Private Capital | Q1 2015

Q1 2015 ■ $6.25

THE MAGAZINE OF THE CANADIAN VENTURE CAPITAL & PRIVATE EQUITY INDUSTRY

PEAK FOOD The imperative for innovation and investment in food and agriculture

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• Five Reasons You Won’t Raise Your Next Fund – Part 2 of 3 • Representation and Warranty Insurance • Reputational Risk in Private Equity Report

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372 Bay St., Suite 1201 Toronto, ON M5H 2W9 Phone: 416-487-0519 Fax: 416-487-5899 www.cvca.ca EDITORIAL BOARD Chair: Steve Hnatiuk, Lighthouse Equity Partners Jenifer Bartman, Bartman Business Advisory Grant Kook, Westcap Management Ashley Smith, CVCA Robert Montgomery, Achilles Media Aki Georgacacos, Avrio Capital Gregory Smith, InstarAGF Asset Management David Unsworth, RBC Venture Partners Peter van der Velden, Lumira Capital Mike Woollatt, CVCA

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701 Henry Ave. Winnipeg, MB R3E 1T9 Phone: 204-953-2189 Fax: 204-953-2184 www.lesterpublications.com

CONTENTS COVER STORY

ARTICLES

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9

Five Reasons Why You Won’t Raise Your Next Fund Reason 2: Repercussions of poor communication

11

Peak Food The imperative for innovation and investment in food and agriculture

By Aki Georgacacos

2

CEO’s Message

Representation and Warranty Insurance Should you consider it for your next M&A deal?

By Mike Woollatt

By Cameron Rusaw

2

CVCA Board of Directors and Management

3 5 20

Fund News

DEPARTMENTS

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By Fred Pidsadny

People on the Move Top Deals of the Quarter

President, Jeff Lester Vice-President & Publisher, Sean Davis EDITORIAL

Why a Brilliant Business Strategy Isn’t Enough: Part 2 Give your strategic plan a healthy dose of clarity

17

Clear Intentions GP/LP trust and transparency revelations from the new Reputational Risk in Private Equity report

By Raymond Page

Editorial Director, Jill Harris Editorial Assistant, Andrew Harris ADVERTISING Stephanie Allen, Larry Kiska, Danny Macaluso, Darryl Sawchuk DESIGN & LAYOUT Art Director, Myles O’Reilly Crystal Carrette, Jessica Landry, John Lyttle, Gayl Punzalan ACCOUNTING Nikki Manalo DISTRIBUTION Jennifer Holmes © Copyright 2015 CVCA. All rights reserved. The contents of this publication may not be reproduced by any means, in whole or in part, without the prior written consent of CVCA. Direct requests for reprint permission should be made to the president of Canada’s Venture Capital & Private Equity Association.

Comments, questions and submissions are welcome, please send to the editor at privatecapitaleditor@cvca.ca

Please follow the CVCA on LinkedIn, Twitter and Facebook

Statements of fact and opinion are the responsibility of the authors alone and do not imply an opinion on the part of the officers or members of the Canada’s Venture Capital & Private Equity Association or Lester Communications Inc. Publication Mail Agreement #40606022 Return undeliverable Canadian addresses to: 701 Henry Ave., Winnipeg, MB R3E 1T9 Printed in Canada.

Please recycle where facilities exist.

Private Capital § Quarter 1 § 2015

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CEO’s Message

CVCA Board of Directors 2015–16 OFFICERS

Mike Woollatt, CEO, CVCA

Looking Ahead

A

s a new year begins, it’s worth reflecting on the many changes taking place at the CVCA, and to look at where we’re headed in 2015.

The CVCA evolved considerably in 2014. We spent the past year focused on building a new framework to serve you better. Over the past year, I have signalled the need for greater transparency so that we can do a better job at telling the industry’s story. Now, that need is being addressed.

Recently we launched our first reveal of year-end results for the Canadian private capital industry. This is the first time a Canadian-based company or association has been in a position to do this since 1974. We’re proud of this accomplishment.

Moving forward, you can expect to have the most accurate information about Canadian deals in venture capital and private equity through our InfoBase – the most comprehensive database on Canadian private capital transactions and fundraising – which is available free to our members.

As well, our efforts towards our new website, continued government advocacy and more professional development events has led to an unprecedented rise in membership, extending our reach and enhancing networking opportunities.

2015 promises more. We’re about to launch our own news site with content that will mirror what you read in this magazine, and will include many more stories about our members, deals and industry trends. We’re seized with doing a better job communicating industry successes. The news site will play a prominent role accomplishing that.

There is also the annual conference taking place midMay in Vancouver, which is shaping up to be an incredible event, as well as a substantial increase in networking and professional development events across the country. 2015 is going to be a busy year.

Of course, all of this isn’t possible without your membership, and I’d like to thank you for your continued support. n Thank you,

Mike Woollatt, CEO, CVCA 2

Private Capital § Quarter 1 § 2015

Dave Mullen, Highland West, Chair Peter van der Velden, Lumira Capital, Past Chair Pierre Schuurmans, Birch Hill Equity Partners, Treasurer Gary Solway, Bennett Jones LLP, Secretary

VICE-PRESIDENTS

Jocelyn Blanchet, KPMG LLP, Vice President Gilles Duruflé, Independent Consultant, Vice President Grant Kook, Westcap Mgt. Ltd., Vice President Gregory Smith, InstarAGF Asset Management, Vice President

