National Post (National Edition) - - FRONT PAGE - DREW HAS­SEL­BACK Fi­nan­cial Post dhas­sel­back@na­tion­al­ Twit­­has­sel­bach

Add the pub­licly traded com­pany to the en­dan­gered species list. Since 2007, the num­ber of pub­licly listed com­pa­nies in Canada has dropped 16.7 per cent, ac­cord­ing to statis­tics from TMX Group Ltd., the com­pany that op­er­ates both the Toronto Stock Ex­change and the ju­nior mar­ket TSX Ven­ture Ex­change.

The drop isn’t merely a blip ex­plained by a re­cent eco­nomic down­turn. It’s an en­trenched, struc­tural trend that has seen the num­ber of listed com­pa­nies shrink at a fairly steady rate of about 1.6 per cent per year.

Mar­ket ex­perts say no sin­gle rea­son ex­plains why Cana­dian pub­licly listed com­pa­nies are go­ing the way of the dodo and most say the an­swer is a mix of con­di­tions. But the in­cred­i­ble shrink­ing eq­uity mar­ket has mas­sive im­pli­ca­tions for en­trepreneurs used to tap­ping pub­lic eq­uity, as well as for the se­cu­ri­ties lawyers, in­vest­ment bankers, ac­coun­tants, and stock ex­changes who de­pend on serv­ing that mar­ket.

Count­less small in­vest­ment banks have re­cently ceased busi­ness. No fewer than 50 bou­tique in­vest­ment firms — some 25 per cent of the mar­ket — have dis­ap­peared, merged or changed their busi­ness mod­els over the past three years, ac­cord­ing to the In­vest­ment In­dus­try As­so­ci­a­tion of Canada.

“That’s a big is­sue for Canada be­cause our mar­ket is just dom­i­nated by small is­suers,” said Bryce Tin­gle, who holds the N. Mur­ray Ed­wards Chair in busi­ness law at the Univer­sity of Cal­gary. “Out­side of the S&P/TSX Com­pos­ite In­dex, our listed com­pan- ies would al­most uni­ver­sally be con­sid­ered small cap or mi­cro cap in ev­ery other mar­ket.”

Listings are not dis­ap­pear­ing due to sim­ple at­tri­tion. Where once upon a time the pool of com­pa­nies lost to takeovers or in­sol­ven­cies would be quickly re­plen­ished by new listings, the num­ber of ini­tial pub­lic of­fer­ings has slumped.

IPOs hit a two-decade high of 355 in 1997, ac­cord­ing to Fi­nan­cial Post data. Last year, there were just 42 IPOs, and that was up only slightly from the two-decade low of 38 in 2014.

One ex­pla­na­tion for the de­cline might be that the Cana­dian mar­ket just doesn’t need as much pub­lic eq­uity as it has in the past. New, al­ter­na­tive sources of fund­ing, such as pri­vate eq­uity and ven­ture cap­i­tal, are avail­able in greater num­bers.

The Cana­dian Ven­ture Cap­i­tal and Pri­vate Eq­uity As­so­ci­a­tion said the value of ven­ture cap­i­tal in­vest­ments in the first quar­ter surged to a record $838 mil­lion, nearly dou­ble the amount recorded dur­ing the same pe­riod last year.

Mike Wool­latt, the CVCA’s chief ex­ec­u­tive, said pri­vate cap­i­tal has ex­ploded in Canada over the past 10 years and is rapidly grow­ing.

About $440 bil­lion in pri­vate eq­uity and $110 bil­lion in ven­ture cap­i­tal North Amer­ica-wide has been raised, but not yet in­vested — a sum Wool­latt calls a “ton of dry pow­der.”

The bulk of that money has been raised in the U.S., but Cana­di­ans are just as likely to be on the re­ceiv­ing end of an in­vest­ment be­cause there is “ba­si­cally no bor­der for pri­vate cap­i­tal any­more,” he said. “The im­pact is that ba­si­cally you don’t have to go pub­lic to get se­ri­ous scale and money.”

Shlomi Feiner, a part­ner at Blake, Cas­sels & Gray­don LLP in Toronto, said re­cent Cana­dian reg­u­la­tory changes have also opened the door to other fi­nanc­ing al­ter­na­tives, such as pri­vate place­ments.

“At one end of the curve, there’s crowd­fund­ing. You’re not tak­ing away the big TSX com­pa­nies, but it’s re­ally open­ing up the pool for pri­vate fi­nance al­ter­na­tives,” he said.

Kurt Sarno, another part­ner at Blakes, said th­ese new pri­vate pools of cap­i­tal are at­trac­tive to com­pa­nies seek­ing cer­tainty.

“The re­cent volatil­ity of cap­i­tal mar­kets makes it hard for is­suers to choose the right time to go pub­lic,” he said. “Not only is pri­vate eq­uity out there in great abun­dance, you can es­sen­tially ac­cess that pri­vate cap­i­tal at any time.”

Lawyers have no­ticed that cor­po­rate clients strug­gling due to the econ­omy, or that have prob­lems with their busi­ness plans, in­creas­ingly pre­fer to ad­dress those chal­lenges in pri­vate.

Pa­tri­cia Olasker, a part­ner at Davies Ward Phillips & Vineberg LLP in Toronto, said that means pub­licly traded com­pa­nies fac­ing trou­bles tend to try to find a buyer for the com­pany or do a “go-pri­vate” trans­ac­tion that buys out pub­lic share­hold­ers and delists the stock.

