Why do Quebec‐based companies shun public capital markets? Compared to companies elsewhere in Canada, the proportion of Quebec companies listed on a stock exchange is much smaller, and the gap has been growing for several years. This reluctance means that high‐growth Quebec companies are depriving themselves of one of the most effective means to improve their competitiveness and achieve sustained growth, on global markets.

2.
TOWARD MORE DEMOCRATIC CORPORATE FINANCING
Why do Quebec‐based companies shun public capital markets? Compared to companies elsewhere in
Canada, the proportion of Quebec companies listed on a stock exchange is much smaller, and the gap
has been growing for several years. This reluctance means that high‐growth Quebec companies are
depriving themselves of one of the most effective means to improve their competitiveness and achieve
sustained growth, on global markets.
Acting on their own initiative, PwC and FMC have attempted to address this question. To that end, we
met with more than 60 business leaders from Quebec to elicit their comments. The pros and cons of
accessing public capital markets are essentially the same from coast to coast since securities regulation
has been largely harmonized across Canada. So why then are Quebec executives less willing to resort to
public markets than their colleagues in other parts of Canada?
The perspectives portrayed by the business leaders, our analysis of their comments and the conclusions
we have drawn form the basis of this report. We have also provided a number of recommendations
based on our observations.
One of our findings was that the leaders of both publicly traded and privately held companies recognize
the advantages of accessing public capital markets. Unsurprisingly, they also recognize a number of
disadvantages. The following conclusions may be drawn about the relative advantages and
disadvantages of going public, as described by our interviewees:
Privately held companies:
 Recognize the potency of public markets.
 Underestimate the reputational benefits of being a public company.
 Place more emphasis on the disadvantages of going public.
Publicly traded companies:
 By a vast majority, would “not hesitate to go public” if they had to do things over again.
The CEOs’ perspectives led us to conclude that the answer to our question may be found, in part, by
analyzing what we have referred to as Quebec’s “financial ecosystem”. The characteristics of this
ecosystem are determinant factors in terms of the available options and the financing choices made by
Quebec‐based companies .
(1)

3. The consolidation of the Canadian securities industry by the banking sector has led to a focus on larger
corporate issuers and their exit from the small cap segment. Moreover, private placement financing by
public and tax‐advantaged funds is relatively more important in Quebec than it is elsewhere in Canada;
these institutional investors have not demonstrated a great propensity to have recourse to initial public
offerings (IPOs) as an exit solution.
This report contains a number of recommendations that are designed to provide a better balance
among various equity financing options. In developed economies, financing through public capital
markets is an essential component of a balanced and high‐performing financial system. To that end, we
call for measures aimed at:
 Promoting public financing of Quebec’s small cap companies.
 Promoting financing through public capital markets by rehabilitating the multiple‐voting
share capital structure and correcting perceptions so that choices are made based on
balanced and informed opinions about the pros and cons of going public.
 Promoting a greater familiarity of the regulatory environment.
 Encouraging individual investors to participate in small cap financing, including the use of tax
incentives different from existing ones.
 Fostering the long‐term growth and perennity of Quebec headquartered companies.
 Promoting Quebec’s entrepreneurial culture.
Our report places special emphasis on the mining sector, given its pivotal importance to the Quebec
economy.
Michel Brunet Pierre Lortie Guy LeBlanc Russell Goodman
Chair Business Consultant Associate Director Partner
FMC FMC PwC PwC
(2)

