Private equity investors are planning for the possibility Canada's economy will struggle to emerge from recession, even if it turns in a positive third-quarter performance, money managers said on Tuesday.

Canada's economy has proven to be one of the most resilient in the developed world to the global economic crisis, and the Bank of Canada predicted in August that the country may emerge from recession as early as the third quarter.

But investors are not convinced, and prefer to plan their investment strategy with a more cautious outlook with the possibility of a double dip on the horizon.

I think people are planning for things to get worse, Steve Dent, a partner at Birch Hill Equity Partners, told a roomful of investors during a round-table discussion in Toronto that was sponsored by the Canadian Venture Capital and Private Equity Association.

I think this really is a year for being cautious. It's difficult to make revenue assumptions.

Private equity buyout activity has suffered in the global economic crisis, and investors are still hesitant to commit to ventures until valuations stabilize.

Industry leaders said on Tuesday that that may take some time as the spread between bid and asking prices remains wide, even as businesses line up in front of private equity investors, seeking to sell before the next dip in the economy.

We're having a hard time understanding where the economy is going. It is still a market in our view where you need to be cautious and careful, said Michael Lay, a managing partner at ONCAP, the fund established by Onex Corp to invest in North American small-cap companies.

Some private equity partners say concern the economy will dip again is leading them to shelve plans for time-consuming, costly initial public offerings for portfolio companies until the outlook points to a sustained recovery.

The Canadian economy is giving mixed signs of vigor.

Data this week showed that retail sales rose twice as much as expected in September as consumers ramped up spending on a wide range of goods, suggesting the economy grew at a healthy clip in the month.

But a week ago Bank of Canada Governor Mark Carney said the economy performed worse than expected in the third quarter and, while recovering, risks further setbacks due to the sharp rise of the Canadian dollar.

Buyout investment was just over $2.0 billion in Canada in the first nine months of the year, less than a quarter the $8.5 billion in the first nine months of 2008.

Erol Uzumeri, senior vice-president for private capital for the Ontario Teachers' Pension Plan Board, said his group sees plenty of opportunity for investing, either directly or in partnerships, but urged the industry to be selective about where it puts its money.

I think there is a tremendous amount of opportunity in areas where people have over-leveraged, he said, warning of a herd mentality among private equity investors.

I think there is going to be a tremendous amount of opportunity actually for people with capital and people who are creative. I think the key is not following the herd, he added.

($1=$1.06 Canadian) (Reporting by Pav Jordan; editing by Peter Galloway)