Low domestic investment by pensions sparks fears of foreign takeovers in Canadian markets
Canadian pensions face criticism for underinvesting in domestic public markets, potentially impacting the growth and resilience of Canadian companies, says François Carrier, head of capital markets at Desjardins Group.
According to the Financial Post, Carrier warned that the lack of investment from pension funds “sucks a lot of liquidity out of the market,” affecting valuations and the ability of Canadian companies to grow as public entities.
The Canada Pension Plan Investment Board (CPPIB), the country’s largest pension manager, had only 12 percent of its capital invested in domestic assets as of March.
This stands in stark contrast to 2001, when CPPIB allocated 70 percent of its investments to Canada, a period when regulations limited pension funds' investments in foreign assets. Currently, just 8 percent of CPPIB’s active equities portfolio consists of Canadian stocks.
In comparison, Japan’s Government Pension Investment Fund allocates nearly 25 percent of its portfolio to Japanese equities, despite Japan comprising only 5.1 percent of the global equity market capitalization.
Canada accounts for 2.6 percent, as per Bloomberg data.
In March, more than 90 business leaders signed an open letter to Finance Minister Chrystia Freeland and provincial counterparts, urging reforms to encourage pension funds to increase domestic investments.
Freeland has enlisted former Bank of Canada Governor Stephen Poloz to explore regulatory changes that could promote Canadian investments among pension managers.
Suggestions include adjustments allowing pension funds to take on a more activist role in the companies they support or establishing a pooled fund to simplify dealmaking for smaller pension plans.
The issue of foreign acquisitions remains pressing, with several Canadian mid-cap companies acquired by foreign buyers this year.
Notable transactions include the acquisition of Stelco Holdings Inc. by Cleveland-Cliffs Inc. and Tricon Residential Inc. by Blackstone Inc. Carrier views these go-private transactions with concern, suggesting they signify dwindling participation in Canadian public markets.
Limited access to adequate capital and undervalued assets open the door to acquisition offers, often from foreign entities, he noted.
The Canadian initial public offering (IPO) market reflects similar challenges, with less than $750m raised this year, predominantly through financial vehicles such as ETFs, as Bloomberg data indicates.
Carrier’s team at Desjardins aims to increase debt market activity for corporations, extending beyond its traditional focus on government debt.
“Raising more capital translates into better valuation, which makes for a more competitive stance on the M&A front,” Carrier stated, emphasizing the benefits for Canadian companies in global markets.
Despite past challenges, the tone of M&A discussions is improving, Carrier observed. Groupe Dynamite Inc. is currently preparing to list on the Toronto Stock Exchange, and Apotex Inc. plans an IPO for next year, according to Bloomberg reports.
Carrier remains cautiously optimistic, stating, “You’ve got to remain open to the possibility that some foreign companies are going to buy Canadian companies. I just hate the fact that we’re making it so easy.”
