Underinvestment by Canadian Pensions Starves Domestic Companies of Capital
The head of capital markets at Desjardins Group, François Carrier, has warned that Canada’s public market has a pension problem. According to him, the country’s largest pension manager, Canada Pension Plan Investment Board (CPPIB), has significantly reduced its investment in domestic assets. This underinvestment has resulted in a lack of liquidity in the market, affecting valuations and making it challenging for Canadian companies to grow and thrive.
The Problem with Underinvestment
Carrier explained that the CPPIB had 12% of its capital invested in domestic assets as of March, compared to 70% in 2001. At that time, Canada had rules that capped pension funds’ investments in foreign assets. In contrast, Japan’s Government Pension Investment Fund allocates nearly a quarter of its portfolio to Japanese equities. This stark difference highlights the issue with Canadian pensions and their underinvestment in domestic markets.
The Impact on Valuations
The lack of investment by Canadian pensions has resulted in reduced liquidity in the market. Carrier stated that this "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." This means that Canadian companies are struggling to achieve proper valuations, making them vulnerable to foreign takeovers.
Foreign Takeovers: A Growing Concern
Several Canadian mid-caps have been acquired by foreign buyers this year. For example, steelmaker Stelco Holdings Inc. was bought by Cleveland-Cliffs Inc., and residential property owner Tricon Residential Inc. was acquired by Blackstone Inc. Carrier expressed his disappointment with these transactions, stating that "privatization portends a lack of participants in the public market."
Raising Capital: A Solution to the Problem
Desjardins is ramping up debt markets activity for corporations, expanding beyond its traditional area of government debt. Carrier believes that raising more capital will lead to better valuations, making Canadian issuers more competitive on global markets.
M&A Conversations Take a More Constructive Tone
The tone of M&A conversations has become more constructive, according to Carrier. Apparel retailer Groupe Dynamite Inc. is planning to list on the Toronto Stock Exchange, while drugmaker Apotex Inc. is preparing for an IPO next year.
Conclusion
Canada’s public market has a pension problem that needs to be addressed. Underinvestment by Canadian pensions has resulted in reduced liquidity, affecting valuations and making it challenging for Canadian companies to grow and thrive. Raising more capital is essential to improve valuations and make Canadian issuers more competitive on global markets.
Recommended Reading
- "Here’s what you need to know about the CPP"
- "The U.K. is courting Canada’s big pensions, too"
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