Canadian public pension funds have long been part of the private equity landscape, primarily as passive investors in third-party funds managed by large buyout firms. But over the past decade, certain public pensions — particularly the Canada Pension Plan Investment Board and the Ontario Teachers' Pension Plan — have become more like the buyout firms themselves, actually acquiring and managing private companies. Particularly in the United States, where both CPPIB and OTPP have opened offices.
This development has been discussed a lot in terms of what it means for pension returns, but there is one quirk that has gotten scant attention: When these systems buy and sell a U.S. company, they don't pay any taxes to the U.S. government. Nor do they pay any taxes to the Canadian government.
The end result is that CPPIB and OTPP have a lower cost of capital than do many of the corporations and buyout firms with which they are competing for takeovers.
Here's how it works: When a Canadian entity purchases a U.S. company and later sells it for a profit, it is not required to pay capital gains taxes to Washington. Nor is it required to pay U.S. taxes on interest, and just 5% on dividends. That's all because Canada has a comprehensive tax treaty with the U.S., which generally supposes that the buyer will pay appropriate taxes in its home country. And this is what would happen if a typical Canadian entity purchased and sold a U.S. company.
The difference with the Canadian public pensions, however, is that they are tax-exempt at home.
So just imagine that CPPIB is competing with KKR to purchase a Wisconsin-based widget maker. Each group views the business as being valued at around $100 million, with a belief that it could double the enterprise value in four years. For KKR and its investors, that would mean a net gain of $100 million ― around $20 million of which would go to KKR partners in the form of carried interest (on which they'd be required to pay capital gains taxes). Some of KKR's limited partners also would be required to pay capital gains taxes on their share of the $80 million.
What all of that means is that while CPPIB and KKR are modeling identical return multiples, the actual cash return for CPPIB is significantly higher than is is for KKR. As such, CPPIB likely could justify paying a bit more for the asset, giving it a competitive advantage.
"In our experience, having partnered with many PE investors on a 50/50 basis, we have been able to arrive at similar pricing on deals demonstrating that there is relative equality when it comes to our tax positions," says a CBBIP spokeswoman.
Except that agreeing to participate in a sponsor-led co-invest and having the flexibility to slightly overpay on a solo deal are different things (particularly when also invested as an LP with the aforementioned sponsor). And it's hard to believe that CPPIB and other Canadian pensions haven't figured that out yet...
• Deal in progress: Multiple sources say that Argosy Partners and MTN Capital Partners are nearing a deal to purchase Rita's Water Ice, a chain of Italian ice concept restaurants, from Falconhead Capital. No final agreement yet, but lots of activity.
• Deal not in progress: Silver Lake is not making a takeover bid for Imperva (NYSE: IMPV), a Redwood Shores, Calif.-based online security company currently valued at around $1.6 billion. There was a recent report that both Silver Lake and Thoma Bravo were prepping bids but, from my understanding, at least the former is incorrect (I've been unable to get info ― yet ― on Thoma Bravo interest).
THE BIG DEAL
• Naspers Ltd. has agreed to sell Polish online auction site Allegro to a private equity consortium of Cinven, Permira and Mid Europa Partners for $3.253 billion. Read more.
VENTURE CAPITAL DEALS
• Prelude, a comprehensive fertility startup founded by Martín Varsavsky, has raised $200 million in funding led by Lee Equity Partners. Read more.
