Setting the Stage
According to Ernst & Young, there is approximately US$695 billion in capital (i.e. dry powder) under management by traditional private equity firms worldwide. Such record levels of dry powder are a driving factor behind the significant competition between traditional PE firms looking to deploy this capital. This results in historically high valuations with EV/EBITDA multiples at an average of approximately 11 times. As traditional PE funds in Canada continue to raise record amounts of capital, they are by necessity drawn to increasingly larger deal sizes. We believe this has resulted in a significant gap and a growing unmet need for PE at the lower end of the mid‑market.
Yet with 75% of small business entrepreneurs planning to exit their businesses in the next 10 years, this is expected to result in the transfer of business assets potentially worth more than $1.5 trillion according to the Canadian Federation of Independent Business. Due to the shortage of institutional capital in this segment of the market, there are very few small, private, independent PE funds in Canada to serve this large and growing market.
Sage believes this pending wave of succession planning related business transitions, combined with the lack of capital flowing into the lower end of the mid-market creates a significant opportunity. Furthermore, this creates an environment that is uniquely appropriate to support the search fund model which allows for founders to be replaced with “new entrepreneurs” or “repeat entrepreneurs” with additional operating experience.