4. FMC | PwC
TOWARD MORE DEMOCRATIC CORPORATE FINANCING
INTRODUCTION
Even though Quebec accounts for 23.2% of the Canadian population, Quebec corporations listed on the
TSX and TSX Venture Exchange account for only 13% and 9% respectively of the total number of publicly
traded Canadian corporations. In 2010, 74 Canadian corporations were newly listed on the TSX, but only
three of them were from Quebec, of which two graduated from the TSX Venture Exchange. Only 11 of
the 206 new listings of Canadian corporations on the TSX Venture Exchange were from Quebec. In fact,
in 2010, Quebec corporations accounted for only 5% of all new listings (5.5% excluding the oil and gas
sector). Quebec companies’ share of the total new stock exchange listings in Canada has been rapidly
declining. Why?
The vast majority of Quebec’s flagship companies accessed the public capital markets early in their
development. It is doubtful that Alimentation Couche‐Tard, Astral, Bombardier, CAE, CGI, Cascades,
SNC‐Lavalin, Transat, Transcontinental, Uni‐Sélect and many others would have been so successful had
they remained private, relying exclusively on internal capital and forgoing the inflow of permanent
external capital. More often than not, their IPOs sought to raise relatively small amounts: Cascades, $5
million; Uni‐Sélect, $3 million; CGI, $10 million.1 Who will be the drivers of tomorrow’s economy if so
few Quebec companies adopt a capital structure aimed at promoting development and sustaining
growth?
If companies hope to grow quickly, they need plenty of equity capital. Few companies can support
accelerated growth exclusively with internally generated funds. Securing outside capital is therefore an
obligatory step, an absolute condition of success—provided that management wants to maximize the
company’s potential.
We acknowledge from the outset that public financing is not suitable for every company. It is a source of
permanent capital with many advantages; however, it also entails various requirements and obligations.
Nonetheless, in developed economies, financing via public capital markets is an essential component of
a balanced and high‐performing financial system.
A number of hypotheses have been put forward to explain why Quebec companies are so under‐
represented on Canadian stock exchanges. We sought to validate those hypotheses because the
situation we observed leaves us concerned with respect to the future vitality of Quebec’s economy. Our
investigation was therefore designed to identify why Quebec entrepreneurs behave so differently with
respect to public capital markets compared with their counterparts in other provinces, particularly
Alberta, British Columbia and Ontario. We also sought to identify the principal factors behind Quebec
corporations’ seeming lack of interest in going public.
To answer the first question, we solicited the opinions of corporate executives because the decision to
resort to the public capital markets stems primarily from the vision and objectives of senior
management (and owners) concerning the nature and future of their company. For the purposes of our
survey, we consulted individually with more than 60 senior executives, divided into five distinct groups.
1
The equivalent amounts in 2011 dollars are $10.4 million for Cascades, $5.5 million for Uni‐Sélect and $17.6
million for CGI.
1

5. Toward more democratic corporate financing
The first group consisted of executives whose companies have listed on the TSX in the period since 1985.
Their experience made it possible to assess the advantages and disadvantages of being a listed company
with some degree of objectivity. The second group consisted of executives of companies that are or
were listed on the TSX Venture Exchange; this exchange differs substantially from the TSX in terms of
dynamics and participants. The third group consisted of executives, often the owners, of privately held
companies; to gain an understanding of the phenomenon we are examining, ascertaining their
viewpoints was essential.
Two other groups were consulted because of their key corporate finance roles. The first consisted of
executives from securities brokerage firms active in Quebec’s corporate financing sector; the second
consisted of institutional and private investors.
This report is intended to provide decision‐makers in the private and public sectors with an informed
diagnosis of the factors underlying the current situation and to propose measures aimed at accelerating
the development of high‐growth or “dynamic” companies, which are responsible for most net job
creation within an economy.
2

6. FMC | PwC
1. PERSPECTIVES OF CORPORATE EXECUTIVES AND OTHER STAKEHOLDERS
1.1 CORPORATE EXECUTIVES
The decision to launch an initial public offering (IPO) has a number of serious consequences. Following
an IPO, senior executives have to take on serious responsibilities towards the many individual and/or
institutional shareholders who bought the company’s business plan and trust in the company’s ability to
methodically implement it. The decision to go public is virtually irrevocable because it is so difficult to
backtrack and take “their” company back by going private.
Public capital markets are the main source of financing for Canadian corporations. In December 2010,
financial market instruments accounted for 64.9% of the total capitalization of Canadian businesses. The
value of the share capital issued annually by listed Canadian companies is 10 to 15 times larger than that
of financing obtained from other sources. This is an inescapable fact of life for all those who are
concerned about the development of the Quebec economy and its key companies.
The main advantages and disadvantages of public company status are well known. We asked the leaders
of the participating companies to rank the relative advantages and disadvantages associated with
gaining access to public capital markets.
Advantages
- Raising equity for financing growth or acquisitions.
- Reducing company debt.
- Allowing founders/senior executives to realize a portion of their investment in the
company and diversify their holdings.
- Creating a currency for acquisitions.
- Enhancing a company’s visibility and image with clients, suppliers, employees and
governments.
- Facilitating the establishment of employee incentive programs.
Disadvantages
- Cost of an IPO.
- Weakening/loss of control of the company.
- Regulatory burden, including initial and recurring costs.
- Information disclosure requirements.
- Need to maintain ongoing contacts with investors and financial analysts.
The survey results for the advantages are shown in Table 1; those for the disadvantages are shown in
Table 2.
3

