October 1, 2011
Interviewed by: David Snow
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Canadian Spinout

Regulatory pressures on banks around the world is causing many of them to shed private equity investment divisions. Banking giant HSBC has already spun out a number of private equity teams, and now the spinout trend has made its way to Canada, where HSBC Capital (Canada) is in the process of becoming an independent firm called Fulcrum Capital Partners.

Privcap speaks with HSBC Capital (Canada) chief executive officer Dave Mullen about the impetus for the spinout, his firm’s deal flow dynamics, and how his firm helps Canadian middle-market businesses go to the next level and develop greater non-Canadian revenue streams.

Regulatory pressures on banks around the world is causing many of them to shed private equity investment divisions. Banking giant HSBC has already spun out a number of private equity teams, and now the spinout trend has made its way to Canada, where HSBC Capital (Canada) is in the process of becoming an independent firm called Fulcrum Capital Partners.

Privcap speaks with HSBC Capital (Canada) chief executive officer Dave Mullen about the impetus for the spinout, his firm’s deal flow dynamics, and how his firm helps Canadian middle-market businesses go to the next level and develop greater non-Canadian revenue streams.

David Snow, Privcap: Dave, what have been some important sources of deal flow for your firm over the past few years?

Dave Mullen, HSBC Capital (Canada): We play in the middle market, so we look for sources that come out of there.  A lot of it comes from our bank.  HSBC’s quite active in the middle market, and that provides it.  We also attend the network from investment bankers to other accountants, lawyers, other contact people.  We’ve been in business for 18 years, so the network’s already pretty well established there.

Privcap: So how does it work?  Is the bank referring opportunities to your firm?

Mullen: Yeah.  Again, we mine the banking network pretty aggressively or as aggressively as we can.  The bank provides both mezz and equity opportunities for us, and so we try to connect with the commercial bankers on a regular basis so that they remember us when opportunities arise from the client.  To date, we’ve gotten about half our deal flow from the bank.

Privcap: How do you help your portfolio companies expand beyond the borders of Canada?

Mullen: Well, we do a number of things.  First of all, we provide some governance for the company; usually provide them to or request that they bring in people like CFOs.  They usually, the mid-market companies, they quite often don’t have a full financial background or people on staff.  We use the HSBC network sometimes to access international connections for them.  And, in addition, we work pretty aggressively on acquisitions, and the acquisitions quite often have an international component to it. . . In our last fund – it was the ’05 fund – about a third of the revenue came from international sources.  Our current fund, about half the revenue comes from international sources.  So, as you can see, there’s a pretty international component to our portfolio companies.  And that’s partly a reflection of a lot of the clients that come to us through the bank are already international because that’s why they’re with the bank.

Again, we’re doing mid-market companies, so we take them to the next level.  And when they go to the next level, that usually involves some more international revenue, more international acquisitions, etc.

Privcap: What was the impetus behind the spinout?

Mullen: It was driven by HSBC.  They’re an international bank.  They have various regulators around the world.  The regulators tend to be pushing banks away from non-core banking activities through a bunch of different either regulations or rules that are being put in place.  And, thus, HSBC made the decision a couple of years ago that they were going to, I think, generally get out the private equity space.

Privcap: So what do you think will remain the same about your firm after the spinout, and what will be different?

Mullen: What will be the same is we’re going to keep a close relationship with HSBC.  We hope to have the good deal flow from HSBC.  We are managing a lot of their money and working with a lot of their clients.  We’re going to have the same focus, which is a middle market.  We’ve been doing that for 18 years.  We think that’s a very good and sweet spot to be in and a good spot to buy companies.

[04:00]

What will change, [is] going from a big organization to a partnership, that’s a big cultural and other change for all individuals.  And we’re hoping that will drive the entrepreneurship within our own organization and practice what we preach to our companies that we do management buyouts with.

Right now, we certainly think it will be business as usual.  In addition to just legal agreements, which ensure some deal flow from HSBC, we’re going to maintain that close relationship.  And, again, we’re managing a lot of their money, so it’s in their best interest and our best interest to keep that relationship as close as we can.

Privcap: Of course, HSBC Canada is not the first private equity division of HSBC to spin out.  You’ve got Montagu in Europe; you’ve got the Asian division that is now independent.  Do you maintain a relationship with those other HSBC spinouts?

Mullen: Yes.  We stay in contact with them, yes, the people in Montagu, the people in Headlands, which is Asian group, the people in London, which is an infrastructure group called Infrared.  We stay in contact.  We refer deals back and forth to each other, refer contacts, capital sources and other things.  There’s not a huge connectivity there, but there is some, and it’s a worthwhile group to stay in contact with.

Certainly, we have to do some hiring.  In certain levels in some of the offices, we have to bring in some additional people.  We have to start thinking about succession planning.  A lot of people are getting closer to the end of their career than the beginning of their career, and we have to bring up some younger talent.  So there is some work that we have to do there, and we’ve got capital in place now for the next five years.  So, through that five-year piece, we’ll have to make some of those changes and additions.

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