By Bitwave 
As the head of capital markets at Desjardins Group, François Carrier has a keen eye on the Canadian pension landscape. In a recent interview with Bloomberg News, he pointed out a pressing issue: Canada’s public market is underinvested in domestic assets. This lack of investment "sucks a lot of liquidity out of the market," affecting valuations and growth prospects for public companies.
The Pension Problem
Canada’s largest pension manager, the Canada Pension Plan Investment Board (CPPIB), has only 12% of its capital invested in domestic assets as of March. This is down from 70% in 2001, when the board was still a relatively new entity and Canada had rules capping pension funds’ investments in foreign assets. CPPIB’s active equities portfolio also had only 8% of its holdings in Canadian stocks as of March 31.
This underinvestment has significant implications for the Canadian public market. Carrier notes that it "has an impact on valuations and your ability to grow and thrive as a public company." This lack of liquidity makes it difficult for companies to access the capital they need, leading to aggressive acquisition offers from foreign companies.
A Call to Action
In March, over 90 business leaders signed an open letter to Finance Minister Chrystia Freeland and her provincial counterparts, urging them to change the rules for pension funds. The letter encouraged policymakers to "encourage them to invest in Canada." In response to this call, former Bank of Canada Governor Stephen Poloz is now looking at ways to entice pension managers to increase their domestic investments.
Potential Solutions
Poloz has heard several potential solutions from industry experts. One proposal is to change regulations to allow pension funds to play a more activist role in the companies they invest in. Another idea is to create a pooled fund that would make deal-making easier for smaller pension plans. These solutions aim to increase pension funds’ investment in domestic assets and encourage them to take on a more active role in the market.
The Consequences of Underinvestment
Several Canadian mid-caps have been acquired by foreign buyers this year, including steelmaker Stelco Holdings Inc. and residential property owner Tricon Residential Inc. Carrier views go-private transactions as "always a little bit depressing" because they indicate a lack of participants in the public market.
When companies can’t access the right kind of capital and achieve proper valuations, it opens the door to aggressive acquisition offers from foreign companies. This not only affects the companies involved but also has broader implications for the Canadian economy.
Raising More Capital
Desjardins is ramping up debt markets activity for corporations, expanding beyond its traditional area of government debt. Carrier believes raising more capital "translates into better valuation, which makes for a more competitive stance on the M&A front, which then allows our Canadian issuers to thrive on global markets."
The tone of mergers and acquisitions (M&A) conversations is becoming more constructive than in previous years. Apparel retailer Groupe Dynamite Inc. is planning to list on the Toronto Stock Exchange, while drugmaker Apotex Inc. is preparing for an initial public offering next year.
Conclusion
Canada’s public market has a pressing issue: underinvestment by pension funds. This lack of liquidity affects valuations and growth prospects for public companies. Policymakers must take action to encourage pension funds to increase their domestic investments and play a more active role in the market. By doing so, they can help Canadian companies thrive on global markets.
Sources
- Bloomberg News: "Canada’s Public Market Has a Pension Problem"
- The Globe and Mail: "Canada’s pension funds face pressure to invest more in Canada"
- Reuters: "Canada’s pension funds urged to boost domestic investments"