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Working for publicly listed companies took up all of Paul Barbeau’s time when he was starting out as a young securities lawyer in 2004.
During some months, he’d be working on six different bought deals, which are a form of public-share sales, alongside a consistent flow of mergers, acquisitions and corporate spinoffs.
But regular – sometimes rapid – declines in deals for publicly traded companies over the next two decades have left his capital markets practice as a partner at McMillan LLP unrecognizable from where he began.
“Today, the majority of my practice is in the private space with private equity and venture capital firms – and even the public stuff more often than not is go-privates where a public company is being taken off the market,” Mr. Barbeau said.
“That has been the story, and I know for all my friends and colleagues, the people I grew up with professionally, it has been the same story for them repeated over and over.”
That tale does not have a happy ending, at least as far as Canadian retail investors and our dwindling economic growth is concerned. The decades-long trend of private capital playing an increasingly prominent role in growing startups into mature companies is robbing average Canadians of the opportunity to participate in their own homegrown success stories, because typically only wealthy individuals or large institutions can buy private company shares.
Historically, private and public markets have enjoyed a symbiotic relationship. Private investors would grow an early-stage company to the point where that company could go public, providing those investors with an exit while allowing the company to keep growing.
But that relationship is breaking down. In the first three months of 2024, none of the 15 exit deals that occurred during the quarter involved an initial public offering (IPO), according to data from the Canadian Venture Capital and Private Equity Association (CVCA). Roughly half involved private investors buying public companies, and the others were sales from one private investor to another.
And because most of the private investors – or occasionally large public companies – that end up buying those mature companies are based outside of Canada, the national economy is also robbed of the economic boost it would have received from those companies staying Canadian-owned. Even in cases where the acquired company continues to operate in Canada, its profits are rarely reinvested inside the country.
Recently, it seemed the shift to private markets was slowing down or even reversing. During the IPO boom of 2021, fuelled by the pandemic surge in stock markets, 33 companies went public in a flurry of offerings. But any optimism that this uptick would continue has now been dashed.
During the initial public offering boom of 2021, 33 companies went public. Since then, roughly half of the Canadian startups have returned to the private markets.Mark Blinch/Globe and Mail
Nearly half of the Canadian startups that went public during that period have since returned to the private markets – and in most cases were forced to accept buyout offers well below their IPO price. Since then, there have been precisely two IPOs in Canada.
A glance at the Toronto Stock Exchange seems hopeful, since the total number of listings has been growing. But a closer look reveals that growth has come almost exclusively from investment products such as exchange-traded funds (ETFs), and the number of bona fide operating companies on the TSX has steadily declined.
The situation isn’t as dire for junior companies, often resource producers, that trade on the TSX Venture Exchange, but persistent volatility has caused valuations to plummet, leaving many of these companies unable to raise money.
As public markets stagnate, private capital keeps growing. According to private market investment manager and advisory firm Hamilton Lane, the amount of private market assets under management globally went from roughly US$600-billion in 2000 to more than US$9.7-trillion in 2022. Global consulting giant McKinsey and Co. estimates that total surpassed US$13-trillion as of June 30, 2023.
All that private capital has made it easier for companies to stay private for longer, and sometimes to never go public, effectively shutting out middle-class investors from participating in what is often a company’s most profitable growth period. The fact that wealthier accredited investors can still access private capital markets only serves to exacerbate income inequality issues by further widening the gap between rich and poor.
“Companies are now staying private for longer, often forever,” said Mike Woollatt, head of Canada at Hamilton Lane. “We are still in the early innings of the growth of this market and it has a long tail to grow into.”
To get a sense of the seismic shift in the investing landscape, you only need to look at how the makeup of the TSX has evolved over the past two decades.
In 2002, large publicly traded operating companies were still plentiful in Canada. The vast majority of TSX listings at the time – 1,166 – were operating companies, while investment products such as ETFs and closed-end funds represented a small proportion of the market, just 174 at the time.
Now, those proportions have nearly flipped, with TSX listings at the end of last year counting 712 operating companies, compared to nearly 1,100 investment funds.
