Investment capital continuing to flow to B.C.'s junior companies despite ongoing market volatility

Increasing interest from international and institutional investors bolstering exchange activity, TSX Venture president tells Business in Vancouver

A subdued economic outlook and persistent global financial crises have made it difficult for publicly traded companies in Canada to raise funds. That was especially true in 2012 for Canada's junior stock exchange.

By the end of November, the number of financings by Vancouver-headquartered companies listed on the TSX Venture Exchange fell 19% year over year, and the total amount the companies raised fell 47%: to $5.1 billion from $9.6 billion in the same period in 2011.

The market, however, remains an important source of capital for B.C. companies. Those listed on the venture exchange have raised $12.8 billion since 2009.

More than half of the companies on the venture exchange are headquartered in B.C., and that number is growing. Last year, more than 40 mining juniors went public, and the largest venture exchange initial public offering was Vancouver's Pure Multi-Family REIT (TSX-V:RUF.U), which raised $51 million in its IPO last July.

John McCoach, president of the TSX Venture Exchange, spoke with Business in Vancouver about the current economic environment and its challenges and opportunities for companies looking for capital.


Q: Market volatility has affected the ability of public companies to raise capital. How do you respond to the challenges for potential new issuers?

A: There's nothing that's particularly unique about attracting capital in a tough market. There's no question it's challenging, but companies are still raising money. The main thing is that companies have to perform, so if they're successful in meeting their milestones and growing their companies, there is still capital out there.

Earlier-stage companies are having more difficulty and finding it more challenging than companies that are a little more developed, so if they're further along the development and risk stage, then it's less challenging.

Q: Is market volatility higher today than ever before?

A: I can understand why people may feel that way, because after the financial crisis in 2008, the markets did bounce back fairly quickly and quite aggressively in a relatively short period of time in Canada. But not so much around the world. So to us, it seemed like a very sharp cycle. But I'm not sure there's enough evidence that it's changed trends of market cycles over a longer period of time.

I was in the brokerage industry for 20 years prior to starting at the exchange, so I have seen a lot of market cycles. This one is definitely challenging, and they always feel bad when you're in them. But you never realize when you're coming out of them until you're nearly there.

Q: What do you consider the key metrics to indicate a potential improvement in the market?

A: I look at trading volumes, which is as good a leading indicator as any. And then financing activity just for general sentiment. We talk to customers and other stakeholders every day, so we have a reasonably good finger on the pulse of the market. Just monitor what's going on globally from an economic point of view and commodity prices, obviously, with our market, which is heavily weighted with natural resources.

Q: Who would be your typical TSX Venture Exchange investor?

A: One of the things we're very proud of, after more than a decade, is more institutional interest in the venture exchange. They're a lot more comfortable in the last few years than 10, 20 years ago.

Q: What's led to that?

A: The markets in Canada have matured a lot since the 1980s. I think that's being recognized around the world. The market has particularly had a better reputation when the TSX acquired the Canadian Venture Exchange (CDNX).

Q: Has that produced any different market dynamics or added volatility to the venture exchange?

A: I'm not sure that the investor base creates much of a different dynamic in trading as opposed to the market's assessment of risk and market cycles. Institutional investors on the TSX will be more vocal about governance issues and about having a say in a company. On the venture exchange, individual retail investors aren't as vocal. That's why our policies call for listed companies to do more filings with us that are reviewed and transparent. Venture exchange policies are much more proactive about what a company has to do.

Q: Does that make it more difficult for companies to raise capital or be a public company?

A: Our marketplace does impose a lot of burden on companies. All these different filings are reviewed for consistency and compliance with our policies. We think that's very important. While companies do find it a burden, we poll them and they still value it, because if they didn't have to meet that level of scrutiny, they wouldn't enjoy the liquidity they have and access to capital that they have had.

Q: Are there plans to make it easier for listed companies?

A: We're investing quite a bit of money to automate our processes where possible. For transactions that are relatively straightforward, we're trying to make it as easy as possible. A simple example would be a private placement financing. Right now, there's a whole process to go through to ensure the financing is within the policy and it's a back-and-forth process with our staff. We're envisioning a customized online portal to simplify the process that can take three to four days to one that can be done in seconds.

Q: How successful have you been in attracting foreign companies to list on the exchange?

A: For 2012, the TMX Group is tracking to be the No. 1 position in the world in attracting foreign listings. Hong Kong has attracted the most in the last few years, and we have been second or third place. This year, we're most likely to have the most number of listings and rank third for capital raised, which is pretty incredible when you consider the size of Canada and GDP relative to other markets in the world.

Q: Why would foreign companies list in Canada?

A: They're listing in Canada to access the North American markets. Relative to going public in other countries like the U.S. or the U.K., it's relatively economic. A lot of the capital that's raised in Canada is sourced outside of the country. We estimate about 40% of the trading that goes on daily in the two markets in Canada comes from outside Canada. That's largely from the U.S. followed by Europe and Asia. That's changed quite a bit.

About six years ago, about 25% of trading in Canada would come from outside the country. Last year, there were times when half of our volumes came from outside of Canada.

Q: Who are your key competitors?

A: By number of listings, Hong Kong for sure. The London Stock Exchange Alternative Investment Market has been very aggressive in attracting companies from outside the U.K., and they've been successful. A lot of African, eastern European and Russian companies are attracted to the London capital markets. The Australian markets are also very active.

Q: But will B.C. still be a key market for the venture exchange?

A: Absolutely. A large percentage of mining companies are listed in B.C., but there's interest here in other sectors as well: industrial, technology, real estate companies.