The midmarket presents opportunities for buyers, says Karrin Powys-Lybbe in The Deal

Canadian Midmarket Defies Despair

January 26, 2009

A bright spot in the buyout world this year could turn out to be the Canadian middle market, where a relatively strong banking system and pending changes in corporate income tax laws are expected to boost deal flow.

The market for buyouts of less than C$500 million (US$400 million) has traditionally been fertile ground. Canadian private equity firms tend to be smaller than their U.S. and European counterparts. Due to Canadian banks' willingness to finance small, well-capitalized deals, that market segment will likely continue to percolate this year.

Market players conceded that it is more difficult to arrange financing than previously, though not as difficult as in the United States, as Canadian banks have so far weathered the financial crisis better than their southern neighbors. Canadian buyouts have historically been 52% leveraged, a far lower risk level than in U.S. deals—leading banks and buyout shops with more success structuring deals in difficult times.

"In prior years, there has been more capital available to help [distressed companies] keep on through rough patches," said Karrin Powys-Lybbe. "That isn't the case now, so we do think there will be some opportunities for good valuations for buyers."

Income trusts, which pay virtually no corporate income tax as long as they distribute profits to shareholders, are drawing interest. The Canadian government has said they will be taxed like other corporations as of Jan. 1, 2011. Many are too small to remain publicly listed companies, said Karrin.

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