7. Toward more democratic corporate financing
Table 1
Relative importance of the advantages of being a publicly traded company
according to public and private company executives
Creating a currency 83%
for acquisitions 59%
Raising equity for financing growth or 77%
acquisitions 91%
Enhancing the company’s visibility and image 50%
with clients, suppliers,
33%
employees and government
Facilitating the establishment of employee 45%
incentive programs 38%
Allowing the founders/executives to 38%
realize a portion of their investment in the 48%
company
37%
Reducing company debt 56%
4

8. FMC | PwC
Table 2
Relative importance of the disadvantages of being a publicly traded company
according to public and private company executives
56%
Need to maintain ongoing contacts
with investors and financial analysts 71%
Regulatory burden 45%
59%
Disclosure requirements 43%
63%
Cost of an IPO 42%
50%
Weakening/loss of control of the company
38%
38%
Based on the respondents’ answers, the main observations may be summed up as follows:
- Private company executives, like those of publicly traded companies, acknowledge the
advantages of gaining access to the public capital markets.
- As a general rule, private company executives attach greater importance to certain
advantages and underestimate others that public company executives deem very
important.
- Private company executives attach much greater importance to the disadvantages than
public company executives do.
The comments we compiled reinforce the message stemming from the quantitative data. The vast
majority of public company executives stated clearly that they would not hesitate to go public if they
had to do things over again. All those who had a favourable opinion insisted that they were pursuing
demanding growth objectives, which their IPO had enabled them to finance by investing the offering’s
proceeds or using their listed shares as currency. Companies with long‐term plans that were
implemented as anticipated had success in the market and earned high valuations. On the other hand,
those who did not achieve significant growth or failed to generate the expected return on their capital
tended to struggle. Corporate executives’ viewpoints about their public company experience clearly
varied according to category.
5

9. Toward more democratic corporate financing
Public company executives tended to disagree with the statement that “public companies are forced to
focus on the short term at the expense of the long term”. The remarks of one executive neatly summed
up the general opinion: “It is wrong to say that [public companies] are managed exclusively for short‐
term considerations. A disciplined management team can respond appropriately to information
requirements without losing sight of medium and long‐term objectives.”
A number of public company executives said that their main motivation in carrying out an IPO—and one
of the main advantages of being listed on a stock exchange—was to diversify their financing sources.
They see an IPO as a way of “making corporate financing more democratic”. One executive said that the
banking syndicate he had done business with for decades “was suddenly no longer there in 2009, when
the time came to renew our lines of credit”. In his view, the fact that the company was publicly traded
and had performed well over the years allowed management to replace the banking syndicate on
advantageous terms in record time. “As a private company, I doubt we’d have been able to complete
the refinancing within the timeframe and on the same terms we obtained,” he said.
Public company executives often pointed out that being listed had increased their visibility and status
with their clients and suppliers as well as with government authorities, which in turn helped to generate
more business opportunities and thus facilitated both organic and acquisition‐driven growth. “It’s a nice
way to introduce yourself to potential clients,” said one interviewee. Several individuals noted that
public company status made it easier to recruit better qualified and more experienced personnel,
thereby contributing to better performance. Most were of the opinion that it is much easier for public
companies to obtain bank or institutional financing and implement employee and executive retention
plans. Moreover, some pointed out that it was much easier for public companies to determine the
division of assets among members of the second (and third) generation and thus to ensure the
perennity of the company.
Most of the public company executives acknowledged that disadvantages did exist but felt that they
were outweighed by the advantages. They had learned how to manage these disadvantages and had
implemented various systems and procedures in response to public market requirements. Some even
saw benefits for their companies: “Regulation forced us to be more rigorous in our financial
management, which resulted in our closing the books faster, adopting corresponding financial controls
and setting up an internal audit department. In short, we had the resources we needed to continuously
improve our performance as well as our capacity to manage growth.” Nevertheless, public company
executives remained critical of constantly changing regulations (IFRS conversion, etc.), which are
becoming more onerous.2 They were also disturbed by the dysfunctional impact of “regulatory
inflation”, especially as it affects small cap companies. But the aspect they found the most troublesome
was the time they had to spend explaining strategic goals, major projects and results to analysts and
institutional investors. Their complaints seem justified. The executives of small cap public companies
often expressed more nuanced views than those of larger companies concerning the advantages of
being listed and were less forgiving in their judgments about the related disadvantages and challenges.
2
Some Quebec companies are reporting issuers in the United States and therefore have to comply with US
regulations (e.g. Sarbanes‐Oxley, etc.).
6

