Private Capital Markets And Its Importance For The Canadian Economy

By Margarita Cargher, Gerard Buckley and Mark Borkowski

When former Dragons’ Den star Arlene Dickenson reported in March, 2017 in Globe Investor that 80% of her personal portfolio is in private investments it is clear that she places a lot of importance on private markets as a driver of the Canadian economy. Arlene is quoted as saying “I’m Bullish on our market, our country and the sector” Canadian companies such as Balzac’s Coffee Roasters, OMG’s Candy and Greenlid have benefited from her bullish view of private company investment.

Private Capital Markets have a positive impact on the Canadian economy. Recently, Exempt Market Dealers (EMDs) had a facelift with the new offering memorandum exemption, which will allow small and medium-sized businesses to access a greater pool of private capital. This is great news for our economy, especially for employment, productivity, and overall economic health.

Tiger 21, the premier peer-to-peer learning group for high-net-worth wealth creators with chapters in Toronto, Montreal, Vancouver, Calgary and across Canada reported in January 2017 that their members hold 21% of their portfolio in private equity investments second only to real-estate which is at 30% while public equity investments is equal at 21%.

Job creation

A few months ago, reading Capital Markets and Job Creation in the 21st Century by Jerry Davis, where the author argued that “the bust-up takeovers of the 1980s [have] signaled a shift in power toward shareholders at the expense of labour.”. He used what is called the “Trump argument” nowadays, which was noted in the Financial Post as ‘a fragile bubble’ article, outlining that Facebook bought Whatsapp in 2014 for US$22 billion (19 x multiple of sales), with 55 employees, while Rogers Communications, CAD $25 billion valuation, with a similar multiple, with over 25,000 employees. The ‘Trump’ argument: shareholder capitalism is incompatible with creating jobs, and easing access to capital markets isn’t going to solve anything unless we encourage a fundamental change in the purpose of the corporation.

This argument does not hold for private capital markets, however. In 2015, the Canadian private sector employed over 11.6 million people. The majority, 70.5% of private sector employment, was employed by small businesses, while medium-sized businesses employed 19.8% Statistics Canada reports that 52% of these businesses requested external financing, and about 83% were approved. Easing access to capital markets is of special importance to private Canadian markets because it allows SMEs to raise money for community ventures, finance the development of an existing business, and hire good resources.

The Canadian government agrees that the future economic growth of this country lies in small and medium sized businesses and the private capital markets that invest in them. In early March this year the federal government and Canada’s big banks announced a $500 million fund aimed at helping SMEs export, with medium-sized businesses contributing to exports twice as much as small-sized This is due to high barriers to entry into a foreign market: the costs, regulatory compliance, marketing, research, and etc.

Because companies lack the cash to invest into entering the foreign market, the SMEs are discouraged from taking the risks, especially because the costs can rarely be recovered. This is where private capital markets can help. As discussed previously, increased access to capital markets can lead to better productivity and capital allocation, which can in turn have a positive impact on the national GDP.

Through the multiplier effect, the more money SMEs are able to spend on its operations, the greater the impact on GDP through spending on office space, equipment, research, and product suppliers.

Bruce Croxon, another Canadian entrepreneurial icon, added more fuel to the fire when he stated in a Financial Post article on Mar 27, 2017 “Canada deserves good marks for investing in tech companies at the startup stage, but we need more money in the ready-to-scale category. Often, those tech startups that make it out of the gate are snapped up by foreign investors; too few Canadian sources were supplying follow on Capital” he goes on to say” Canada is currently in a position to attract more foreign talent as U.S. anti-immigration sentiment takes hold. Canada should put the pedal down to re-establish our brand as the go-to country to build a tech business or work for one.”

On this note, we would like to add that our economy is a cycle of a series of decisions by the businesses and the regulators. With the new memorandum rules in effect, this is a chance for EMDs to increase business executives’ investment confidence and improve prospects. Economic conditions matter, as well as the ability to recruit good resources, but remember that access to financing is always important. Pairing a SME with a right financing solution can lead to greater returns and positive impact on the Canadian economy.

The export, with medium-sized businesses contributing to exports twice as much as small-sized. This is due to high barriers to entry into a foreign market: the costs, regulatory compliance, marketing, research, and etc. Because companies lack the cash to invest into entering the foreign market, the SMEs are discouraged from taking the risks, especially because the costs can rarely be recovered. This is where private capital markets can help. As discussed previously, increased access to capital markets can lead to better productivity and capital allocation, which can in turn have a positive impact on the national GDP. Though the multiplier effect, the more money SMEs are able to spend on its operations, the greater the impact on GDP through spending on office space, equipment, research, and product suppliers.

The importance of the Private Capital Markets supporting this economic growth is increasingly important. Gerard Buckley, CEO of Jaguar Capital and Lead Director of Maple Leaf Angels Capital Corporation understands the growth of private capital and its contribution to Canada as Maple Leaf Angels is about to close it second angel backed fund. “it is private funds like this across our country that make a collective difference to how companies flourish and grow the Canadian economy” says Buckley in closing.

Margarita Cargher and Gerard Buckley work with Jaguar Capital. Mark Borkowski is President of Mercantile Mergers & Acquisitions Corp.

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