EdgeStone Capital Equity Fund – Early Phase Analysis

The timing for creating a $180 million private equity fund is very opportunistic. With the strong Canadian economy positioned for continued growth, a federal budget surplus, and a low Canadian dollar, there will be numerous Canadian companies looking to PE firms for financing. This economic outlook coupled with $180 million of initial capital, EdgeStone will be able to be extremely selective in terms of potential targets, further increasing potential returns while limiting risk.

Structure of Fund

Type and Size of Investments It is imperative to identify the proper size and type of investments that EdgeStone will be engaging in. In terms of size, exhibit 1 identifies the average Canadian deal size was $1.8 million in 1996. However, as a first time fund with a substantial capital base, it is my recommendation that the average deal size for the first years of operating be around 3% of AUM. This will allow the fund to focus on generating strong returns on a smaller number of investments rather than being spread too thin.
In regards to the type of investment, it is my recommendation that EdgeStone become a passive investor, and focus on sourcing deals with companies that are growing rather than struggling.

Industry Focus With an underdeveloped supply of capital in Canada, limiting the fund to a specific industry focus could harm potential returns.

Geographic Focus With less than 25 PE firms that could qualify as direct competition to EdgeStone, in addition to increasing demand within the Canadian PE industry, there is no need to focus on companies that lie outside of Canada (Exhibit 2). The Offer Memorandum should define the geographic boundaries of the investment focus to include only companies that are headquartered in Canada.

Evaluating Target Opportunities and Sourcing Deals

Sourcing and