Underinvestment by Canadian Pensions is Starving Domestic Companies of Capital
According to François Carrier, head of capital markets at Desjardins Group, Canada’s public market has a significant problem. Canadian pensions are underinvested in the country’s public markets, which is starving domestic companies of capital and exposing them to foreign takeovers.
The Impact of Underinvestment
Carrier emphasized that this 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." This underinvestment can have far-reaching consequences for Canadian businesses, making it difficult for them to access the capital they need to expand and innovate.
Canada Pension Plan Investment Board’s Investment Portfolio
The country’s largest pension manager, Canada Pension Plan Investment Board (CPPIB), had 12% of its capital invested in domestic assets as of March. This is a significant decrease from 2001, when CPPIB was a relatively new entity and Canada had rules that capped pension funds’ investments in foreign assets. In 2001, 70% of CPPIB’s portfolio was invested in domestic assets.
Comparison with Japan
For context, Japan’s Government Pension Investment Fund allocates nearly a quarter of its portfolio to Japanese equities. This is despite the fact that Japan makes up only 5.1% of global equity market capitalization, compared to Canada’s 2.6%.
Open Letter to Finance Minister Chrystia Freeland
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.
Potential Solutions
Poloz has heard several potential solutions, including 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 dealmaking easier for smaller pension plans. These changes could help increase investment in Canadian public markets and provide domestic companies with access to the capital they need.
The Effect of Privatization
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 IPO Market
The Canadian initial public offering (IPO) market has been sluggish, with less than $750 million raised this year. This is largely due to financial vehicles such as ETFs, which have dominated the market.
Desjardins’ Efforts
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."
Conclusion
Canada’s public market has a significant problem: underinvestment by Canadian pensions is starving domestic companies of capital and exposing them to foreign takeovers. By addressing this issue and increasing investment in Canadian public markets, we can provide domestic companies with the access to capital they need to grow and innovate.
Recommendations for Discussion
- How can Canada’s pension funds be encouraged to invest more in domestic markets?
- What changes are needed to regulations to allow pensions to play a more activist role in the companies they invest in?
- How can we increase investment in Canadian public markets and provide domestic companies with access to capital?
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