To further understand just how much things have changed, Boston College law professor Renee Jones crunched the numbers around when companies make public offerings. In 1996, the average age of a U.S. company going public was seven years old. Today, the average age is 15 years.
For context, imagine if Apple Inc. waited eight more years to go public, joining public markets in 1988 instead of 1980. The company quadrupled in size over that time and the broader investing public would have missed out on all that growth.
More than 90 per cent of companies globally with annual revenues of more than US$100-million are now privately held, according to Hamilton Lane data. And what is publicly traded, Mr. Woollatt points out, is increasingly concentrated.
Nvidia edged ahead of other tech companies in June, 2024, to become the world's most valuable publicly traded company, placing it among the likes of Apple and Amazon in the S&P seven.ROBYN BECK/Getty Images
“Look no further than the S&P seven,” he said, referring to the fact that Amazon, Apple, Google parent Alphabet, Facebook parent Meta Platforms, Microsoft, Nvidia and Tesla are responsible for an outsized proportion of public market returns.
The trend has spread throughout Western markets. The number of public companies in the U.S. market has fallen from a peak of more than 8,000 in the late 1990s to roughly 4,300 today. Similar declines have beset the British market, with the total number of public companies on the London Stock Exchange falling from more than 3,300 as recently as 2007 to just 1,836 by the end of 2023.
Consolidation is part of the explanation. Many companies, particularly in the natural-resources sector, have joined forces in recent decades in the pursuit of scale. But new companies have not been going public anywhere near fast enough to offset the decades-long overall decline.
Canada still has four times as many public companies per capita as the United States, meaning a much larger proportion of our entrepreneurs are taking their companies public than elsewhere. Yet the increasingly volatile – and often underwhelming – performance of newly listed companies in Canadian public markets has damaged the value proposition for going public.
As the cost of going public has grown and the potential returns have shrunk, CVCA chief executive Kim Furlong said many Canadian entrepreneurs are opting to seek private investments from outside of Canada.
“If you are going to make the investment in going public, it needs to return the capital that you need,” Ms. Furlong said in an interview. “That has recently not been the case.”
Even companies that did make money initially by going public in recent years beat a hasty retreat after learning how much a bear market can limit their ability to raise cash. Last month, Vancouver-based Copperleaf Technologies Inc. became the latest example of that by accepting a buyout offer valuing the enterprise software developer at roughly 20 per cent below its IPO price from late 2021.
Out of 20 Canadian tech companies that went public during the IPO boom of the early 2020s, Copperleaf was the ninth to reverse course and chart a return to private markets.
John McKenzie, CEO of the TMX Group Ltd., in the TMX Market Centre in December, 2021.Fred Lum/The Globe and Mail
Going public has long been an obvious goal for growing companies, for reasons that go beyond access to capital. It was a sign of success, of having arrived. Entrepreneurs used to dream of ringing the opening bell and the inevitable wave of accolades and media attention that would follow.
Becoming a publicly traded business still offers that allure, but the cost-benefit analysis has changed. The benefits have stayed the same, while the cost of compliance keeps on growing alongside the list of governance and disclosure requirements public companies face.
As John McKenzie, CEO of TSX-owner TMX Group Ltd., bluntly put it in a recent interview: “We add new expectations to public companies, we don’t take any away.”
The seemingly never-ending compliance commitments is even making serial entrepreneurs who are veterans of the go-public process skeptical.
Bryce Tingle, Murray Edwards chair of business law at the University of Calgary and author of Hard Lessons in Corporate Governance, has talked to entrepreneurs that build companies, some of whom have taken four or five them public and grown them on public markets.
Today, though, “they are doing their absolute damndest to avoid them,” he said. “And if you ask them why, it always comes down to corporate governance. It is just miserable having a whole bunch of poorly informed people looking over their shoulders and telling them what to do.”
Proxy advisory firms such as Institutional Shareholder Services, Mr. Tingle said, now have more than 90 governance best practices they are looking for when they are rating a public company.
“That is a lot of rules that need to be accommodated,” he said. “People that don’t do corporate governance, I think the scale and granularity of our interventions on corporate governance would really come as a surprise to them.”
