Cost inflation inescapable as $400-million Sagard private equity fund eyes targets

‘We’re looking for businesses that do well in tougher times’

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Inflation and a potential recession were not on everyone’s mind when Marie-Claude Boisvert joined Sagard Holdings Inc., the alternative investment arm of Power Corp., in January last year with a plan to raise $ 400 million for a new private equity fund to buy stakes in mid-market Canadian companies.

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But such economic challenges cannot be ignored this week, as Sagard Private Equity Canada reaches its fundraising target and Boisvert contemplates the five-to-seven-year investment thesis for potential targets.

“Right now we are absolutely factoring in cost inflation, not only on salaries but purchases and also on capex,” Boisvert said in an interview Tuesday.

Despite macro-economic concerns roiling markets, Boisvert, who has been investing in private equity since 2008 when the credit-fueled financial crisis rocked markets and shook valuations, said Sagard Private Equity Canada is not shutting the door on raising more funds and it has already made its first investment in Quebec-based Groupe LOU-TEC Inc.

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The heavy machinery and equipment rental company has been operating since 1979 and, with the new funding from Sagard in hand, announced Monday that it would be expanding through the acquisition of another company, Accès Location +.

Boisvert said LOU-TEC has a decades-long track record and notably did well during prior periods of inflation and recession.

Their sales went up when the market went down

Marie-Claude Boisvert

“Their sales went up when the market went down,” she said, explaining that tough economic times cause companies to rent rather than buy equipment, and this doesn’t tend to revert when economic times improve.

Her fund is targeting investments in companies with earnings of between $ 10 million and $ 30 million in manufacturing, business services outsourced by companies and financial services, she said. An emphasis is being placed on leaders in their field, and those that can pass added costs such as inflation through to customers, rather than being forced to absorb them and reduce margins.

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Initial investors in the Canadian private equity fund include the Caisse de dépôt et placement du Quebec, BMO Financial Group, CIBC, Export Development Canada and Investissement Quebec, as well as Power Corp. affiliates Canada Life and Sagard Holdings.

Boisvert, who is no stranger to investing in tough times, acknowledged that earlier economic downturns including the 2008 financial crisis and the early days of the COVID-19 pandemic have been on her mind in recent weeks as the conversation swirls around the potential for another recession .

“We’ll see how they compare,” she said.

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In a report Tuesday, Fitch Ratings said the global macroeconomic outlook has “deteriorated materially since the beginning of the year,” with implications of tightening financial conditions, weakening growth, the Russia-Ukraine war and persistent supply-chain disruptions “feeding through multiple sectors . ”

The Canadian Chamber of Commerce, meanwhile, said in a June report that a record 39 per cent of firms expect to raise prices over the next quarter as companies struggling to recover from pandemic restrictions are faced with a cost crunch alongside labor recruitment and retention difficulties, and supply-chain pains “expected to persist well into 2023.”

Boisvert said she is focusing on making the right decisions and investments over the next couple of years to enable Sagard Private Equity Canada to meet internally targeted returns despite the challenges.

“Our goal is to deploy this capital diligently but to seize the opportunities that present themselves and do our work well,” she said.

“We want to make sure we can make it through those 18 to 24 months… so we’re looking for businesses that do well in tougher times.”

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