PE: Poised to perform

Iain Munro, Director and Head of BMO GAM Private Equity (PE), North America, shares his insights on the attractive opportunities available now for PE investors – and how to access them through a multi-dimensional, lower-risk strategy that delivers outsized returns.
January 2021

Iain Munro

Director, Private Equity, BMO Global Asset Management – Canada


Iain Munro, Head of BMO Global Asset Management Private Equity (BMO GAM PE), North America, shares his insights on the attractive opportunities available now for PE investors – and how to access them through a multi-dimensional, lower-risk strategy that delivers outsized returns.

Value in the vintage

While the pandemic effectively ground M&A transactions to a halt last March, private equity (PE) activity is picking up again as the industry continues to adapt to the evolving conditions – finding value despite the economic uncertainty. PE firms are actually expected to pursue a record number of deals in 2020: through mid-November, investors announced nearly 4,100 deals, up 5% from all of 2019.1 Since then, the long-term outlook has only become clearer, with the promise of vaccines and increasing certainty in U.S. politics.

The fact remains that there continues to be an abundance of companies with robust fundamentals and stable balance sheets that are poised to experience solid growth once the vaccine is widely dispersed. Given PE’s long-term investment horizon and access to locked-in institutional capital, a 2021 vintage fund is well-positioned to benefit from the economic rebound and generate strong risk-adjusted returns, similar to the outperforming funds that were established in the years following the Global Financial Crisis. The median return of a 2006 vintage fund was 8.1% compared to 13.9% for comparable funds introduced in 2009.2 Moreover, PE firms are better prepared than they were a decade ago with more than $US1.4 trillion in deployable capital (EY) to manage existing portfolios, and acquire new assets.2  

PE’s best returns tend to follow recessionary periods

january IQ Munro

Source: Pitchbook, Dealogic.

Canadian mid-market: a hot spot

There are also an increasing number of PE targets on the horizon, particularly in the Canadian mid-market. An unprecedented transfer of wealth is projected to occur among private companies based on the age and stage of their owners, which means many will be seeking liquidity options in the near future. According to a recent PwC report, there are more than 816,000 Canadian private and family businesses that will be changing either their CEO or ownership in the near future, while 70% of Canadian private company owners are planning to either sell or pass on their business in the next few years.3

This segment represents approximately two-thirds of Canada’s $1.2 trillion GDP, which creates extremely attractive dynamics for institutions looking to invest in the industry.4 Ultimately, the first institutional capital injected in these businesses could foster significant improvement, stability and continuity in challenging times, with the ability to implement best practices; enhance management teams; and provide additional funds to execute on growth initiatives. As a result, capital calls are expected to increase this year as managers take advantage of the favourable opportunities, especially as companies become active sellers.

LPs, take note

That said, there is no denying that COVID-19 propelled a series of changes for the PE industry at large – from potentially permanent shifts in business models to high valuations and a tech-reliant due diligence process. Firms worldwide have had to adapt.

As always, institutional investors should have a clear understanding of the general partner’s (GP) investment strategy, the types of holdings and the sectors in which it intends to invest, particularly as many managers have turned to defensive posturing to refocus on more resilient and noncyclical industries. Another important issue to address – especially now with interest rates dramatically low – is to look at how a GP has historically used leverage in the investments it has made to drive returns versus organic growth. At BMO Global Asset Management, a significant part of our due diligence process involves examining the GP’s historical track record to understand where – investment by investment – they have created value, and if they would look to use a higher debt multiple for their portfolio in the current landscape.

Across our entire suite of PE strategies, we prefer GPs that have employed operational best practices to drive growth and increase profits compared to financial engineering (while the latter generates a return, it will not position a company for an attractive realization and it also increases risk). Our approach is truly focused on helping businesses become more resilient, so they can boost employment and benefit their bottom line. Notably, however, Canadian mid-market PE managers have been more conservative in their use of leverage than in the U.S. (while Canadian banks have employed their own stringent guidelines to govern debt levels) which, to our advantage, has better positioned companies to weather the storm.

Recent discussions in the industry have also focused on how PE managers can conduct comprehensive due diligence without the ability to rely on travel or face-to-face interaction. Meeting management teams has historically been an enormous part of building relationships and GPs being able to evaluate the strength of portfolio company operations. Nevertheless, industry disruptors have adjusted through the use of technology – providing a forum for interactive tours – and outdoor, or “walking meetings”. Many are also working with advisors to sharpen their diligence by starting the process earlier and running robust downside scenarios, including protracted economic downturns and the opportunity to grow market share as other competitors weaken.

As a Limited Partner (LP), it’s important to address the issue and ask about the impact to their process. Based on our team’s conversations, many of the GPs in which we invest have actually seen a productivity improvement since the pandemic started. With virtually no time spent travelling, investment professionals have become more efficient in their ability to assess targets and focus in on high-probability opportunities.

BMO GAM PE: Enhanced value and diversification

To determine the right PE manager to maximize these opportunities, it is vital to first consider their corresponding risk and return profile. For example, BMO GAM PE’s latest fund offering, BMO First Canadian Capital Partners LP, provides Canadian institutions that either have limited or zero investments in the asset class the ability to gain diversified exposure through a single, relatively low minimum investment – thereby mitigating the typical risks associated with PE and a concentrated portfolio.  As a value-add fund-of-funds, our LPs gain access to a variety of different underlying managers, vintage years, sectors and geographies through a combination of carefully selected fund investments (both primaries and secondaries) as well as co-investments. With dedicated investor support and a wealth of expertise, we provide an attractive value proposition for those that are entirely new to private equity, or have little experience with it – from family offices, foundations and endowments to pension plans.

