Not So Loonie: Canada's CAI Capital Looks South For Growth

By Paul Ziobro

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CAI Private Equity

After nearly two decades cultivating a strong following from Canadian investors in the middle-market buyout space, CAI Capital Management Co. is having a coming-out party for the rest of the world.

Since 1990, CAI Capital has raised three funds, primarily from a core group of Canadian limited partners that includes corporate and public pension plans, banks and insurance companies. Its last partnership, CAI Capital Partners & Co. II LP, raised C$375 million in 2004, with three-quarters of the capital coming from inside Canada. The firm declined to discuss returns.

But as it targets C$600 million ($590 million) for its latest fund, CAI Capital wants to diversify its investor base outside of Canada, to both the U.S. and elsewhere, in order to build a broader base for fund-raising efforts in the future. It is hoping Canada's changing macroeconomics, as well as its own time-tested investing strategy, will prove enticing. The firm declined to comment on fund-raising.

While CAI Capital invests across North America, its roots are clearly in Canada. Some 65% of its deals have been done there, and it is one of the longest-standing players in the country, with deep ties to the Canadian business and financial communities from the top of the firm on down.

Its founding partners include David Culver, one-time chairman and chief executive of Canadian aluminum company Alcan Aluminum Ltd., Peter Restler, who once led Lehman Bros.' Canadian business, and Richard J. Schmeelk, former head of the global operations for Salomon Brothers Inc.

Those ties, as well as a network of former operating executives that CAI Capital taps into for advice and, at times, board representation on portfolio companies, have helped yield various proprietary deal opportunities. Its acquisition of Vista Midstream Solutions Ltd., which acquired and operated assets in the Canadian midstream natural gas industry, was sourced through the company's chairman, C. Kent Jespersen, an investor in CAI's funds and member of its investor network. More than 70% of the firm's completed deals come from non-competitive situations, said Peter Gottsegen, a founder and managing partner at CAI.

That percentage may rise further if the Canadian dollar continues to strengthen against the U.S. dollar, discouraging U.S. firms from chasing deals north of the border and allowing the firm's portfolio companies to pursue add-on deals of U.S. targets. The firm also thinks coming changes to the tax status of income trusts, a type of company that had been a source of competition for buyout firms in Canada, will leave the competitive field even less crowded.

These days, the firm believes its aversion to relying too heavily on debt also strengthens its competitive advantage. About 90% of CAI Capital's investments have debt-to-Ebitda multiples of less than three times, Gottsegen said, and its entire portfolio was leveraged at only two times Ebitda, or earnings before interest, taxes, depreciation and amortization, as of March 31.

Management teams like that strategy, as it means they can focus on growing a company without worrying too much about a heavy debt load. But it has cost the firm some deals in the recent past, as other, more aggressive bidders have bested it by offering bigger price tags funded by more debt. But in the current environment, with debt costing a pretty penny, CAI thinks the tables have turned.

"If you get all your attention from leverage and the market changes as it has, you have an arrow in your quiver but you already shot it," CAI Managing Director Tracey McVicar said. "You try to have more arrows in your quiver."

CAI Capital Management Co.

Investment Strategy
CAI Capital invests in middle-market companies with annual sales of at least $50 million and cash flow of at least $10 million. Typical investments are between $20 million and $75 million, and the firm frequently offers co-investment opportunities to limited partners.

The Early Days
In December 1989, CAI Capital's founders took control of Zenith Laboratories Inc., a generic drug manufacturer, out of bankruptcy, and six years later sold it to Ivax Corp., getting back over 30 times invested capital. The firm's first fund was raised in 1990.

Portfolio
Current investments include AeroSat Corp., a maker of antennas that enable television and high-speed Internet access on airplanes; GLM Industries LP, which designs tanks and other vessels used in the oil and gas industry; and Shred-Tech Corp., a maker of mobile document-shredding trucks.