When it comes to shoring up Canadian capital markets in an uncertain geopolitical climate, it can be easy to advocate for more investment, but what that looks like is a lot harder to untangle. There are several structural issues that can make it difficult to invest in Canada, and one area experts have increasingly pointed to revolves around the shrinking size of the investable universe in Canada stemming from a lack of IPOs (initial public offerings) coupled with an influx of private capital.
The Financial Pipeline spoke with Jamie Coulter, recently retired CEO of Raymond James Ltd. and a 30-year veteran of Canada’s investment industry about the state of Canadian capital markets, and what the rise in private equity within public markets may mean.
Financial Pipeline: You’ve spoken recently about a shift you’ve noticed over the years away from public offerings and toward private equity in capital markets – when did you first notice this, and how has it evolved?
Jamie Coulter: It became apparent to me when I was looking at the capital markets business for Raymond James in Canada (in 2024) and trying to figure out if this was a secular or cyclical decline. Looking at some readily accessible data from the Toronto Stock Exchange around the amount of publicly-listed operating companies on the Toronto Stock Exchange, going back 10 years, it’s clearly a downward sloping curve. This isn’t unique to Canada, and it’s across all the major industries around the world. There’s little to no IPO activity. We haven’t seen anything of substance in probably four or five years, and at the same time we are seeing listed companies being acquired by private equity firms.
FP: How does that change things, to have more private equity ownership of listed companies than public holdings?
JC: Within capital markets, you may have a PE acquisition, strategic M&A, companies that fail – they go bankrupt and then they delist. Historically, in a healthy capital market dynamic, (when you lose companies), there would have been enough public offerings to come along and offset that attrition, but we’re not seeing that anymore. For example, let’s say there’s a financial services firm with a one or two billion dollar enterprise value that is acquired by a private equity fund. There’s not another $2 billion enterprise company waiting in the wings to come and replace it, so that’s a loss (to public markets).
FP: What’s causing this shift away from IPOs?
JC: I’ve spoken to several private equity firms in Canada that have hundreds of millions in capital. The funds that are getting raised these days are just getting bigger. There’s capital being allocated to that group and they’re helping their portfolio companies mature and set their business plans – that should make those companies perfect for listing on an exchange.
But unanimously, all the private equity firms I spoke with were all of the same view: (A public listing) isn’t an attractive alternative for them. In many cases they would be locked up, so they would only be able to liquidate a portion of their holdings in whatever the investee company is, and then they’d be committed to holding onto their position for months, or in some cases years.
For them, a cleaner exit is just to sell the company to another private equity firm and then either return the capital to their LP partners or reinvest it in the next fund.
FP: Why is this a problem?
JC: It’s a problem for a capital markets business that relies on equity underwriting activity as a source of revenue. But more broadly speaking, I think it’s a problem for portfolio managers who are now seeing their universe of investible companies continue to shrink. And then by extension, that’s probably a bad thing just for Canadians in general – less opportunities to create wealth. Everyone’s trying to save for something: A house, retirement, medical bills, kids’ tuition, you name it. And (if) the alternative is looking for private pools that the average retail Canadian can allocate some of their portfolio toward, that’s not a very attractive proposition. Private equity has a place and can be the right option in certain circumstances, but most regular Canadians just don’t have the capacity to invest that way. And in most cases, those types of investments simply aren’t suitable either. The alternative – investing in the public markets – is getting harder because the number of listed operating companies continues to decline.
FP: What’s most concerning about this combination we’re seeing, where there is significant growth in private equity coupled with declining listings of operating companies on stock exchanges?
JC: It brings to mind some of the conditions that were in place that caused the global financial crisis in 2007-2008, and you see it in the private credit space as well – valuations are a little suspect, suddenly a fund that might be gated has to sell off some of their other assets at a discount. It brings up questions about how assets are valued and what kind of sightlines investors can get into that.
FP: So it’s about liquidity, transparency and pricing?
JC: Exactly, and that’s what happened in the global financial crisis, but now there’s probably more capital allocated to private credit than ever before, and that market is as opaque as it’s ever been. At a firm like Raymond James, you try to manage the exposure to that asset class. Dealers are probably being more proactive than they ever have been in terms of managing that risk and not just leaving it in the hands of the advisor anymore.
FP: Aside from the amount of capital allocated to private credit, what else is different now than in 2008? The financial crisis happened pre-COVID, pre-Trump, pre-tariffs – and before the geopolitical climate we’re in now. What’s the risk we’re facing if something goes wrong under the current market environment?
JC: The global financial crisis followed the bursting of the internet bubble. There was a five- or six-year period of time in between those two major events. What’s happened here, though, is there is an almost 18-year bull market run in effect between the global financial crisis and today. One of the concerns everyone brings up is that valuations on the major indices are stretched at all-time highs, and reminiscent of even the Great Depression in 1929. And there’s an element of complacency in and around both equity valuations, driven by a couple of different things: One, we’ve had a pretty good run. We were in a relatively low inflationary environment until we hit COVID. That kind of changed things a little bit, but we’re coming back to what we were used to before. And if you look at the S&P 500 over time, it just keeps going up. And then roughly the same time period, housing valuations steadily increased too.
There’s another inflection point during COVID when residential housing prices really jumped up, but now the housing prices have started to come back. We got through the global financial crisis, and in the pandemic, there was a massive injection of liquidity into the system by federal banks around the world acting in concert. In hindsight, probably the right thing to do, but it creates this perception that the Fed will always sort of bail you out.
And so I think that causes people to overlook some of the other maybe fundamental issues that are there gnawing away at the foundation that supports these valuations and maybe, the next time we get a big hiccup like we did in the months of ‘08, central banks may not have the capacity to provide as much liquidity as they did the last time around. That sets you up for potentially an even bigger fall than we saw 13 years ago.
FP: From a broader market perspective, if we’re in a spot where there’s too much private equity, valuations that don’t exactly make sense, there’s a lack of Canadian investment and too much money in the market – what would help mitigate the potential downside of all of this, or get us back on track?
JC: We’re seeing a lot of government fiscal policy come into effect. We’re actively talking about pipelines. And those are big infrastructure projects. They’re talking about quite significant increases in defense spending for example, some investment in scientific research, and a whole variety of other policy levers being pulled. Those represent investment into Canada from a government perspective.
There’s also a flow through structure in place that works well for resource extraction, mining and oil and gas in particular. Could that concept be applied to other industry sectors? You don’t have to reinvent the wheel, just broaden access to a concept Canadians are actually pretty comfortable with. Publicly listed mining companies and oil and gas exploitation and development companies raise capital regularly using a flow through type vehicle from retail and institutional Canadians. That would generate some more public listing activity, as would bringing back the income trust vehicle. There are also conversations that could be had between private and public players around things like lockups, which are a Street convention, not regulatory.
So, while some of the solutions are at the government and regulatory level, the hope is that the public market and private sector industry can pick up and run with the rest – that may be the best bet to make sure that if there’s a downturn, it’s a relatively shallow one.
