A Toronto Stock Exchange sign adorns a doorway at the Exchange Tower building in Toronto, on Jan. 23, 2019.CHRIS HELGREN/Reuters
J. Ari Pandes is an associate professor of finance and an associate dean at the University of Calgary’s Haskayne School of Business. Michael J. Robinson is a professor emeritus in entrepreneurship and Innovation at the University of Calgary’s Haskayne School of Business.
Much concern has been raised about the declining number of public operating companies and the corresponding decline of initial public offerings, or IPOs, on the Toronto Stock Exchange, or TSX. However, much less attention has been devoted to the current state of junior public equity markets, namely the TSX Venture Exchange, or TSXV. This is curious, because Canada has a unique and rich history in the development of early-stage ventures through its junior stock exchanges.
Historically, there were three main regional exchanges: the Alberta Stock Exchange, the Vancouver Stock Exchange and the Winnipeg Stock Exchange. They all began operations in the early 20th century and provided much needed capital to support the growth of early-stage ventures, particularly in Western Canada, where institutional capital was traditionally scarce. The entrepreneurial spirit of these competing exchanges led to such developments as the capital pool company (CPC) program in Alberta, which then spread nationally and was a precursor to special purpose acquisition corporations, or SPACs.
Through a series of events, in 2001, all of Canada’s main regional stock exchanges were merged into what is known as the TSXV, which continues the tradition of supporting the early-stage ecosystem in the country. At its peak in 2002, the TSXV had a total of 2,504 public listings (both operating companies and CPCs). Much like the trends in the senior market, total listings on the TSXV have also been on the decline, with 1,670 in 2023.
One of the factors for this decline has been the fewer number of companies going public on the TSXV. In the period 1993-2000, there were on average 159 IPOs annually; since then, that figure has dropped to 91. This is troubling, but it is also important to recognize that the TSXV has historically and continues to attract more listings than the senior TSX.
A statistic that has been absent from the discussions around the declining number of IPOs on the TSX is the graduations from the TSXV to the TSX. A main draw of the Canadian capital markets is the ability to go from the minor leagues to the big leagues, allowing companies to gain valuable public-markets experience before graduation.
This entry point to the TSX is not trivial: in 2007, there were 72 graduations – the highest ever. There were only 12 graduations in 2023. However, these numbers still dwarf the number of debuts on the TSX through an IPO. Our research has shown that the long-term performance of companies that graduate from the TSXV to the TSX are superior to companies that directly go public on the TSX.
The declining trends are concerning. Canada has the largest and arguably the most successful public venture market globally. We should continue to embrace this, and ensure that our regulators and policy makers develop policy frameworks that encourage the growth of the public equity markets. Many of the recent changes by securities regulators have focused on liberalizing the private markets, allowing more individuals to invest in early-stage private companies.
But there are significant risks for individuals investing in private venture companies, as there is less transparency, greater information gaps and a lack of liquidity. These issues are better resolved in junior public equity markets, which provide more liquidity and fall under the governance structure of the stock exchange.
By liberalizing the private markets, regulators and policy makers have created an uneven playing field between junior private companies and junior public companies. For example, most of the tax incentives that are available to the former are not available to the latter, even though many of the companies in the two markets are of the same size and scale.
Public markets are the primary agency for imposing transparency on our corporations, and so policies should be developed with the aim of balancing the attractiveness of both markets. Otherwise, we risk parts of our economy going dark.
To revive our junior public equity markets, increasing the awareness of investment opportunities is a good place to start. Historically, the capital providers to TSXV companies have predominantly been individual retail investors, but a generational demographic shift in investors has left a hole. Young investors are willing to invest in higher-risk crypto markets or U.S. technology stocks, but some lack the knowledge and the willingness to explore investment opportunities on the TSXV.
Unfortunately, studies of the return performance of the TSXV understate the returns potential, since companies that graduate from the TSXV to the TSX and continue their strong growth are dropped from the TSXV index after they graduate. Developing an index performance measure that includes the gains to TSXV graduates would be helpful in addressing this bias, as well as promoting the success stories of companies listed on the TSXV.
The predominance of retail investors on the TSXV poses another challenge: the ability to influence the governance practices of public venture companies. Many of the scandals in the Canadian and U.S. senior public markets can be traced back to a failure of effective corporate governance. In the private markets, angels and VC investors require the establishment of an effective governance structure as a condition of their investment.
In addition, the Canadian Venture Capital Association, in conjunction with the Institute of Corporate Directors, has developed programming to increase the governance capabilities of corporate founders, investors and independent directors. However, there are no such explicit incentives for public venture companies to improve their governance practices, besides the stock-exchange rules. A potential solution is to promote governance educational opportunities to the founders of junior public companies.
Unless we make adjustments, our early-stage corporate gazelles will continue to struggle accessing much needed development capital. With Canada suffering from a productivity crisis, providing greater access to capital to Canadian venture companies through our public equity markets is one step to solving that problem.