“I cer­tainly hear that advice more of­ten be­ing given to com­pa­nies that are strug­gling: Don’t keep your­self in the spot­light where you’re forced to report ev­ery quar­ter. Get out of that arena, fix your prob­lems, then think about go­ing pub­lic later,” she said.

Lawyers also note that pub­lic com­pa­nies have been ex­posed to a new risk in re­cent years: class-ac­tion law­suits launched by dis­grun­tled in­vestors.

On­tario, for ex­am­ple, amended its Se­cu­ri­ties Act in 2005 to cre­ate new grounds for in­vestors to sue com­pa­nies. Those amend­ments are now a decade old, but the courts are still work­ing through the “first im­pres­sion” cases that will lay the foun­da­tion for how th­ese law­suits will work in the fu­ture.

“Lit­i­ga­tion risk is prob­a­bly some­thing to be mind­ful of," said Philippe Tardif, a part­ner in the Toronto of­fice of Bor­den Lad­ner Ger­vais LLP. “There’s def­i­nitely ex­po­sure to in­vestors be­cause of the ad­vent of class ac­tions, par­tic­u­larly in se­cu­ri­ties. That’s def­i­nitely a fac­tor.”

The U.S. ex­pe­ri­ence with class ac­tions over the past 20 years is re­veal­ing. At first blush, lit­i­ga­tion risk seems to have lev­elled off in the U.S. Ac­cord­ing to statis­tics com­piled by NERA Eco­nomic Con­sult­ing, a lit­tle more than 200 com­pa­nies are sued in se­cu­ri­ties class ac­tions each year.

Yet the num­ber of pub­licly listed com­pa­nies is also shrink­ing in the U.S., down to about 5,300 at present from about 8,800 two decades ago. That shrink­ing de­nom­i­na­tor means the odds of a U.S. pub­lic com­pany get­ting sued in a se­cu­ri­ties class ac­tion have al­most dou­bled.

Another rea­son fre­quently men­tioned for the de­cline in pub­lic com­pa­nies is the cost and has­sle of reg­u­la­tory com­pli­ance.

Leg­is­la­tors tend to re­spond to mar­ket crises with fresh laws that tend to be quickly passed but slowly or never fully en­acted. For ex­am­ple, the U.S. Sar­banes-Ox­ley Act of 2002 and The Dodd-Frank Wall Street Re­form and Con­sumer Pro­tec­tion Act of 2010 may her­ald fresh pro­tec­tions for in­vestors, but they also erect reg­u­la­tory bur­dens.

Com­pli­ance isn’t cheap. And U.S. laws also im­pact a lot of Cana­dian com­pan- ies with dual U.S.-Cana­dian stock listings or cross-bor­der ac­tiv­i­ties.

“The cost bur­dens have in­creased over time," said Jeremy Fraiberg, co-chair of the merg­ers and ac­qui­si­tions group at Osler, Hoskin & Har­court LLP in Toronto. "Since Sar­banes-Ox­ley and so forth, there have been in­creased con­trols on pub­lic com­pa­nies. That may be a good thing ul­ti­mately, but when you in­crease the cost of some­thing, there may be a cor­re­spond­ing de­crease in de­mand. It’s eco­nomics.”

The Univer­sity of Cal­gary’ s Tin­gle, who has launched sev­eral star­tups of his own, has heard all th­ese ar­gu­ments to ex­plain the de­crease of pub­lic com­pa­nies — the avail­abil­ity of pri­vate eq­uity, the rise in lit­i­ga­tion risk, and the in­creased reg­u­la­tory costs and bur­dens — but he’s not con­vinced any of them get to the root cause.

He thinks com­pa­nies choose to go pri­vate or re­main so for a much sim­pler rea­son: Com­pany founders and man­agers rec­og­nize that go­ing pub­lic comes with a loss of con­trol and a lot of has­sle. “I think that man­agers are look­ing at pub­lic mar­kets and think­ing, ‘I don’t need that crap,’ ” he said.

And this, Tin­gle said, is an is­sue that should in­ter­est Cana­dian se­cu­ri­ties reg­u­la­tors, who should be sur­vey­ing pub­lic com­pany ex­ec­u­tives on which rules they find most bur­den­some and then de­ter­mine whether they can be fixed. He also said se­cu­ri­ties com­mis­sions should be reach­ing out to pri­vate com­pany man­agers to ask why they’ve avoided go­ing pub­lic.

He sug­gests Cana­dian se­cu­ri­ties reg­u­la­tors fo­cus too much on ad­dress­ing cor­po­rate gov­er­nance is­sues, such as set­ting rules on ex­ec­u­tive com­pen­sa­tion, and not enough on things that might stop the con­tin­u­ing de­cline in the num­ber of Cana­dian pub­lic com­pa­nies.

“They’re pre­sid­ing over a ship that’s tak­ing on wa­ter quickly,” Tin­gle said. “The de­cline of pub­lic mar­kets means that the kind of busi­nesses that are the fu­ture are get­ting less money.”


The com­mod­ity down­turn has, in re­cent years, dealt a blow to the TSX Ven­ture Ex­change, a mar­ket­place for emerg­ing com­pa­nies.

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