Instead of gaining exposure to typically 8-15 companies through a commitment to one direct private equity fund, our strategy provides investors with exposure to 100 plus businesses. Our aim is to build a diverse, premium portfolio of mid-market-focused GPs to generate superior long-term absolute and risk-adjusted returns – targeting a 15% net IRR.5 To accomplish this, we tactically construct a vital balance between experienced managers with strong track records, and prime managers. The latter, typically a team that has spun out of a larger PE group, offer tremendous value because not only are they proven, capable professionals, but they’re also highly motivated to make their new firm a success as they aspire to raise successor funds and financially, they often do not have historical carried interest to rely upon. In our experience, that alignment of capability and motivation bodes well for a robust performing fund. These returns are only enhanced by our secondary investments – which allow for the acquisition of positions in established funds and, consequently, their underlying assets from other investors (often at a discount) – and co-investments directly in operating companies in partnership with other PE funds.

Led by a tenured team of global PE investors with more than 140 years of collective experience, our disciplined and differentiated approach to investing has led to consistent outperformance (see graph below).

BMO PE’s historic performance in buyouts (primaries, secondaries and co-investments) is relatively strong, with a 23.0% IRR^ Compounded portfolio returns (logarithmic scale)

Figures in CAD.

*BMO PE has outperformed the MSCI World (a global listed equity index) by 18.6x.

^ IRR is BMO PE’s aggregate portfolio level performance since inception, net of all underlying fund management fees, costs and expenses, in CAD.

IRR = Internal Rate of Return. The internal rates of return is a metric used in financial analysis to estimate the profitability of potential investments. The internal rate of return is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted case flow analysis.

The track record is provided for illustrative purposes. Past performance should not be seen as an indication of future results. There is no assurance that the Fund will achieve comparable results in the future.

Source: BMO Global Asset Management Private Equity, as at June 30, 2020.

Strongly positioned for the future

Bringing our global PE strategy to Canadian accredited investors, we achieved the inaugural close of BMO First Canadian Capital Partners LP in November 2019. This has proved extremely beneficial as we work through the pandemic with significant dry powder. With valuations already starting to come off pre-pandemic levels in some sectors, there are attractive buying opportunities in our mid-market sweet spot (enterprise values up to $500 million), with strong underlying fundamentals that may be challenged in the current landscape.

Many of the companies in this market segment are owner-managed businesses, and are generative in terms of profits. What they may lack, however, is the competence and/or capital to reach the next level operationally, to build out in new directions, or potentially reimagine their business model entirely now – which is where an effective PE manager comes in. In our investment process, we seek to identify and select PE managers that have a proven track record of growing businesses. This is evidenced by our results which show approximately half of the value creation is driven by earnings growth (as opposed to leverage effect or multiple expansion) with the ability to scale businesses both organically and via add-on acquisitions.6  

As a result, it is an active PE market, particularly in Canada where the landscape is primed for sales: in 2019, the region’s mid-market buyout managers raised in excess of $9 billion in deployment capital.7 Add to this, the country ranks first among OECD nations for its entrepreneurial appeal, with the most educated talent pool.8 As the first and only PE fund manufactured by a Canadian bank specifically for Canadian accredited investors, our domestic-focused mandate also enables investors to benefit from our established relationships with many Canadian PE fund managers as well as those of the broader BMO enterprise , providing greater sourcing opportunities.

Despite the industry-wide setback earlier in 2020, we have already seen evidence of improved M&A and fundraising activity last quarter (based on deal flow and our conversations with GPs and placement agents), which is a solid indicator of growth for the year ahead. While 2021 is by no means an open book, we can be certain that the private equity industry has the tools to endure, and that the right manager with the right focus will come out stronger – and enhance institutional portfolio returns.

To learn more about BMO GAM Private Equity, and its comprehensive solutions to strengthen portfolios, please contact your Regional BMO Asset Management Institutional Sales & Service Representative


1 PwC, Private Equity Deals Insights: 2021 Outlook.

2 Ernst & Young, Why private equity can endure the next economic downturn, 2020.

3 PwC, Once in a Lifetime Report, 2019.

4 Statistics Canada, all industries gross domestic product (GDP) at basic prices by industry, monthly growth rates equalled $1.82T as at June 2020.

5 BMO Global Asset Management, October 2020.

6 BMO Private Equity Trust PLC as at 30 November 2019.

7 Pitchbook Data, Inc. PE, Growth & Late-stage Venture Capital, 2019.

8 OECD Indicators of Talent Attractiveness, May 2019.


Not intended for distribution outside of Canada.

Certain of the products and services offered under the brand name BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations.

This communication is intended for informational purposes only and is not, and should not be construed as, investment, legal or tax advice to any individual. Particular investments and/or trading strategies should be evaluated relative to each individual’s circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Past performance does not guarantee future results.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments.  Please read the fund facts or prospectus of the relevant mutual fund before investing.  Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.

For a summary of the risks of an investment in BMO Mutual Funds, please see the specific risks set out in the prospectus. 

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

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