Skip to main content

The Globe and Mail

Private equity firms muscling in on Canadian banks’ commercial lending

Various buildings in downtown Toronto are from left CIBC; Bank of Montreal, 1 King West and Scotiabank (brown building).

FRED LUM/THE GLOBE AND MAIL

A growing roster of private equity firms hoping to buy or lend to small and mid-sized Canadian companies has the country's biggest banks on edge, forcing them to reassess their long-standing commercial banking strategies out of fears of getting left behind.

Canada's banks developed their commercial banking arms over decades by lending to companies that typically generate annual revenue of $50-million or less, nurturing scores of client relationships. Since the financial crisis, however, private equity firms have been scooping up smaller companies, shaking up their historical banking relationships.

Such disruption is more rampant today because scores of baby boomers are looking to sell the businesses they built from scratch now that valuations are soaring again. Private equity firms are natural buyers because they are flush with cash, and willing to spread more in the small to mid-market sector because its prospects for deal flow keep getting better.

Story continues below advertisement

Anatol von Hahn, Bank of Nova Scotia's head of personal and commercial banking, said he would be "be very surprised if we don't have double, triple" the number of small Canadian companies that are owned by private equity firms twenty years from now. Because they are flush with cash that they simply can't sit on, private equity firms are often willing to pay big multiples to buy small businesses. "They're playing a huge role," he said.

Scotiabank is particularly attuned to what is happening in this market because it's embarking on a rapid expansion of its commercial banking operations after spending months studying the landscape. However, Canada's third-largest lender is not alone. Commercial banking is a priority for many of its rivals because personal borrowing is slowing, with the most recent quarter-over-quarter growth mostly flat across the sector. Lending to small and medium-sized businesses, however, is still expected to grow at rates in the high single-digits.

To adapt to the changing dynamics, Scotiabank has gone so far as to invest in certain private equity funds in order to get access to the companies they acquire, according to Mr. von Hahn, allowing the bank to pitch itself as a potential banking partner.

The trend isn't playing out in Canada alone. U.S. firms are looking for mid-market acquisitions north of the border. In May, New Jersey-based private equity player Swander Pace Capital acquired Montreal's Recochem, marking its 10th acquisition north of the border in the past decade. More acquisitions could come because the firm recently raised a brand new $350-million fund.

"Companies that are based [in Canada] are perfect for us," said Swander Pace managing director Andrew Richards, adding that many firms in Canada have the potential to expand east-west or north-south, provided they get a capital infusion.

Firms like Swander Pace make it clear that they are looking for baby boomers who want to sell. "There are a lot of family or entrepreneurially-run businesses. Our role in the middle market is to work with them during some sort of evolution," Mr. Richards says. Such assistance would historically come from the commercial banks.

In the near future, private equity firms may not be the only institutions Canadian banks need to worry about. In June, insurer American International Group (AIG) teamed up with Oak Hill Capital Management to launch Varagon Capital Partners to lend to medium-sized companies. The trend not only adds more competition to an already heated commercial lending market, but it "exacerbates a weakening of commercial and industrial underwriting standards at U.S. banks over the past few years," according to rating agency Moody's Investors Service, because lenders are doing whatever they can to win business.

Story continues below advertisement

The rating agency readily acknowledges that AIG's initial investment commitment of $1.5-billion may not seem like much, but "it points to the institutional market's increased participation in this sector as it searches for yield."

Report an error Licensing Options
About the Author
Reporter and Streetwise columnist

Tim Kiladze is a business reporter with The Globe and Mail. Before crossing over to journalism, he worked in equity capital markets at National Bank Financial and in fixed-income sales and trading at RBC Dominion Securities. Tim graduated from Columbia University's Graduate School of Journalism and also earned a Bachelor in Commerce in finance from McGill University. More

Comments

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