Canada’s public market has a pension problem: Desjardins
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Canadian pensions are underinvested in the country’s public markets, starving domestic companies of capital and exposing them to foreign takeovers, says the head of capital markets at Desjardins Group.
That lack of investment “sucks a lot of liquidity out of the market, which has an impact on valuations and your ability to grow and thrive as a public company,” said François Carrier in an interview with Bloomberg News.
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The country’s largest pension manager, Canada Pension Plan Investment Board, had 12 per cent of its capital invested in domestic assets as of March, compared with 70 per cent in 2001, when the board was a relatively new entity and Canada had rules that capped pension funds’ investments in foreign assets. Just eight per cent of CPPIB’s active equities portfolio was in Canadian stocks as of March 31.
Japan’s Government Pension Investment Fund allocates nearly a quarter of its portfolio to Japanese equities. Japan makes up 5.1 per cent of global equity market capitalization and Canada 2.6 per cent, according to data compiled by Bloomberg.
Carrier isn’t the only one who sees a problem. In March, more than 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.”
At Freeland’s request, former Bank of Canada Governor Stephen Poloz is now looking at ways to entice pension managers to do exactly that.
So far, Poloz has heard solutions such as changing regulations to allow the pensions to play a more activist role in the companies they invest in, or creating a pooled fund that would make dealmaking easier for smaller pension plans.
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Several Canadian mid-caps have been swallowed up by foreign buyers this year, including steelmaker Stelco Holdings Inc., which was bought by Cleveland-Cliffs Inc., and residential property owner Tricon Residential Inc., which was acquired by Blackstone Inc.
For Carrier, conversations around go-private transactions are “always a little bit depressing,” because he believes privatization portends a lack of participants in the public market. When Canadian companies can’t access the right kind of capital and can’t achieve proper valuations, Carrier said, the door opens to aggressive acquisition offers, often from foreign companies.
The Canadian initial public offering market has been sluggish, with less than $750 million raised this year, largely for financial vehicles such as ETFs, data compiled by Bloomberg show.
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 M&A conversations is more constructive now than in the past year, Carrier said.
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, Bloomberg reported.
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“You’ve got to remain open to the possibility that some foreign companies are going to buy Canadian companies,” Carrier said. “I just hate the fact that we’re making it so easy.”
With assistance from Layan Odeh
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