September 9, 2013

Torquest on the Hunt With New Buyout Fund

U.S. private equity firms are all over Canada searching for deals, but the locals still feel they can beat them to the transactions they want.

Even better, when it comes time to sell, having that U.S. money here in Canada means a wider range of potential buyers.

"The U.S. guys are coming to Canada big time," said Brent Belzberg, founder and senior managing partner of TorQuest Partners, a Toronto-based firm that manages upwards of $1-billion in equity capital. "A lot of the mid-market trasactions have U.S. sponsors that are bidding on them. But they tend to buy things when we're selling as opposed to when we're buying."

Mr. Belzberg, one of the originals of the Canadian buyout scene, now has more money to put that theory to the test, having just closed a new $535-million buyout fund known as TorQuest Partners Fund III. The official announcement will be made on Tuesday.

The firm will be looking to put $15- million to more thatn $100-million of the fund's money into transactions, mostly in Canada.

TorQuest's fund would rank as one of the biggest raised in Canada in recent years, with only a handful of private equity funds topping the $500-million mark. Since 2011, only six Canadian buyout funds have raised more than that, according to figures from Thomson Reuters.

However it's no longer just Canadian firms scouring the mid-market in Canada for targets. U.S. firms such as WynnChurch Capital and Huron Capital Partners have opened offices in the country and are starting to put deals on the scoresheet. However, they are not yet sourcing deals on their own for the most part, industry observers say, instead relying on agents such as investment bankers to put up for-sale signs and run auctions.

For Canadian firms, "a lot of the time they have proprietary deal flow locally pretty much to themselves," said Kirk Falconer, derector of private equity research for Thomson Reuters in Canada and editor of peHUB Canada.

Mr. Belzberg says his firm usually see U.S. rivals at auctions. He says the U.S. buyout shops don't yet have the deep networks to unearth as many exclusive deals as the Canadians who have tilled this soil for years. He sees most of them when TorQuest is ready to sell.

"If we try and move up a level to bigger than we are, we're going to run into U'S' guys all the time," he said. "If we stay beneath them, at a level that allows us to remain in a space where the transactions aren't easily put in a book that can be sold by Piper Jaffray or Lazard, it's easier for us to buy them in Canada, and then build them and sell them to them [U.S. fund managers]."

TorQuest is in the process of finalizing the initial exits from companies in its second fund. Mr. Belzberg said that for two companies that TorQuest is in the process of selling, "both have a lot of U.S sponsor interest and both of them are Canadian deals."

The firm has agreed to sell foodmaker Associated Brands, which produces goods such as bouillon and gelatin, for $187-million to TreeHouse Foods Inc. Six years ago, TorQuest bought the company in the transaction valued at $45.7-million, according to Bloomberg.

Other coming exits from TorQuest II that are announced should yield "big numbers," he said.