• Snapsheet, a Chicago-based provider of virtual claims technology and services, has raised $20 million in Series C funding. F-Prime Capital and IA Capital Group co-led the round, and were joined by Liberty Mutual Strategic Ventures, Intact Ventures and USAA. www.snapsheetapp.com
• KodaCloud, a Campbell, Calif.-based provider of cloud-based WiFi for enterprise customers, has raised $10 million in Series A funding from Comcast Ventures, Celtic House Venture Partners and Voyager Capital. www.kodacloud.com
• VMRay GmbH, a German provider of agentless threat analysis and detection solutions, has raised $3.9 million in Series A funding from eCapital Entrepreneurial Partners and High-Tech Gründerfonds. www.vmray.com
• Aramisauto, a French online used-car marketplace, has raised an undisclosed amount of strategic funding from PSA Group, a French auto company whose brands include Peugeot, and Citroën. www.aramisauto.com
PRIVATE EQUITY DEALS
• The Carlyle Group has acquired an undisclosed stake in ProKarma, an Omaha, Neb.-based IT services company. No financial terms were disclosed. Sellers include Endeavor Capital. www.prokarma.com
• Court Square Capital Partners has acquired an undisclosed stake in Terra Millennium Corp., a Richmond, Calif.-based industrial services company. No financial terms were disclosed. www.tmcorp.com
• EQT Partners is expected to receive several non-binding private equity offers for BSN Medical, a German bandage and plaster cast maker that it is seeking to sell for around €3 billion, according to Reuters. Bidders are expected to include BC Partners, The Blackstone Group and CVC Capital Partners, with J.P. Morgan and Morgan Stanley helping to manage the process. Read more.
• GTCR has acquired Riverchase MSO LLC, a Fort Myers, Fla.-based dermatology practice management business. No financial terms were disclosed, except that debt financing was provided by Golub Capital, NXT Capital and Northwestern Mutual. www.riverchasedermatology.com
• Onex Corp. has agreed to acquire Save-A-Lot, an Earth City, Mo.-based grocery store chain, from Supervalu Inc. (NYSE: SVU) for $1.37 billion in cash. Read more.
• Premier Research, a middle-market contract research organization for the life sciences market, has secured an undisclosed amount of growth equity funding from Metalmark Capital. www.premier-research.com
• Pritzker Group Private Capital has agreed to acquire ProAmpac, a Cincinnati-based maker of flexible packaging, from Wellspring Capital Management. No financial terms were disclosed. Read more.
• Tecomet Inc., a Wilmington, Mass.-based contract manufacturer for the medical device and aerospace industries, has acquired Mountainside Medical, a Boulder, Colo.-based provider of medical device components and instruments used in minimally-invasive surgical devices. Tecomet is a portfolio company of Genstar Capital, and reportedly is on the block for more than $1 billion. www.tecomet.com
• TSG Consumer Partners has completed its previously-announced acquisition of Duckhorn Wine Co., owner and operator of six wineries in Napa Valley, from GI Partners. No financial terms were disclosed. www.duckhorn.com
• Acushnet Holding, a Fairhaven, Mass.-based maker of golf products under such brands as Titleist and Footjoy, has set its IPO terms to 19.33 million shares being offered at between $21 and $24 per share. It would have an initial market cap of approximately $1.67 billion, were it to price in the middle of its range. The company. The plans to trade on the NYSE under ticker symbol GOLF, with J.P. Morgan and Morgan Stanley serving as lead underwriters. It reports $54 million of net income on $903 million in revenue for the first half of 2016. Shareholders include Mirae Asset Securities and the Blackstone Group. www.titleist.com
• BlackLine Systems, a Woodland Hills, Calif.-based accounting software company, has set its IPO terms to 8.6 million shares being offered at between $13 and $15 per share. It would have an initial market cap of approximately $690 million, were it to price in the middle of its range. The company. The company plans to trade on the Nasdaq under ticker symbol BL, with Goldman Sachs serving as lead underwriter. It reports around a $17 million net loss on $56 million in revenue for the first half of 2016, compared to an $11 million net loss on $37 million in revenue for the year-earlier period. Shareholders include Silver Lake Sumeru (47% pre-IPO stake) and ICONIQ (23.1%). www.blackline.com
• Cofco Meat Holdings, a Chinese pork producer, has set its Hong Kong IPO terms to between HK$2 and HK$2.65 per share, with plans to offer 975.6 million shares. Pre-IPO shareholders include KKR, Baring Private Equity Asia, Hopu Investment Management Co. and Boyu Capital. Read more.