DIRECTORS

Alain Denis, Fonds de solidarité (FTQ), Board Rob Barbara, Build Ventures, Board John Berton, Georgian Partners, Board Ross Bricker, Optimum Technology Fund, Board Joseph Catalfamo, Summerhill Venture Partners, Board Paul Day, Export Development Canada, Board Howard Donaldson, Vanedge Capital, Board Joe Freedman, Brookfield Asset Management, Board Aki Georgacacos, Avrio Capital, Board Sarah Goel, Edgestone Capital, Board Michael Hollend, TorQuest Partners, Board Wally Hunter, EnerTech Capital, Board Lorne Jacobson, TriWest Capital Partners, Board Tom Kennedy, Kensington Capital Partners, Board Edmund Kim, ONCAP, Board Elmer Kim, Roynat Equity Partners, Board Erik Levy, CPPIB, Board Jeff Linner, PFM Capital, Board Geneviève Morin, Fondaction, Board Dave Mullen, Graycliff Partners, Board & Chair Karamdeep Nijjar, iNovia Capital, Board Rob Normandeau, SeaFort Capital, Board Jerome Nycz, BDC, Board Marc Paiement, Novacap, Board Michael Raymont, AVAC, Board Whitney Rockley, McRock Capital, Board Jane Rowe, Teachers’ Private Capital, Board Rakesh Saraf, Alberta Teachers’ Retirement Fund, Board Pierre Schuurmans, Birch Hill Equity Partners, Board & Treasurer Lloyd Segal, Persistence Capital Partners, Board Kent Thexton, OMERS Ventures, Board Edward Truant, Imperial Capital, Board Mark Usher, Wellington Financial LP, Board Peter van der Velden, Lumira Capital, Board & Past Chair Mike Walkinshaw, Fronterra Ventures, Board

MANAGEMENT

Mike Woollatt, CEO Ashley Smith, Communications Associate Ted Liu, Research Director Andrew Keenan, International Trade Liaison Officer Marie Labitté, Research Associate Elaine Bedell, Administrator Lauren Hart, Events Manager Emily Gallant, Member Liaison Kieran Lawler, Director of Communications

› fund news NOVACAP Industries IV holds $300M initial close

Maple Leaf Angels launches MLA48, Maple Leaf Angels 48 Fund I

NOVACAP has held an initial close of NOVACAP Industries IV with $300 million in commitments from Caisse de dépôt et placement du Québec, who invested $80 million, Fonds de solidarité, Investissement Québec, EDC, Fondaction and other institutional partners. NOVACAP expects to meet its $425-million goal in a subsequent close in the next few months.

Maple Leaf Angels Corporation has launched Maple Leaf Angels 48 Fund I LP (MLA48), “Canada’s first angel investment fund that commits to [making] investment decisions within 48 hours.”

Maple Leaf Angels Capital Corporation will manage MLA48.

The fund is targeted to close by the end of calendar 2014 with the first investments occurring in early 2015. MLA48 is looking to invest up to $110,000 per company into early stage start-ups that have yet to receive seed funding.

Version One Ventures closes Fund II at $35M

Information Venture Partners launches Fund I

Version One Ventures has closed its second fund, Version One Fund II, at $35 million with commitments from existing and new investors including Northleaf Venture Catalyst Fund (NVCF), which committed $10 million. The new fund will continue to focus on marketplace, platform and SaaS, as well as now also adding healthcare, cryptocurrency and Government 2.0.

Information Venture Partners Inc., formerly the venture capital arm of the Royal Bank of Canada, has announced the launch of Information Venture Partners Fund I. This launch reflects the transition of the business to becoming an independent venture capital fund platform. Managed

by Rob Antoniades and Dave Unsworth, Information VP is actively raising its second independent fund.

Canaan Partners closes Canaan X

NL unveils $12M Venture Newfoundland and Labrador

Canaan Partners has raised US$675 million for its 10th fund, Canaan X. British Columbia Investment Management Corporation (bcIMC), a limited partner investor in Canaan VIII and Canaan IX funds, along with another investor, recommitted to the new fund. Fund X will continue to focus on early rounds of tech and health start-ups.

The government of Newfoundland and Labrador (NL) has officially unveiled $20-million investments in two venture capital funds, $10 million in Build Ventures and $10 million in Venture Newfoundland and Labrador. Venture Newfoundland and Labrador Fund is initially capped at $12 million with $2 million from BDC Capital. An additional $3 million in commitments is anticipated from individual private investors. Managed by GrowthWorks Atlantic Ltd., Venture Newfoundland and Labrador Fund will provide funding to support new local start-ups and companies in the very early stages of their development.

Second City PE II targets $300M for energy investments Second City Private Equity held a $26.2 million initial close in December 2013 for Second City PE II, according to regulatory filings. Second City is targeting $300 million for the energy-focused fund. Second City PE II has already made three co-investments in Shield Energy Ltd., InPlay Oil Corp., Venturion Oil Limited and an investment in an undisclosed natural gas facility.

Teralys Capital Innovation Fund holds $279M initial close Teralys Capital Innovation Fund, a new fund of funds created under the Government of Canada’s Venture Capital

Private Capital § Quarter 1 § 2015

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Fund News

Action Plan (VCAP), has held an initial close with $279 million in commitments. Limited Partners include BDC Capital on behalf of the Government of Canada, Investissement Québec on behalf of Government of Québec, Caisse de dépôt et placement du Québec, Fonds de solidarité FTQ, Fondaction CSN, National Bank of Canada, Desjardins Group, Knight Therapeutics and OpenText Corporation.

Kensington Capital Partners launches new $300M VCAP fund of funds Kensington Capital Partners announced the launch of the Kensington Venture Fund, a VCAP fund of funds, with an initial closing of investor commitments totaling $160 million. LPs include BDC Capital on behalf of the Government of Canada, Richardson GMP, OpenText Corporation, Royal Bank of Canada, BMO Financial Group, CIBC, TD Bank Group, Scotiabank, individual investors and Kensington Private Equity Fund. Kensington Venture Fund will invest in promising VC funds and companies in the technology, cleantech, IT, telecommunications and digital media sectors.

Golden Venture Partners II closes at $40M Golden Venture Partners has closed its oversubscribed second fund, Golden Venture Partners II, LP with $40 million commitments anchored by Northleaf Venture Catalyst Fund (NVCF) ($15 million) with participation from BDC Capital and other investors. Golden Venture Partners II will continue to focus on mobile investments with a particularly strong emphasis towards mobile enterprise, mobile vertical marketplaces, mobile advertising and data and mobile consumer opportunities, including the Internet of Things.

LASSEDESIGNEN / SHUTTERSTOCK.COM

Stonebridge Infrastructure Debt Fund II holds $201M initial close

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Stonebridge Financial Corporation has launched its second infrastructure debt fund, Stonebridge Infrastructure Debt

Private Capital § Quarter 1 § 2015

Fund II LP with an initial capital close of $201.5 million.

