Canada’s Public Market Has a Pension Problem
The country’s largest pension managers are underinvested in domestic assets, starving Canadian companies of capital and exposing them to foreign takeovers. This issue has been highlighted by François Carrier, the head of capital markets at Desjardins Group.
A Lack of Investment in Domestic Assets
According to data compiled by Bloomberg, Canada Pension Plan Investment Board (CPPIB) had only 12% of its capital invested in domestic assets as of March. This is a significant decline from 2001, when the board was relatively new and Canada had rules that capped pension funds’ investments in foreign assets. In 2001, CPPIB had 70% of its capital invested in domestic assets.
Consequences for Canadian Companies
The lack of investment in domestic assets by Canadian pension managers has several consequences for Canadian companies. Firstly, it means that these companies have limited access to capital, which can make it difficult for them to grow and thrive. Secondly, the lack of liquidity in the market can lead to lower valuations for Canadian companies, making them more attractive targets for foreign takeovers.
A Problem That Needs to Be Addressed
Carrier is not alone in his concerns about the lack of investment in domestic assets by Canadian pension managers. 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 to "encourage them to invest in Canada."
Solutions Being Considered
At the request of Finance Minister Freeland, former Bank of Canada Governor Stephen Poloz is now looking at ways to entice pension managers to invest more in Canada. Some of the solutions being considered include changing regulations to allow pensions to play a more activist role in the companies they invest in, or creating a pooled fund that would make deal-making easier for smaller pension plans.
Consequences for Canadian Companies
The lack of investment in domestic assets by Canadian pension managers has several consequences for Canadian companies. Firstly, it means that these companies have limited access to capital, which can make it difficult for them to grow and thrive. Secondly, the lack of liquidity in the market can lead to lower valuations for Canadian companies, making them more attractive targets for foreign takeovers.
A Concerned Industry
The industry is concerned about the consequences of a lack of investment in domestic assets by Canadian pension managers. "Conversations around go-private transactions are always a little bit depressing," said Carrier. "When Canadian companies can’t access the right kind of capital and can’t achieve proper valuations, the door opens to aggressive acquisition offers, often from foreign companies."
A Need for Change
The industry is calling for change to address this issue. "You’ve got to remain open to the possibility that some foreign companies are going to buy Canadian companies," said Carrier. "I just hate the fact that we’re making it so easy."
A Sluggish IPO Market
The Canadian initial public offering (IPO) market has been sluggish, with less than $750 million raised this year, largely for financial vehicles such as exchange-traded funds (ETFs). This is a concern for Carrier and Desjardins Group.
Raising More Capital
Carrier believes that 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." To achieve this, Desjardins is ramping up debt markets activity for corporations, expanding beyond its traditional area of government debt.
A More Constructive Tone in M&A Conversations
The tone of mergers and acquisitions (M&A) conversations has shifted from being more aggressive to being more constructive. "Apparel retailer Groupe Dynamite Inc. is in the process of listing on the Toronto Stock Exchange, while drugmaker Apotex Inc. is planning an IPO next year," reported Bloomberg.
A Problem That Needs to Be Addressed
The issue of underinvestment by Canadian pension managers is a pressing concern for the industry. It needs to be addressed through changes in regulations and policies that encourage these managers to invest more in domestic assets. This will help Canadian companies access the capital they need to grow and thrive, making them less attractive targets for foreign takeovers.
References
- "Canada’s Public Market Has a Pension Problem" by Bloomberg
- "Desjardins Ramps Up Debt Markets Activity for Corporations" by Bloomberg
- "Canadian IPO Market Sluggish, with Less than $750 Million Raised This Year" by Bloomberg
