Private equity eyeing Canada's blue-chips - study

VANCOUVER, British Columbia May 28 (Reuters) - Large, listed Canadian companies will increasingly fall prey to takeover bids from private equity firms over the next five years, according to a study released on Monday.

Consulting firm McKinsey & Company said private equity deals in Canada, as in the United States, are gathering pace for reasons that include the cost of operating publicly and poor capital management by some listed companies.

"This indicates that private equity firms will be considering taking over some large Canadian publicly-listed companies," McKinsey said in its fifth annual report on Canada's private equity industry.

The study comes at a time when at least three private equity consortia are considering a buyout of BCE Inc. (BCE.TO), Canada's biggest telecoms company.

McKinsey said Canada's private equity industry has experienced "unprecedented growth" and by 2006 had C$65.5 billion ($60.7 billion) of private capital under management.

The number of Canadian buyout firms, which buy up businesses, restructure them and try to sell them at a profit, has increased from 43 to 53 since 2003, McKinsey said.

Canada's buyout market has produced higher long-term returns than in the United States, the study said. Five-year and 10-year Canadian pooled buyout returns have outpaced U.S. returns by 1,100 to 1,700 basis points.

But returns from Canadian venture capital investors, another segment of the private equity industry, have lagged those of their U.S. peers.

McKinsey said it expected U.S. private equity players to increasingly set their sights on Canada, especially on mid-sized transactions.

The consulting firm predicted that infrastructure deals, including transactions involving ports and utilities, would remain hot in Canada over the next five years.

It expects a "vibrant" high-yield market to emerge in Canada as investment banks and hedge funds provide more debt financing and the Canadian income trust market shrinks.

McKinsey expects some Canadian private equity players, like their counterparts in the United States, to consider listing their stock as a way to secure an ongoing source of funds.

"While it is a bit paradoxical that 'private' equity would like to become 'public', the logic is reasonable," the study said. ($1 = $1.08 Canadian)