ArcTern Ventures, BDC Capital, Canoe Financial, Elemental Energy, Lorem Partners and MaRS Catalyst Fund. All remain shareholders. See Venture Capital Journal’s news brief here.

Canadian PE deal of the week: Shareholders of Sportscene Group overwhelmingly approved the Boucherville, Quebec-based restaurant company’s going-private transaction, Sportscene said this week. That means the deal, earlier announced at a $51.25 million value, should close on or around January 17. Sportscene is being privatized by President and CEO Jean Bédard and a consortium of Quebec investors led by Champlain Financial Corp.

Bédard in November said the deal came “eighteen months after the start of the worst crisis ever to affect the restaurant industry” and will allow the business to simplify operations and better pursue implementation of its pre-pandemic strategic plan. Check out PE Hub’s news brief here.

 
 
 
Top Scoops
 
Fund terms and conditions in 2022: All signs point to a more challenging fundraising environment this year, with faster fundraising cycles and supersized mega-offerings, Private Equity International's Carmela Mendoza wrote this week. Are there going to be shifts in fund terms as 2022 progresses?

Mendoza provides a round-up of factors that could shape fund terms in the year ahead, based on recent reports and the views of market participants. They are: (1) higher GP commitments (2) a shift in the power balance to LP on fees and terms (3) in a crowded market, more “military precision” on the part of GPs in their rollouts of new funds (4) and more LP protections in first-time vehicles. Subscribers can read Private Equity International’s story here.

Seed is the new Series A: Every venture capital firm is a seed investor these days, or so it seems, Venture Capital Journal's Alastair Goldfisher wrote this week. Mega-funds, and the late-stage tech companies they usually back, are capturing the attention. But seed-stage investing is bustling and there’s no slowdown in sight.

Goldfisher highlights factors driving the trend. They are: (1) The cost of launching startups has dropped, making it easier for them to get going with only seed VC provided by multiple sources (2) big VC funds are making earlier bets and writing larger cheques, giving rise to the expression “Seed is the new Series A.” (3) this downstream movement is flooding the space with capital (4) and veteran seed funds retain a competitive edge over newcomers. Subscribers can read Venture Capital Journal’s story here.

That’s it. Have a great day! Please get in touch with me with your feedback, story ideas, tips, etc., at kfalconer@buyoutsinsider.com or find me on LinkedIn .
 
 
 
 
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