LPs include Canadian pension funds, STONEBRIDGE a n a l y z e | s t r a t e g i z e | m a n a g e insurance companies and Business Development Bank of Canada. Fund II will be open-ended for a period of up to 10 years. Fund II has an investment objective to invest in long-term, fixed rate, senior debt financings for the purpose of the construction, operation, ownership or maintenance of infrastructure assets.

Onex commits additional $500M to Onex Partners IV Onex Corporation has committed an additional US$500 million to Onex Partners IV increasing its commitments from $1.2 billion to $1.7 billion. Onex Partners IV, Onex’s largest fund to date, now increases its size to $5.66 billion.

Onex continues to be the largest investor. The increased commitment will apply to new Onex Partners IV investments completed after June 3, 2015.

Callisto Capital IV holds $188M initial close Callisto Capital has held an initial close for its fourth fund, Callisto Capital IV, securing $188 million from Canadian investors. Investors include both returning institutional investors and individual investors, most of whom have been partners with Callisto for many years, including CEOs of both current and past portfolio companies. Callisto Capital IV’s target size is $300 million and a final close is expected to occur during 2015.

Versant Venture Capital V final closes at $305M Versant Ventures has closed Versant Venture Capital V LP at US$305 million, exceeding its target size of $250 million, with significant support from Business Development Bank of Canada, Fonds de solidarité FTQ, Northleaf Venture Catalyst Fund and Teralys Capital. n

› people on the move

The Next 36 has appointed Peter Carrescia as its new managing director. Carrescia has previously served as managing director at OMERS Ventures and as director at a number of technology companies.

Bob Chiste joins EnerTech Capital as EIR in Houston and Dr. Vicky Sharpe joins EnerTech Capital Advisory Board Bob Chiste has joined EnerTech Capital as an Executivein-Residence (EIR) based in Houston, Texas. Chiste is CEO of Sorfina Capital. Chiste has served as Interim CEO of two current EnerTech portfolio companies (REGEN Energy and Enbala Power Networks) and since 2009 has been serving as chairman of both companies. Dr. Vicky Sharpe has joined the EnerTech Capital Advisory Board. Dr. Sharpe is the founder and former CEO of Sustainable Development Technology Canada (SDTC).

Whitney Rockley appointed to board of UPWARD to advance women in business Uniting Professional Women Accelerating Relationships and Development (UPWARD) has appointed Whitney Rockley, co-founder and managing partner of McRock Capital, to its board of directors. Through her involvement in UPWARD, Rockley will work to connect Canadian women in technology to some of the leading female thought leaders and senior executives from Silicon Valley and across the world.

AIMCo appoints former Pyramis CEO Kevin Uebelein as new CEO Alberta Investment Management Corporation (AIMCo) has appointed Kevin Uebelein as its new CEO, effective Jan. 5, 2015. Uebelein has previously served as president and CEO of Pyramis Global Advisors, the institutionally focused asset management unit of Fidelity Investments, and global head of investment solutions at Fidelity Investments. Prior to joining Fidelity in 2008, Uebelein held senior positions with Prudential Financial Inc., including head of alternative investments, and culminating

as chief investment officer for Japan, and then international operations.

Cycle Capital adds Amit Srivastava as senior partner Amit Srivastava has joined Cycle Capital Management as senior partner. Srivastava previously served as managing partner and CEO of Entrepia Ventures. Prior to joining Entrepia in 2001, he worked for seven years at JP Morgan Chase, including four years at JP Morgan Partners.

Ontario Teachers’ appoints Jo Taylor as managing director for EMEA The Ontario Teachers’ Pension Plan has appointed Jo Taylor as managing director for Europe, Middle East and Africa (EMEA) and head of the London office. In his new role, Taylor retains primary responsibility for Teachers’ Private Capital (TPC) and private equity investments in the region. Taylor becomes a member of the Teachers’ Investment Committee. Taylor joined Teachers’ as head of Teachers’ London private equity office and VP of TPC in 2012 from Ethean Capital, where he was a partner.

OPTrust hires Hugh O’Reilly as new CEO OPTrust has hired Hugh O’Reilly as new president and CEO of OPTrust, effective Jan. 5, 2015. O’Reilly currently leads the Pension Benefits and Insolvency Practice Group at Cavalluzzo Shilton McIntyre Cornish LLP, a firm he joined after a successful career on the management side as a partner at Torys LLP. O’Reilly replaces Bill Hatanaka, who resigned effective Jan. 1, 2015. Hatanaka, formerly group head of wealth management at TD, joined OPTrust in November 2012.

Christopher Morris becomes CEO of GrowthWorks Capital R. Christopher Morris, principal of R.C. Morris & Company Special Opportunities Debt Fund II LP, the secured debtholder of Growth Works Capital Ltd. (GWC), has assumed position of president and CEO of GWC, replacing David Levi who becomes GWC’s executive chairman and continues as president and CEO of Matrix Asset Management Inc., GWC’s parent company. n

Private Capital § Quarter 1 § 2015

YANLEV/SHUTTERSTOCK

Next 36 appoints Peter Carrescia new managing director

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Peak Food The imperative for innovation and investment in food and agriculture

By Aki Georgacacos, Avrio Capital

A

fter the holiday season, many of us leave our spirited eating habits behind. But don’t let the apparent abundance of food fool you. The fundamental global challenges related to an exploding population and the concomitant implication on food security is real. The single largest challenge to the survival of mankind is not “peak oil,” but “peak food” – how to address the clear and present danger driven by the increasing gap between the earth’s fixed resources and an exploding population base.

Tackling this challenge will require cooperation between government, universities, politicians, scientists, philanthropists and entrepreneurs. And it’s that last bucket – how entrepreneurs are applying precision agriculture to turn the tide on scarcity – that is proving to be pivotal.

As the world economy continued to expand seven-fold during the last half of the 20th century, the earth’s natural life-support mechanisms struggled to keep pace, setting the stage for a future with very limited capacity to sustain life. This will be even more pronounced by 2050 when the earth’s population approaches 10 billion.

