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May 30, 2019 – Private equity deals are key to fueling the growth of small firms, as well as the Canadian economy, according to a report from the C.D. Howe Institute. In “Growth Surge: How Private Equity Can Scale Up Firms and the Economy,” Daniel Schwanen, Jeremy Kronick and Farah Omran examine the role of private equity as a stepping stone for growth by home-grown firms and recommend governments implement measures that can help firms grow, or gain a more solid footing, beyond the initial venture stage.

Compared to US firms, Canadian companies have lower productivity, and fewer grow into large businesses, note the authors. At the same time, Canada has experienced a dearth of Initial Public Offerings (IPO) over the last 30 years and, correspondingly, owners of promising Canadian startups and young companies often “exit” by selling their stakes to large foreign companies rather than support their growth in Canada. In this context, the authors investigate what other source of capital (and associated expertise) could complement public equity in fostering firm growth in Canada.

In their report, the authors find that private equity capital (venture capital and private equity) plays such a positive role, nurturing growth, jobs, investment, trade, and productivity in the Canadian economy. “At a time when IPOs have been in decline, private equity deals have picked up the slack in supporting entrepreneurs looking to grow their firms,” commented Daniel Schwanen.

They examine the economic impact of a large range of recent deals – 100 deals under $500 million, 69 deals between $500 million and $1 billion, and 85 over $1 billion. The main takeaways:

  • Smaller deals were heavily focused on both domestic and international growth of Canadian companies;
  • Mid-size deals were more diversified as to their ultimate direction, including proportionately more foreign investment in Canadian companies; and
  • Larger deals involved proportionately more Canadian investors looking abroad to buy.

The authors also note that smaller PE deals are more concentrated in  the high-growth/high-productivity sectors of Canada’s economy, based on sciences and engineering.

The authors recommend:

  1. introducing measures similar to those in the US Small Business Jobs Act of 2010, exempting from taxation the capital gains on selling shares of certain small businesses. Early returns suggest that investment in small and medium-sized enterprises and the number of investors have increased since this policy was put in place in the US.
  2. opening more Canadian infrastructure investments to private investors.
  3. reorienting the Small Business Deduction to young and growing firms, in contrast to applying it to all businesses that are small.

Read the report here

For interviews or more information, contact: Daniel Schwanen, Vice President Research; Jeremy Kronick, Associate Director, Research; Farah Omran, Junior Policy Analyst; David Blackwood, Communications Officer, C.D. Howe Institute, phone 416-865-1904 ext. 9997, email: dblackwood@cdhowe.org

The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.