10. FMC | PwC
Most of the private company executives we surveyed did not see an IPO as a desirable option. Dilution
of control, “executive” personality traits (with many CEOs unwilling to take on the public role that being
listed entails) and an externally “imposed” rate of growth were the arguments most often cited. Public
company executives maintained that the standards imposed by public capital markets are demanding
but manageable; in contrast, private company executives mainly see these standards as leading to a loss
of autonomy and an increased workload, including activities that, in their view, do not add value to their
companies. It is also clear that media visibility, pressure to grow and the obligation to issue quarterly
financial statements hold no appeal for them.
A number of private company executives were quick to assert that in Quebec, the availability of capital
to finance development and expansion is not an issue; they see capital as abundantly available. Several
claim to enjoy the benefits that accrue to public companies without having to contend with the
disadvantages. As they see it, they already have ready access to capital, rigorous management, high‐
quality financial systems and good governance, thanks to outstanding boards of directors and advisory
committees. Most of all, they feel that they have the flexibility they need to make required corrections
quickly, if needed. They also contend that they have lower financing costs without the constraints of
having to issue strategic and financial information about their activities.
Some executives see institutional private financing as a transitional step toward an IPO and being listed
on an exchange. Significantly, a number of executives who see advantages in “staying private” are not
interested in considering an investment by a private investment fund or a venture capital firm. Such
investors generally seek returns that are commensurate with the risks they incur and their investment
time horizon is relatively short. The objective of private investors or venture capitalists is to maximize
the value of their investment when they exit; it is highly unlikely that their need for short‐term
performance would be preferable to the “tyranny” of public markets, which, at least, provides
permanent equity capital. In both cases, rapid sustained growth is required. Obviously, not all company
owners or executives are willing to comply with such performance requirements, especially when they
believe that Quebec society does not value such efforts.
Other executives see institutional private financing as a trap to be avoided. One interviewee said that
one of the advantages of launching an IPO is that “you’re not locked into a shareholders’ agreement,
especially if there are multiple institutional investors”. This individual said he would like to give the
public capital markets a try but had put off doing so because of “the boycotting of small caps” and the
fact that the size of the issue “would create liquidity problems”.
The costs associated with an IPO and the information, control and governance requirements imposed on
publicly traded companies doubtless constitute another major disadvantage of going public.
7

11. Toward more democratic corporate financing
Table 3 shows that, in general, private company executives downplay the advantages of being listed.
Table 3
Perspectives of public and private company executives
I think that listing my company on the stock 77
exchange enabled (would enable) me to seize
more investment opportunities 45
I think that listing my company facilitated (would
56
facilitate) bank borrowing or bond financing 45
48
I think that our financing costs are (would be)
lower than if we’d stayed private 47
40
Public companies are forced to favour the short
term over the long term 43
The concerns that private company executives shared with us are valid and relevant. However, they do
not explain the substantial gap between Quebec and the other provinces in the propensity of companies
to access public capital markets. The regulatory requirements that apply to listed companies are
essentially the same coast to coast, thanks to sustained efforts by provincial authorities to harmonize
them. The stated advantages and disadvantages do not vary from province to province. The costs are
the same throughout Canada, except for translation costs for Quebec‐listed issuers. So when the time
comes to weighing their options, why do Quebec‐based executives reach different conclusions than
those in other provinces?
1.2 MINING SECTOR
The importance of Quebec’s mining sector and the specific factors associated with financing mineral
resource exploration and development in Canada justify the special attention that we have paid to this
sector.
The viewpoints of executives of mining companies headquartered in Quebec are similar to those of
public company executives with respect to the advantages and disadvantages of being listed. However,
as far as the mining executives are concerned, being listed is a necessity, not a choice. Nevertheless,
they remain highly critical of Quebec’s financial sector, which they consider deficient in several respects.
They condemned the lack of major Quebec institutions willing to finance mining projects: “They wait
until we are on third base!” One executive offered this terse assessment: “Montreal is out of it, as far as
mining finance is concerned. In Canada, it all happens in Toronto, Vancouver or Calgary”; this pretty well
sums up the mining executives’ point of view. We also noted that the relative lack of mining financing
activity negatively affects the quality and expertise of professionals serving companies in this sector.
8