The drivers of the peak food phenomenon are extensive: increases in CO2 emissions and droughts, declines in fertilizers, fresh water and suitable land to expand agricultural production all play a role.

Notwithstanding these limitations on our planet’s natural resources,

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Cover Story

SUNNY FOREST/ SHUTTERSTOCK.COM

The single largest challenge to the survival of mankind is how to address the clear and present danger driven by the increasing gap between the earth's fixed resources and an exploding population base.

Private Capital § Quarter 1 § 2015

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Cover Story

IGOR STRUKOV / SHUTTERSTOCK.COM

The future battlefront (as it relates to agricultural productivity) is being waged along technological lines.

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society (and specifically, agri-business) is obligated to increase global food production to nourish up to three billion additional mouths by 2050 – an increase of almost 40 per cent.

The future battlefront (as it relates to agricultural productivity) is being waged along technological lines. More specifically, by an emerging sector known as precision agriculture, which uses information technology and big data to monitor crops and guide the application of seeds and inputs.

Although still nascent, the concept of using real-time imagery or sensors to account for variability within fields, and to automatically apply fertilizer, water and other inputs at the rates best suited to the crop and soil conditions, offers significant promise in generating the kind of step function changes required to secure the global food supply.

For example, using satellite imagery, it is possible to map spatial variations in crop and soil conditions and then match inputs – water, seed and fertilizer – to those variations by applying them at variable rates. This does two things: first, it shows the difference between healthy and stressed plants, and secondly it tells growers how much input to apply to each small area, known as a management zone. Many short-term and long-term issues relating to crop production can be detected and actions can be taken before irreparable damage is done and crops are lost.

It is also possible to address water shortage issues through precision irrigation, which allows farmers to monitor soil moisture, plant stress (from drought, lack of aeration and other factors) and weather data via mobile devices and computers. In some cases, producers can reduce water consumption by 25 to 30 per cent, simultaneously increase yields and minimize fertilizer leaching and other environmental impacts.

Private Capital § Quarter 1 § 2015

Other companies are addressing the peak food issue from a seed breeding angle. Advanced plant breeding companies are creating seed that can be grown using less water, be more productive and vigorous and withstand disease and insect pressure. As sophistication around greenhouse technology improves, advanced structures that recycle and optimize CO2 and heat utilization are also augmenting overall global food production.

A group of venture capital funds managed by Avrio Capital have been focused on growth stage investments in these sectors since 2002 and have made investments in each of the technology silos discussed above. These types of disruptive technologies are beginning to make a significant and relevant impact on the global food security chain. Other well-known global investment franchises, such as Kleiner Perkins, that seek to invest only in disruptive technologies which address global issues are also now investing in agricultural technology.

The investment environment in the sector is complex.

Food security became a very hot topic after record high grain prices in 2008 marked the start of a period of volatility. Since that time, prices have fallen back on the rebound in production and global stocks, with decent harvests expected in several major grain producers this year, but there’s a risk of complacency on the long-term outlook.

Notwithstanding the near-term stability in the space and the complexity of the investing ecosystem, sophisticated investors must continue to invest in food and agriculture to address the peak food issue, and by extension, to ensure that agriculture continues to provide a strong foundation for our civilization and our economy. n

Aki Georgacacos is co-founder and managing director of Avrio Capital.

Your Next Fund

Five Reasons Why You Won’t Raise Your Next Fund

Part 2 of 3

Reason 2: Repercussions of poor communication This article is the second of a three-part series on the current fundraising environment based on PrivCap interviews with leading global limited partners. The following is based on an interview conducted by David Snow, featuring Michael Elia of StepStone, Moose Guen of MVision Private Equity Advisors and William Chu of Zurich Alternative Asset Management.

D

Moose Guen, MVision: This is the heart of today’s environment. Looking at organizations like ILPA, the essence of their mandate is transparency in communication. It’s visibility. Because in the crisis of 2008 and 2009, all of a sudden, a lot of investors closed their programs because they couldn’t understand their commitments or their risks. There were discrepancies over valuations. There were valuation policies and consistency of valuations. What the general partners underestimate again and again is they believe that if they contacted the investors a couple of times – with a one-way dialogue so that they walk in, tell you things and then walk

MOPIC / SHUTTERSTOCK.COM

avid Snow, PrivCap: We’re talking about fundraising and about the Darwinian environment in which we find ourselves in the fundraising market. There are many reasons a LP might not re-up for your next fund. Let’s talk about Reason #2: You’ve been a poor communicator. How could it be that a GP has performed fairly well and delivered the LPs what they’re supposed to want most of all, which is returns, and yet they might pass on the GP’s next fund because of poor communication? What are some manifestations of poor communication?

Private Capital § Quarter 1 § 2015

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Your Next Fund

“It behooves GPs to partner up, so to speak, with LPs to ensure they are well informed at all times.”

– William Chu, Zurich Alternative Asset Management

away – they’ve ticked the box. You’ve been briefed and you can go off and have a revelation about what was just told to you as opposed to an understanding of the risks of your investments. The key message here to GPs is to ensure that you have a dialogue with your investors. Understand what your investor is thinking and double-check that the investors actually understand what you’re doing with the portfolio companies, because memory naturally is 60 per cent faulty. So, by default, these one-way conversations don’t quite work.

PrivCap: Mike, what are some examples of poor communication?

Michael Elio, StepStone: Poor communication really falls into two camps: there’s poor communication with your current investors, making sure they’re up to speed on what’s going on in your fund, why you’re doing what you’re doing and, of course, giving good news and bad news when it comes to performance. There’s also communication that comes along for the new investors you’re going after during fundraising. If you communicate with your investors just once, that one communication is what the LP bases their entire perception of you on. If you communicate with them 10 times, they can see a trend and get comfortable with that communication. Make sure that you not only communicate with your investors, but you also communicate within your own team and organization. LPs have a lot of different touch points with them and making sure everybody knows the story (hopefully the correct story) will help convey that image from the GP to the investor.