The counter: Private equity isn’t a soft touch. Partners at private equity firms often join the company’s board. And they usually load the balance sheet with debt to accelerate growth and juice returns – a practice that saddles companies with substantial interest payments, leaving them more vulnerable to economic downturns.
Brendan Ballou, former special counsel for private equity in the U.S. Justice Department’s antitrust division, published a book last year called Plunder: Private Equity’s Plan to Pillage America. It describes case after case of private equity firms buying public companies and cannibalizing them for quick profits, most notably Toys “R” Us.
A family leaves a Red Lobster location in Calgary in May, 2024. The company filed for bankruptcy in Canada and the U.S. earlier this year.Jeff McIntosh/The Canadian Press
Seafood restaurant chain Red Lobster, which filed for bankruptcy in Canada and the U.S. earlier this year, serves as a fresh reminder of how private owners with a five-to-seven-year investment horizon can have limited interest in a company’s longevity. While some commentators pointed to the chain’s money-losing US$20 unlimited, endless shrimp special as the cause of its downfall, its bankruptcy filing showed total losses related to that scheme were US$11-million, while losses related to its private equity owner’s decision to sell and lease back its real estate were well over US$100-million.
“There are all sorts of different private equity firms with all sorts of different mandates and, frankly, different levels of, maybe, morality here,” said McMillan’s Mr. Barbeau, though not referring specifically to the Red Lobster case. “There are many, or at least some, private equity firms whose mandate might not be consistent with long-term growth – and that is an issue.”
Hamilton Lane’s Mr. Woollatt argues the opposite is true and cases such as Toys “R” Us and Red Lobster are exceptions to the rule. Public companies are the ones overly focused on quarterly results, he said, while private investors find maximizing business growth is what maximizes their returns.
Staying out of the public limelight does allow managers to focus more on growing their business, but Ari Pandes, associate dean of the University of Calgary’s Haskayne School of Business, argues that leads to a lack of transparency.
“That is where a lot of discovery happens, is in the public markets, but if everybody goes dark then all of a sudden we as the public do not have a view into those companies,” he said in an interview. “The unintended consequences of all these best practices is that companies go dark and they can do away with all these so-called best practices and not have to deal with them at all.”
The debate over better stewardship may never get settled, but one inarguable consequence of the rising prominence of private investing is that average, individual investors miss out.
“When these companies come to public markets at a later stage in their life cycle, there is no question that the average retail investor is missing out on some of that early-stage growth,” Loui Anastasopoulos, CEO of the Toronto Stock Exchange, said in an interview. “But that is unfortunately just the way the markets are playing out.”
To be clear, retail investors aren’t completely cut out from accessing private companies. For instance, public pension fund managers such as the Canada Pension Plan Investment Board invest heavily in private assets. Last month, a research paper funded by the Global Risk Institute and using data from Toronto-based CEM Benchmarking found 157 pension funds in Canada, the U.S. and Britain have shifted huge proportions of their assets from public to private markets over the past decade.
Across Canada, pension funds went from having 51 per cent of their assets invested publicly in 2013 to 34 per cent by 2022. Over the same period, Canadian pension fund asset allocation more than doubled from 14 per cent to 33 per cent.
Canadian wealth managers have also been launching a slew of new funds that provide individual Canadian retail investors the same access to private markets. Just last month, for example, Power Corp. of Canada’s alternative-investment arm Sagard Holdings launched its first private credit fund for retail investors. In March, the Bank of Montreal joined forces with U.S. private equity giant Carlyle Group to launch a private equity strategies fund and, last year, Fidelity Investments Canada LLC partnered with Brookfield Asset Management Ltd. to launch a fund focused on private real estate assets.
In total, more than 40 alternative firms and funds have come to Canada over the last three years, said Claire Van Wyk-Allan, head of Canada at the Alternative Investment Management Association.
“It is so important that we democratize access to private market products so that retail investors can access them fairly beyond just what their pensions are already investing in,” she said.
