The Not-So-Far North
Friday, July 11, 2008
Peter Gottsegen helped found CAI Private Equity in 1989. The firm focuses on North America, with Canada being a particular area of expertise. CAI uses personal relationships to attain favorable deals in Canada and uses its U.S. connections to help Canadian companies expand. Gottsegen talked to PrivateEquityCentral about why his firm's Canadian focus is so beneficial and how some ongoing rule changes concerning income trusts up North are affecting business.
PrivateEquityCentral: Can you tell us a little more specifically how your firm's geographic focus works?
Peter Gottsegen: I think about 60% to 65% of our deals have been in Canada with the balance in the U.S. What we try to focus in on is areas in which we have particular knowledge, and where we have relationships. Both of those things give us an edge in making money for our investors. In Canada we have particular knowledge and experience from some of the people that are involved with the firm. A couple of our founding partners had extensive knowledge and experience in Canada. And we have three offices — one in Toronto, one in Montreal, and one that we opened in Vancouver about six years ago. We've been doing a lot of deals out west. I think what the knowledge does for us is it helps us to understand the fabric of the country and the various communities. It's much more regional up there than it would be down here. Having people on the ground, we're able to find transactions and execute those transactions.
In the U.S., we focus in on healthcare and aviation, where we have some particular experience and particular relationships. That does the same thing — helping us to find the deals and execute once we find them.
PEC: Your firm has a policy of not using a lot of leverage in your deals. How do you manage that?
PG: That comes back to the relationships. In Canada in particular the price is not always the determining factor in a family selling a business or an entrepreneur selling a business. In many cases they want to know that the reputation of the company is going to be maintained, or that the management that will be left behind will be treated fairly, and that the company will be able to grow and be successful. Because of the relationships that the individuals, the founding partners and some of the young people we have working in the Canadian offices have been able to do is go out and speak to those people. Sometimes a deal might take three or four years to get done, but if you can establish the right kind of relationship with the seller and they think you're going to be able to continue on and grow the business then you can buy it at a favorable price. We try to buy at a reasonable price. The other thing it allows you to do is to do your due diligence over a long period of time. In an auction situation, where people are pushing the price and it's competitive, we just have not been very good in that. That's because we like to buy at a reasonable price and we're not really highly leveraged.
PEC: How does the rule change regarding income trusts in Canada affect your business?
PG: The last deal that we did was a large one. If it wasn't the largest management led buyout in Canadian history it was certainly among the top few. I think it was the largest income trusts going private. It was called CCS, and it had a total enterprise value of (CAN) $3.8 billion. We completed that transaction in November. We did it with Investar, Kelso and Goldman Sachs. The founder and CEO of the company also rolled over $500 million of his stock into the transaction. So we've had some experience on the income trust side. We think it's going to be a great opportunity for private equity firms in the future. The minister of finance said on Oct. 31, 2006 that no new income trusts would be permitted, that existing income trusts would be limited in the amount of capital they could raise in the capital markets, and by 2011 all income trusts would have to convert to some other form. Initially people thought there would be a big rush of income trusts converting, and it didn't really happen. Then people thought maybe the rules would change. There wasn't as much activity as everybody thought. But two things have happened: The income trusts were run to generate cash so the cash could be distributed to their owners. With the new rules they can't get capital and expand their business.