12. FMC | PwC
We met with executives from mining companies of various sizes. They were unequivocal in their
assertion: no public financing means no business. Overall, they see a TSX Venture listing as an obligatory
step in financing “junior” exploration and production companies. The flow‐through share process is
powerful and necessary, and the SODEMEX and SIDEX specialized funds play a little‐known but vital role
in the financing of Quebec junior mining companies. Securities brokers active in this market segment
also share that view.
In the mining exploration sector, emulation is an important factor that manifests itself in three ways.
First, activity rapidly shifts to successful locations. For example, during the hard times between 1993 and
2000, exploration companies took advantage of the discovery of diamonds in Canada’s North and nickel,
copper and cobalt at Voisey’s Bay. Similarly, in Quebec, the development of the Lac Bloom iron ore
deposit led to several other potential projects in the Labrador Trough area. Second, to successfully
finance junior companies, investors must be convinced that three key factors are present: favourable
metal prices, positive prospects and good progress in project implementation. Once again, the
participation of certain investors, particularly those considered highly knowledgeable, attracts other
players. Third, the success of some companies encourages other industry “specialists” to jump in and
start companies of their own.
Nevertheless, the comments we heard do not provide a satisfactory answer to the underlying question:
why are Quebec mining companies under‐represented on the TSX and TSX Venture Exchange when
Quebec is home to some of the most extensive and most promising mineral resources in Canada? The
following observations offer some insights:
Entrepreneurship: The leaders we met with were bullish about Quebec’s mining industry and
proud of the expertise and quality of Quebec geologists and mining engineers, who work all
over the world. They added, however, that their enormous technical experience does not
prepare them to lead a small mining company, where close interaction with the financial sector
and familiarity with the demands of capital markets are key success factors.
Education: Mining exploration and development activities are inherently very risky. It must
therefore be expected that many if not a majority will be partial or total failures. On the other
hand, the successes generate high returns. This high‐risk profile is far from suitable for many
investors. It must be admitted, however, that investors in other provinces show much greater
interest in this profile than Quebec investors do. The suggestion that this might be a “cultural
difference” is unconvincing.
1.3 SOCIAL ENVIRONMENT
One factor that often came up in our interviews was the conclusion, tinged with some bitterness, that
entrepreneurial success was often disparaged rather than welcomed in Quebec and that any sense of
entrepreneurial zeal had faded. The executives we met with were enthusiastic about the initiative taken
by Marc Dutil, of the Canam Group, in founding the École d’Entrepreneurship de la Beauce, an
unprecedented private venture in Quebec. Nevertheless, it soon became clear that the social
environment was a significant factor in the phenomenon we were trying to understand.
Data on entrepreneurship in Canada published recently by the Fondation de l’Entrepreneurship du
Québec and the Business Development Bank of Canada support the diagnosis provided by these
executives. The survey results in Table 4 indicate that Quebec lags behind most regions of the country at
every stage of the entrepreneurial process.
9