PrivCap: William, why are LPs so fixated on frequent and tremendous communication? Why don’t they just sit back and enjoy the distributions and the cash that comes back from their GPs? William Chu, Zurich Alternative Asset Management: I’m sure some LPs do that, but hopefully most LPs take the initiative as fiduciaries to understand what the GP has built in terms of a portfolio for you. Ultimately, at the end

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of the day, the investor needs to understand the risks that were taken and underwritten and also how the GP has communicated. It’s incredibly important for the LPs to be proactive about that because, as you’ve noted, there is an evolution as with any process and GPs are getting much better in regard to communicating. There’s a lot to be made about the annual meeting, but it’s also important to recognize those intermittent touch points. If nothing else for the GPs, if you don’t do it, your competitors are doing it and when that fundraising time comes, while you do have that existing relationship, those that have invested to help educate or inform or to distill down whatever the strategies or ideas may be, it would actually level the playing field a bit with existing managers. It behooves GPs to partner up, so to speak, with LPs to ensure that they are well informed at all times.

Guen: Yes. It’s interesting, because some investors, when they come to fundraise and the GP comes to fundraise, the investors switch the person who’s going to do the work because they feel that William here, who sits on the advisory board, is biased. But, to the point that was just made, you need to have that infrastructure so that he’s aware of the messaging; the internal briefs and the arguments have been clear so that you are actually not that far removed from understanding who the GP is and when you do your due diligence, you’ve got channels of communication with the reports and material that is consistent in their numbers.

Elio: GPs need to realize, though, also in the fundraising process, that enlightenment comes early on. You need to convince the LP early that your strategy, your opportunity and your differentiator are truly unique. That enlightenment comes early. With the due diligence process, the GP needs to understand that we wouldn’t be in diligence in the first place if the LP didn’t have some conviction about investing. n

Copyright © PrivCap LLC

Insurance

Representation and Warranty Insurance Should you consider it for your next M&A deal?

By Cameron Rusaw, Davies Ward Phillips & Vineberg LLP

ARKA38 / SHUTTERSTOCK.COM

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key concern of a financial sponsor exiting a portfolio company investment through an M&A transaction is to limit its post-closing liability exposure for breaches of its representations and warranties in the acquisition agreement. The traditional method of addressing this concern is to shift to the buyer as much of the risk of loss resulting from such breaches as possible. This is done through negotiating caps, baskets and other limitations on the seller’s liability for losses caused by misrepresentations, as well as the scope of the representations and warranties themselves.

Another way to address this concern is to shift the risk to an insurance company by purchasing representation and warranty (R&W) insurance. R&W insurance can eliminate or greatly reduce the seller’s exposure to postclosing liability while providing the buyer with recourse for losses it may suffer due to misrepresentations in the acquisition agreement.

R&W insurance is a rapidly growing phenomenon. R&W insurance is commonly used in parts of Europe, Australia and New Zealand, but until recently it was rarely used in North America. In the U.S., R&W insurance is still used only in a small minority of deals, but it is quickly catching on. All the major insurance brokers are reporting large increases in the use of R&W insurance in the U.S. over the past two or three years. M&A professionals who were once skeptics are increasingly open to the idea.

This is true to a lesser extent in Canada, where the uptake has been much slower than in the U.S. This may be due to the traditional lag between U.S. and Canadian practice trends. The relatively low frequency of post-closing litigation over indemnity claims in M&A deals in Canada compared to the U.S. (like civil litigation of any type) may also be a factor. Whatever the reason, many market observers predict that the popularity of R&W insurance will continue to grow in Canada as it has elsewhere.

Private Capital § Quarter 1 § 2015 11

ARTFAMILY / SHUTTERSTOCK.COM

For sellers, R&W insurance can provide a clean exit by eliminating or reducing the indemnity as well as any holdback or escrow.

R&W insurance is not new. I first encountered it in my practice almost 20 years ago. Historically it was seldom used, however – in North America at least. A common perception among M&A professionals was that premiums and deductibles were too high, the process took too long and the policies often didn’t match the requirements of the parties. The industry has evolved, though, and many of the historical concerns are no longer valid. Premiums are lower (typically two to four per cent of insured value), and deductibles are lower (one to three per cent of transaction value). Moreover, as the product has evolved and gained acceptance, the insurance companies that provide this coverage have developed expertise in pricing the risk and are able to move quickly and efficiently through the due diligence and underwriting process. Many of the brokers in this area, former M&A lawyers who fully understand the requirements and dynamics of M&A deals, can quickly get up to speed on the specifics of your deal, and work in “deal time.” From start to finish, the process can now be done in as little as seven to 10 days. In a recent

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Private Capital § Quarter 1 § 2015

deal, we obtained a non-binding quote for a sizable insurance policy (close to $50 million) within 24 hours, and we were able to design a policy that fit the needs of our deal within a week.

What is R&W insurance?

R&W insurance is an insurance policy that provides coverage for a breach of a representation and warranty in the acquisition agreement. Each policy is different, but typically it will provide blanket coverage for losses from claims made by the buyer for a breach or inaccuracy of any of the reps and warranties in the acquisition agreement. Sometimes specific representations (e.g., environmental) are carved out, and sometimes coverage is arranged only for specific reps and warranties.

Generally, R&W insurance only covers unknown risks; known issues are typically excluded from coverage. In the typical “buyer policy,” the insurer will pay the amount of the buyer’s claim for losses up to the policy limit subject to a deductible and any exclusions. Insurers typically

Insurance

For buyers, R&W insurance can provide more coverage than the seller would otherwise have agreed to give.

charge an underwriting fee of $20,000 to $40,000 to cover the cost of their outside counsel engaged to assist with due diligence, and a one-time premium of two to four per cent of the insured amount. R&W insurance is typically available for deals in the range of US$25 million to $1 billion.

Why R&W insurance?