• Quantenna Communications Inc., a Fremont, Calif.-based provider of Wi-Fi video networking for whole-home entertainment, has set its IPO terms to 6.7 million shares being offered at between $14 and $16 per share. It would have an initial market cap of approximately $492 million, were it to price in the middle of its range. The company plans to trade ticker symbol QTNA, with Morgan Stanley, Barclays and Deutsche Bank serving as lead underwriters. Quantenna reports a $1.95 million net loss on around $57.5 million in revenue for the first half of 2016, compared to a $7.4 million net loss on $36.6 million in revenue for the year earlier period. It has raised around $166 million in VC funding from firms like Sequoia Capital (24.73% pre-IPO stake), Rusano (10.39%), Venrock (10.22%), Sigma Partners (9.41%), Southern Cross Venture Partners (8.88%), DAG Ventures (8.32%), Centerview Capital Technology, Vivint and NTT Group. www.quantennacom
• ZTO Express Inc., a Chinese express package delivery company, has set its IPO terms to 72.1 million shares being offered at between $16.50 and $18.50 per share. The company would have a fully-diluted market cap of around $12.8 billion, were it to price in the middle of its range. It plans to trade on the NYSE under ticker symbol ZTO, with Morgan Stanley and Goldman Sachs (Asia) serving as lead underwriters. ZTO reports $115 million of net income on $639 million of revenue for the first half of 2016. Shareholders include Sequoia Capital and Warburg Pincus. Read more.
• Continental AG, a German car components maker, has acquired Hornschuch, a German maker of products like functional foams and artificial leather for automobiles and other applications, from EquiStone Partners. No financial terms were disclosed. Read more.
• Lion Capital has agreed to sell GHD, a London-based maker of hairstyling products, to Coty Inc. (NYSE: COTY) for £420 million. Read more.
• Cisco Systems (Nasdaq: CSCO) has acquired Heroic Labs (dba Worklife), a San Francisco-based provider of meeting productivity software. No financial terms were disclosed. www.cisco.com
• The Delivery Group, a postal services company owned by Next Wave Partners, has secured an undisclosed amount of debt financing from Apollo Global Management, according to Private Equity International. Proceeds will be used, in part, to finance a new acquisition and to refinance existing debt. Read more.
• Intercontinental Exchange (NYSE: ICE) will be required to sell Trayport, a London-based maker of commodities trading software, in order to satisfy British antitrust concerns. Read more.
• Mentor Graphics Corp. (Nasdaq: MENT), a Wilsonville, Ore.-based maker of chip design software with a $2.9 billion market cap, has hired Bank of America to explore strategic alternatives (including a potential sale), according to Reuters. Read more.
• PZU, a Polish state-run insurer, in in talks to acquire Poland-based Bank Pekao from Italy’s Unicredit SpA. Read more.
• Steinhoff International of South Africa has agreed to acquire Australian home-goods retailer Fantastic Holdings (ASX: FAN) for A$361 million. Read more.
FIRMS & FUNDS
• Audax Group has closed its third senior loan fund with $500 million in capital commitments. www.audaxgroup.com
• Daphni, a Paris-based seed and early-stage VC firm, has raised €150 million for its debut fund. Read more.
• K-Fund, a Spanish early-stage VC firm, has raised €50 million for its debut fund. Read more.
• Metalmark Capital is targeting $1.5 billion for its third mid-market private equity fund, according to Dow Jones. www.metalmarkcapital.com
• Welkin Capital, a Hong Kong-based VC and growth equity firm, is raising upwards of $200 million for its second fund, according to a regulatory filing. It already has secured $59.5 million. www.welkincapital.com
MOVING IN, UP AND ON
• Damon Conway has joined Atlas Partners as a principal. He previously was with Mill Road Capital. www.atlaspartners.com
• Jason Fertig has joined Mizuho Americas as a managing director and head of North American healthcare investment banking. He previously served in a similar role for Nomura. www.mizuhoamericas.com
• Vanessa Larco has joined New Enterprise Associates as a partner. She previously was with Box as director of product management for mobile and web. www.nea.com
• Joan Tan has joined fund placement agent Sixpoint Partners as a Hong Kong-based managing director and head of Asia distribution. She previously was a managing director and head of China for Diamond Dragon Advisors.
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