Relative Attractiveness of Investing in US vs. Canada

Curious how people working in PE think about investing in the US vs. Canada. The general sense I get is that US-based PE firms generally stick to the US or buy companies that operate across US and Canada and less so buy businesses that are 100% Canadian focused (unless they have an angle / the process is weak). On the other hand, Canadian-based PE firms are much more willing to buy Canadian-only businesses.

My general view is that when comparing two businesses operating in the same industry and same EBITDA, one of which only operates in the US and the other of which only operates in Canada, the US opportunity is likely to be more attractive for several reasons.

First, the US market is ~10-15x the size of the Canadian market (based on GDP), so for the same sized business, there are more growth opportunities in the US than Canada. For example, a $30mm EBITDA business in the US may have a low market share, whereas the same size business in Canada could be a market leader. While being a market leader could make the business attractive, it could also mean that the business has saturated the market and doesn't have strong growth prospects. 

Second, the Canadian government is fairly liberal and in many ways operates more like Europe than the US when it comes to topics like business friendliness. For example, laying off people is much harder in Canada than the US and businesses generally incur significantly higher severance costs (not uncommon to have to pay employees 6 months severance in Canada vs. <1 month in the US).

Third, the Canadian economy is much more sensitive to interest rates, particularly in residential mortgages where the most common mortgage length is 5 years or less compared to 30 years in the US. As a result, as mortgages roll over, Canadians are currently feeling the pressure of higher interest rates more so and more quickly than their US counterparts.

One positive aspect of Canada is its population growth, which is higher than the US driven by high immigration.

Are there any other key differences between the two countries people would highlight from an investing perspective?

In light of the above, is there a case to be made that Canadian businesses generally speaking should transact at a discount to US businesses in a PE context and that this could potentially make investing in Canada worthwhile? I imagine it could vary by industry, but if so what is the general multiple discount your firms try to obtain when looking at a Canadian-only business vs. US business in the same industry and similar size? ~1-2x turns or more?

Assuming there is a valuation discount for Canadian businesses, could one value creation play be to buy a 100% Canadian business and then expand into the US in a meaningful way (most likely through transformational M&A) to form a North American player that could get a higher multiple at exit due to increased scale and geographical diversity?

I imagine there are some US-based PE firms who would pass on an opportunity to bid on a 100% Canadian business. Even if the sponsor who bought the business did transformational M&A such that in 5 years time the business had evolved to a sales mix of ~75% Canada / ~25% US, US-based sponsors might still view the business as predominantly Canadian-based and pass. If true, then the multiple arbitrage may only be obtained if the Canadian business is able to significantly diversify its revenue mix (say to 50/50 US/Canada), which if done through M&A would likely carry a lot of execution risk given entry into a new country in a meaningful way.

I have seen some processes for 100% Canadian businesses over the past 12-24 months become broken. This is partially due to the state of the M&A markets recently and granted these processes were in more challenged industries, yet I wonder if part of the reason the processes broke down is because PE firms are just less interested in buying Canadian-only businesses. If so, could it be a value trap to buy one of these businesses thinking you're getting it for a good price only to struggle to exit in a few years due to limited buyer interest (assuming at your exit the business still only operates in Canada)?

The reason I'm asking this question is in part because I work at a firm based in the US that invests across North America, yet given the background of the Partners tends to see significantly more deal flow from Canadian bankers than US bankers. I spend more than half my time looking at Canadian-only businesses and think we miss out on a lot of US opportunities that could be more attractive. My firm as a whole doesn't think Canadian businesses should trade at a discount to US businesses, which makes me less excited to look at Canadian businesses (given my more negative view of the Canadian market), so I wanted to get the forum's thoughts on how they and their firms think about the two markets and whether my more bearish view of the Canadian market relative to the US is warranted.