For sellers, a R&W insurance policy can provide a clean exit by eliminating or reducing the indemnity as well as any holdback or escrow. For buyers, it can provide more coverage than the seller would otherwise have agreed to give. For example, in one deal where the parties were in tough negotiations over the amount of the escrow and the indemnity cap, we were able to arrange insurance that enabled the buyer to agree to a much lower escrow (three per cent) than it had wanted (10 per cent). This was a good result for both parties. The seller received 97 per cent of the purchase price on closing, which it could distribute to its limited partners with confidence that it had effectively

reduced its post-closing risk to the remaining three per cent. The buyer had coverage for claims up to the policy limit ($50 million) and the three per cent escrow effectively served as the deductible for the policy. Moreover, the credit risk for the buyer was reduced – if it ever made a claim, it would be against an AAA rated insurance company instead of a PE fund at the end of its fund life.

R&W insurance can also be used strategically by sellers in an auction process. Sellers sometimes arrange for R&W insurance policy quotes upfront, and prepare an auction draft of the acquisition agreement that contemplates a policy being in place. The auction draft would contain customary representations and warranties, but would provide that the buyer’s only recourse for a misrepresentation would be to the insurance policy, subject only to a small deductible that may or may not be placed into escrow. Buyers would be asked to make their bid based on this, including by factoring in the cost of the premiums for the insurance into their proposed purchase price. In addition to offloading risk to the insurer and giving the Private Capital § Quarter 1 § 2015 13

Insurance

seller a clean exit, this approach can streamline the negotiations and increase deal certainty.

Other situations in which R&W insurance can be helpful include: ›› Where there are credit or collectability concerns, such as where the seller is insolvent or in a foreign jurisdiction ›› Where an indemnity is not available, such as where the seller is a trustee in bankruptcy or in a public M&A deal ›› Where there are multiple sellers, particularly where the sellers’ indemnities are on a several basis rather than joint and several ›› Where the sellers include employee shareholders who are staying on in the business

IVELIN RADKOV / SHUTTERSTOCK.COM

How to get R&W insurance

14

The process typically begins with a phone call to the broker. There are a number of brokers with specialists in this area who can quickly and efficiently arrange coverage. A good broker will have you connected with an appropriate insurance carrier within 24 hours who can issue a non-binding indication within a few days. The insurer will likely request access to the data room and will provide a due diligence checklist. As part of this process, the insurer will also likely want to have a call with the buyer and its deal team to discuss the buyer’s due diligence. Once the insurer’s due diligence is complete, the carrier will issue a draft policy. Great care must be taken to ensure that the terms of the policy match the terms of the acquisition agreement or otherwise gives you the coverage you are

Private Capital § Quarter 1 § 2015

seeking. There are a number of things that merit close attention, including making sure that the losses covered by the policy line up with the losses as defined in the acquisition agreement and that the deductible lines up with the escrow amount or holdback. Insurers are now quite used to negotiating the terms of the policies and have shown flexibility and willingness to accommodate the insured’s needs.

It’s a tool, not a panacea While historically I was a skeptic, I now regularly advise clients in M&A deals, especially sell-side clients, to at least consider whether R&W insurance might make sense in their particular circumstances. R&W insurance will not be appropriate for all situations, and should not be regarded as a panacea. There will be times where the principal risk that the parties are worried about (e.g., an adverse CRA audit of past, tax-sensitive transactions) is one that the insurer cannot get comfortable underwriting. Or the cost of the premiums will be regarded as too high relative to the perceived risk. Or your deal may be too small or too big. But in the right circumstances, it can be a useful tool, and M&A professionals and players will be well advised to learn to use it. n

Cameron Rusaw is a partner at Davies Ward Phillips & Vineberg LLP. He has a broad transactional practice with a focus on mergers and acquisitions, cross border transactions and private equity. Rusaw is also an adjunct professor at University of Toronto Law School, where he teaches a corporate transactions course.

Strategy

WHY A

Brilliant

BUSINESS ISN’T

STRATEGY ENOUGH

Part 2

Give your strategic plan a healthy dose of clarity

By Fred Pidsadny, Focus Management

MACROVECTOR / SHUTTERSTOCK.COM

Part 1 of this two-part series appeared in the Q4 2014 issue of Private Capital.

L

et’s face it: many strategic plans are a collection of lengthy, meaningless and often grandiose statements about mission and vision. Some can be uncomfortable to read aloud; others can be downright cringe-worthy. Indeed, some organizations spend precious time creating BHAGs (big, hairy, audacious goals) – also known as elaborate declarations of hope – instead of clear, direction-setting statements. Not surprisingly, metrics of success are unlikely to be found in these types of plans, and confusion about where the organization is really going abounds.

Sound familiar? Not convinced? Well then, try this: take a walk about and randomly ask individuals you work with

to describe where they believe the enterprise is “supposed” to be heading. Then wait. Listen to what is said and what is not said. You’re sure to be informed. You might even be surprised. And you will very likely be motivated, urgently, to inject some clarity into your plan. If there’s one thing that most successful business leaders agree on, it’s this: fuzziness is the enemy of execution. Clarity is king. Clarity is the key to strategy execution.

How, then, can you ensure that your strategic plan is infused with laser-like clarity?

Let’s start by defining what we mean by “strategy.” Every organization, arguably, has a strategy, or a set of beliefs

Private Capital § Quarter 1 § 2015 15

Strategy

Most companies follow a traditional strategic planning process, an often-lengthy exercise involving endless analysis of mission statements, prior decisions and actions, and issues related to management performance and culture. While this can be a worthwhile exercise, the process most often yields a laundry list of organizational goals, strategies and actions, and a plan that is activities-based rather than output-oriented.

Strategy alignment

regarding what must be done in order to achieve success.

The problem is, most strategies, however well-conceived, fail to address the three vital measures of clarity: ›› The mind: Ask yourself – does each individual on the team have the exact same understanding of what the strategy is? Do they “get” it? How do you know this for sure – have you asked them? Great leaders take time to address even the smallest of concerns so that the strategy is crystal clear to everyone. ›› The heart: Does everyone support the strategy in the same way that you do? Are they excited and passionate about it? Are they eager to own it, to commit to it?

A strategy that everyone understands but only a few get excited about won’t get you far. ›› The hand: Is it clear to everyone how the strategy must translate into action for them, personally? Can each and every person say, “Here’s what I’m working on that supports the strategy”? Take a moment to poll your team to clarify what specifically they’ll be doing to make the strategy a success. Are they all on board?