However, no matter how many alternative funds arrive in Canada, they still remain out of reach for many Canadian retail investors.
Kim Furlong, CEO of Canadian Venture Captial & Private Equity Association, says many Canadian entrepreneurs are opting to seek private investments from outside of Canada.Shay Conroy/The Globe and Mail
The Fidelity-Brookfield private real estate fund, for example, requires a minimum investment of $150,000. And while the BMO-Carlyle fund has a comparatively lower entry point of $25,000, keep in mind that median annual contributions to Registered Retirement Savings Plans (RRSPs) in Canada are roughly $4,000, according to data from Statistics Canada.
Private retail funds have also struggled to replicate the liquidity of public markets that allows investors to quickly and easily sell their holdings. Investors in those new private funds have been repeatedly jolted by redemption freezes, something that money managers will put in place when they don’t have enough cash to meet investor demand for withdrawals.
In the past month alone, private money managers Ninepoint Partners LP, Next Edge Capital and Hazelview Investments have all halted redemptions in their funds, preventing investors from getting their money out. In the case of Hazelview, it was the second time in a year investors were blocked from cashing out of its $1.3-billion Four Quadrant commercial real estate fund.
The democratization process “is just starting, but it is not at any scale,” the CVCA’s Ms. Furlong said. “Even though some people have mused about it and have had interesting conversations about it, nothing has really materialized.”
One obvious way to fix the problem is to encourage more companies to go public. Make it worth their while. And to this end, Mr. Barbeau, the lawyer, believes a practical solution is for regulators and policy makers to recognize that most public companies in Canada are simply not large enough to meet the rising governance, disclosure and compliance requirements of modern public market regimes.
“The strength of the TSX and the TSX-V has historically been mid-cap or junior growth companies, and for them, every marginal hour of regulatory burden is a big deal because they don’t have a legal group with 300 people,” he said. “That has been challenging for that ecosystem of junior-to-mid-cap companies.”
On this front, TMX Group has become a de-facto lobbyist for public companies in recent years, in hopes of bringing the cost-benefit analysis of going public back into balance. The company has pushed the federal government to close a loophole that denies public companies access to scientific research and experimental development (SR&ED) tax credits and, more recently, urged Ottawa to exempt Canadian investments in Canadian companies from having to pay higher capital-gains taxes.
But it’s fighting an uphill battle, which is why TMX Group has been adapting its business model to focus more on value-added services. Since 2006, with that strategy in place, the company’s revenues have nearly tripled – from barely $400-million to nearly $1.2-billion – all while the money it makes from new companies joining its exchanges has barely budged.
Initial listing fees in a slow year like 2023 can fall below $9-million – and even during the IPO frenzy of 2021 and 2022 that figure barely doubled. Additional listing fees, which TMX earns from existing public companies issuing new shares through equity financings such as bought deals, has also remained range-bound between roughly $70-million and $110-million over the past two decades.
Instead, TMX’s growth has primarily come from its data and analytics services, where revenues have increased over five-fold since 2006. New platforms providing consistent revenue – such as when TMX paid over US$1-billion for index provider VettaFi Holdings LLC last year – have driven much of that growth.
“It is a different business today than it was 10 years ago,” said Jaeme Gloyn, a National Bank Financial analyst who covers TMX. “I think it is for the better and I think most investors would agree it is for the better. And the share price will tell you it was for the better.”
Indeed, TMX shares have more than doubled over the past five years, from roughly $18 each in mid-2019 to more than $38 today.
“It is not TMX’s decision whether a company raises money or doesn’t raise money,” Mr. Gloyn said. “They can do everything in their power to make it simpler to do so, but ultimately it is out of their hands.”
But that doesn’t mean TMX Group is giving up. Despite the long-term decline in public markets, Mr. Anastasopoulos is not about to admit defeat. His team still talks to seven or eight new companies every day about the possibility of going public, he said, and TMX has more than 1,800 private companies in its pipeline of businesses with the potential to go public.
“We are having this conversation at what seems like the worst time,” he said. “But coming out of 2024, we are going to see some strong momentum because there is a lot of demand that has been building up.”