16

Private Capital § Quarter 1 § 2015

An alternative approach is strategy alignment, a process designed to align strategies to both the “outside” business landscape and the “inside” environment of the organization, and prioritize the two to three things that matter most to success. Using the clarity measures of the mind, heart and hand, organizations can quickly align priorities, and start to focus on great execution of the strategy.

Strategy alignment begins with a thorough examination of the current situation, including an objective definition of the organization itself, and a reflection of its external and internal environments.

Team members are asked to assess the future, create a shared vision and purpose, and set measurable goals for success. Importantly, team members must define what success means at this stage, so that they can answer the question, “Are we there yet?” Then, and only then, can they start to chart a course of action.

Now comes the hard part. Once the actions have been identified, choices must be made. Clarity of direction does not mix well with long lists! Strategy is about executing two to three things that really matter. These choices define, in clear and undeniable terms, the chosen strategy that will be implemented.

At this point, it is useful to reflect on how the strategy changes the nature of the organization. These changes might be structural, affecting the placement of people, skills and capital; or they might be more qualitative, altering in some significant ways the very nature of the enterprise. Again, the principles of mind, heart and hand must be applied to achieve clarity and commitment.

The final output? A strategic plan that is aligned with the realities of both the external business landscape and the internal capacities and capabilities of the organization. A document that is infused with laser-sharp clarity.

A blueprint for success. n

Fred Pidsadny is president of Focus Management.

Reputational Risk

Clear Intentions How trust and transparency impact decision-making – insights from the newly released Reputational Risk in Private Equity Report

By Raymond Page, International Administration Group (IAG)

S SERGEY NIVENS / SHUTTERSTOCK.COM

EC Commissioner Kara Stein highlighted the increasing importance of transparency in private equity at a keynote address she gave at Columbia Law School recently on hot topics in securities regulation: “Investors appear to appreciate the increased transparency they are receiving, and there is evidence they want more.”

With the Canadian Venture Capital Association (CVCA)’s new figures showing a resurgence in private equity investment, with investment at its highest since 2007, it is interesting to see how much transparency impacts investor’s views on their private equity investments.

Commissioner Stein was referring to The Reputational Risk in Private Equity Report (The RRiPE Report), which IAG

commissioned with Thompson Taraz. The report surveyed the views of over 200 general partners (GPs) and limited partners (LPs) and shows a stark disconnect between the perceptions of GPs and their LP investors on transparency.

Although 92 per cent of GPs believe they are providing their LPs with all the information they need, more than half of the LPs disagreed.

Rising LP demands GPs on average rated their fund reporting 3.9 out of 5, whereas LPs rate GP reporting on average 3.3 out of 5.

According to LPs, venture capital funds are the worst performers. The increasing demands from some LPs for additional or supplementary requests are placing a greater burden on smaller or newer fund managers who may not

LP Supplementary data requests according to LPs (multiple responses possible) The same, standard data but organised / formatted in a different way The same, standard data but provided more frequently or at different times More information about events related to the GP’s firm More information on valuation movements More information on other aspects of individual portfolio companies

34% 37% 55% 71% 72%

Private Capital § Quarter 1 § 2015 17

The views of over 200 GPs and LPs show a stark disconnect between the perceptions of GPs and their LP investors on transparency...according to LPs, venture capital funds are the worst performers. pension and/or municipal funds are being professionally managed.

Good communication is built on trust, and unfortunately The RRiPE Report also revealed that trust was lacking between GPs and LPs. For example, 99 per cent of GPs suspect that LPs have met them despite having no intention of investing in their fund. Surprisingly, 63 per cent of LPs admitted to taking a meeting despite having no intention of investing. This lack of trust is further compounded by the fact that 84 per cent of GPs surveyed also believe that LPs misled them about why they didn’t invest.

LPs feel very uncomfortable revealing the true reasons for not investing.

“Sometimes, GPs’ egos are so inflated that you cannot give them the true reason for passing; they may write you off completely,” said one North American insurance group managing director. However, only 16 per cent of LPs admitted to lying to GPs about the reason they didn’t invest in their fund.

be set up to meet those demands in the timeframe that some LPs expect. Indeed, one GP reported that in one year, she had received 9,000 requests for additional information.

Forty-one per cent of participants in the research are based in North America and they shed light on further concerns around the communications they receive from GPs. Each one of the 128 LPs that took part in the study had put a manager on formal review for one or more communication or reputational issues. More than half of the LPs put a private equity fund manager on review due to poorly communicated personnel changes, and 42 per cent have done so because of inaccurate or incomplete reporting. LPs are taking seriously how GPs communicate to ensure that the dollars they are investing on behalf of

NIYAZZ / SHUTTERSTOCK.COM

Issues that have led to a manager being put on review by a LP

18

Reputational issues from the portfolio

39%

Slow response to enquiries

40%

Insufficient governance controls

40%

Reputational issues from the GP and/or its personnel

41%

Inaccurate or incomplete reporting

42%

Poorly communicated personnel changes

Private Capital § Quarter 1 § 2015

Future for investor relations 52%

What will the future be like for investor relations and improved transparency? One answer appears to be increased oversight and regulation.

CHARTS COURTESY OF IAG & THOMPSON TARAZ, THE REPUTATIONAL RISK IN PRIVATE EQUITY REPORT

Reputational Risk

many also appreciate that this isn’t a panacea for all the communication issues between investors and their fund 63% managers. One head of a Swiss family office sums it up: “By far, the most frustrating issue is that everybody does things differently. It is not the portal.”

As Commissioner Stein mentioned at Columbia Law School, the issues of transparency have their own intricacies and can be complicated. Nonetheless, the efforts to improve the vital relationship and flow of information between both investor and fund manager should continue. n

An insight into LP behaviour – proportion of LPs that have demonstrated the following behaviours Took a meeting despite no intention of investing Requested information only to benchmark other funds Lied about reason for not investing Requested LP login and never used it Requested extra info; did not use it

27% 16% 27% 18%

Indeed, 48 per cent of LPs strongly agreed that increasing oversight is a good thing to improve transparency.

However, both LPs and GPs recognize when increased oversight doesn’t work. When asked about the Alternative Investment Fund Management Directive (AIFMD), the EU regulation that came in 2013, most agreed that it isn’t the right approach. It was perceived as serving political goals, rather than protecting the investor.

Perhaps standardization of reporting holds the key to greater transparency. Take, for example, the AltExchange Alliance, which was founded by a group of GPs and LPs to improve standardization in 2013. It has over 50 members globally, including Canada’s Institutional Limited Partners Association (ILPA).

LPs believe that technology could also improve transparency, with 83 per cent believing that GPs should invest more in LP portals and other online investment tools. Yet

Raymond Page, FCCA, is managing director at the International Administration Group (IAG), which provides specialist fund administration services for private equity, real estate, alternative assets and listed fund structures. With 25 years’ experience working in the financial services industry, he focuses on developing IAG’s business and completing strategic joint ventures in Asia and Europe to strengthen its international reach. For more information, visit www.iagfundservices.com.

Private Capital § Quarter 1 § 2015 19

Top Deals in 2014

Top 15 Completed Foreign PE Deals in 2014 Country

$ (in millions)

1. X2 Resources Partners LP Inc

UK

2,766.00

2. Wilton Re Holdings Limited

Bermuda

2,025.18

3. York Risk Services Group, Inc

US

1,444.25

4. DTZ

US

1,187.42

5. London Array 1

UK

1,177.88

6. Bord Gáis Éireann (BGE) Wind Portfolio Ireland

1,077.79

7. Safe Harbor Water Power Corporation US

990.58

8. Valor Logística Integrada S.A. (VLI)

Brasil

932.24

9. Transportadora de Gas del Perú S.A. (TgP)

Peru

901.23

10. XPO Logistics, Inc.

US

766.64

11. IPALCO Enterprises, Inc.

US

689.66

12. Brookfield Smoky Mountain Hydropower Project LLC

US

602.34

13. George Little Management LLC

US

361.93

14. 21st Century Oncology Holdings, Inc.

US

360.95

15. The Space Entertainment S.p.A.

Italy

190.03

Top 25 Completed PE Deals in 2014

Top 25 Disclosed VC Deals in 2014

20

Company

Company

Location

$ (in millions)

Company

Location

$ (in millions)

1. D2L Inc./Desire2learn

Ontario

91.26

1. Tim Hortons Inc.

Ontario

11,827.00

2. HootSuite Media Inc.

BC

66.45

2. AltaLink LP

Alberta

3,100.00

3. D-Wave Systems Inc.

BC

61.75

3. Patheon Inc.

Ontario

2,043.02

4. Aurinia Pharmaceuticals Inc.

BC

57.10

4. Encana Bighorn Assets

Alberta

2,000.00

5. WP Technology Inc., dba Wattpad

Ontario

51.48

5. Brookfield Property Partners L.P.

Ontario

1,800.00

6. LightSpeed Retail Inc.

Quebec

38.33

6. Heritage Oil Plc

Alberta

1,700.00

7. Kik Interactive Inc

Ontario

38.30

7. Veresen Midstream Limited Partnership Alberta

1,000.00

8. MedAvail Technologies Inc.

Ontario

33.80

8. lululemon athletica inc.

BC

919.74

9. 2NDSITE Inc., dba FreshBooks

Ontario

32.22

9. Atrium Innovations Inc.

Quebec

874.00

10. Monteris Medical Inc. 11. SHOP.CA Network Inc.

Manitoba Ontario

31.00 31.00

10. Nordion Inc.

Ontario

727.00

11. CHC Group Ltd.

BC

679.44

12. Zymeworks Inc.

BC/Quebec

31.00

13. BuildDirect.com Technologies Inc.

BC

29.76

12. Canadian Non-Operated Resources LP (CNOR)

Alberta

675.00

14. Highland Therapeutics Inc.

Ontario

28.17

13. GFL Environmental Inc.

Ontario

650.00

15. RANOVUS Inc.

Ontario

26.90

14. National Energy Corporation

Ontario

505.00

16. Visier Inc.

BC

25.97

15. CSV Midstream Solutions Corp.

Alberta

500.00

17. Blockstream Corporation

Quebec

22.98

16. McInnis Cement Inc.

Quebec

500.00

18. SecureKey Technologies Inc.

Ontario

21.74

17. Agropur coopérative

Quebec

470.00

19. Peraso Technologies Inc

Ontario

20.00

18. Bruce Power LP

Ontario

450.00

20. Themis Solutions Inc.

BC

20.00

19. WSP Global Inc.

Quebec

400.00

21. Mogo Finance Technology Inc.

BC

18.60

20. Stornoway Diamond Corporation

Quebec

398.00

22. Cooledge Lighting, Inc.

BC

18.47

21. Jamieson Laboratories Ltd.

Ontario

300.00

23. Transition Therapeutics Inc.

Ontario

18.24

22. Imaginea Energy Corp.

Alberta

300.00

24. BuildDirect.com Technologies Inc.

BC

17.09

23. Minacs Worldwide Limited

Ontario

290.45

25. Vision Critical Communications Inc.

BC

16.00

24. BlackBerry Limited

Ontario

273.70

25. Lundin Gold Inc.

BC

200.51

Private Capital § Quarter 1 § 2015

2015 CO N F E R E N C E

VANCOUVER, BC MAY 19 TO 21, 2015

Save the date for the biggest VC and PE event in Canada!

Join us at the CVCA’s 2015 Annual Conference,

For more information, visit www.cvca.ca.

No matter which direction you’re thinking of taking your business, the right guidance and transaction advice will help you choose the best route.

Deciding to sell your business, buy a business or find new financing for your business is one thing. Deciding which approach to take is another. MNP Corporate Finance transaction advisors know the right roads to take – and the connections you need – to make whatever direction you’ve decided on work for you. We’ll develop strategies for every km of the journey – whether that journey is across the street or across the international date line.

MNP Corporate Finance. Transaction advice that will get you there.

Contact Ted McCarron, MBA at 403.648.4173 or ted.mccarron@mnp.ca