13. Toward more democratic corporate financing
Table 4
Entrepreneurship among the Canadian population
Canada Alberta/BC Ontario Quebec
Plan to become entrepreneurs 11.2% 16.9% 11.1% 6.9%
Efforts underway 4.6% 6.1% 4.8% 3.6%
Company owners 10.1% 13.2% 11.4% 5.1%
Closings 6.7% 8.5% 6.4% 5.5%
According to our survey results, the proportion of Quebecers who plan to become entrepreneurs is
virtually half that of Canada as a whole—a warning sign that our pipeline of emerging companies with
high‐growth potential will dry up. Where will we find the next crop of entrepreneurs ready to take the
place of the many people who will be retiring in the next decade?
It would also be a mistake to underestimate the impact of emulation within the business world on the
behaviour of business leaders. Our interviewees acknowledged that this factor is a powerful incentive.
The strong crop of IPOs in the 1960s and the mid‐1980s clearly illustrates the ripple effect and the
importance of emulation in creating and maintaining a fertile environment. There is little doubt in our
minds that many of the private company executives we met with would not feel as hesitant if they did
not feel that they were the only ones considering this step. Several public company executives
emphasized that from 1983 to 1987, when Quebec companies launched an unprecedented number of
IPOs, “there was a buzz in the business community”, sustained by frequent formal and informal contacts
among business leaders, financiers, accountants and lawyers. The public status of a number of large
institutional investors in Quebec fosters a sense of reserve among their executives and creates a more
structured framework for their dealings. The situation is different in Toronto and Calgary: “When you go
to a restaurant, you see the whole financial community interacting with business executives. Everyone is
trying to do a deal. You don’t see that in Montreal anymore.”
1.4 QUEBEC’S FINANCIAL ECOSYSTEM
For companies that have passed the start‐up stage and need external capital, the financial sector is
unavoidable. In our study, three facets of the financial sector were examined: the role of securities
brokers, the role of institutional investors with respect to small cap companies3 and the role of
institutional investors in the area of private placements. These roles are interlinked—a characteristic
that was frequently noted by the interviewees. We also noted that the structure of Quebec’s financial
services industry has a decisive effect on behaviour.
3
The criteria defining a small cap company differ by jurisdiction. In the US, the Advisory Committee on Smaller
Public Companies defines a small cap company as one whose market value is approximately between US$129 and
$787 million. Companies with a market value of less than US$128 million are defined as “microcap companies”.
The EU defines SMEs according to the maximum value of their net assets: about $65 million for a medium‐sized
company, $20 million for a small company and $4 million for a micro‐company. Statistics Canada defines an SME as
any business establishment with 0 to 499 employee and less than $50 million in annual revenues. For the purposes
of our report, a small cap company is defined as a public company with a market value of between $5 million and
$50 million.
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14. FMC | PwC
1.4.1 Quebec’s securities industry
Amendments to the Bank Act in 1987 authorized Canadian banks to engage in securities brokerage
activities either directly or through a subsidiary. Within the space of just a few years, these activities
were consolidated within banks that today account for nearly 70% of the securities business in Canada.
In Quebec, the five largest brokerage firms account for 82% of assets received from individuals. This
concentration within large institutions is not without its consequences, in particular with respect to their
policies on public financing of corporations.
We noted that our interviewees in the major banking institutions were all targeting the same market
segment: IPOs with a minimum value of $50‐$75 million, corresponding to an average market
capitalization of about $250‐$300 million. In their view, few Quebec companies meet their criteria;
those that have reached the desired size are in no rush to access the public capital markets. In this
respect, it must be recognized that the cost structure of these major Canadian institutions, the
compensation packages for executives of their brokerage subsidiaries and their representatives and
concerns about the risks of damaging a bank’s reputation due to the failure of a company underwritten
as part of an IPO are important factors that influence bankers’ behaviour.
The same phenomenon was observed in the US: after the Gramm‐Leach‐Bliley Act was adopted in 1999,
revoking the Glass‐Steagall Act and allowing the commercial banks to engage in securities trading,
commercial banks acquired the vast majority of brokers specializing in small company financing.
Concurrently with this restructuring of the US securities industry, the number of IPOs dropped
significantly, mainly in the small and medium cap category, while the number of new listings on the
American Stock Exchange and NASDAQ also declined.
It is important to distinguish between the characteristics and dynamics of the public capital markets and
the internal considerations that determine which activities an institution wants to or can pursue. The
argument that the “public markets are not made for small companies” is not very convincing in view of
what is happening in other Canadian provinces and other parts of the world. In fact, 206 Canadian
corporations were listed on the TSX Venture Exchange in 2010 and the average IPO value of these
companies was $6.6 million ($4.0 million in 2009).
Two or three Quebec securities brokerage firms have focused on the small‐cap segment of the IPO
market. Our interviewees indicated that this activity met their company’s profitability objectives. For
some of these firms, this is a recent development. The fact remains, though, that this activity is viewed
critically and marginalized by the Quebec financial sector. This attitude hinders the development of this
market segment in a number of ways. For example, institutional funds generally refuse to participate as
lead investor in these issues on the grounds that the investment would be too small for them. In
another case, a specialized manager known for this type of investment was turned down by institutional
funds on the grounds that they could do it better directly!
It would be surprising if the structure of the Quebec securities industry did not have an effect on Quebec
companies’ propensity to resort to the public markets. A review of income trust IPOs is revealing. This
financing structure, typically associated with the real state sector, was extended to other economic
sectors beginning in 1995. The formula was well received: by 1997, the value of income trust IPOs in
Canada stood at $10.3 billion. Yet the first income trust IPO was not launched in Quebec until 1998.
11

15. Toward more democratic corporate financing
In subsequent years, Quebec income trust IPO amounts remained low compared with those in Ontario
and the rest of Canada; since 1995, the gross proceeds of Quebec income trust IPOs accounted for 9% of
the Canadian total. However, Quebec companies that availed themselves of this form of public financing
(such as Boralex, Genivar, Yellow Pages Group, Transforce, etc.) experienced strong growth, fuelled by
numerous acquisitions.
The fact cannot be denied: in every jurisdiction, the vitality of public financing of small caps hinges on
the existence of securities brokerage firms specializing in that market sector.4 The ownership of such
companies is generally local and independent of major national and international financial groups. The
conclusions of an impact analysis of Quebec’s provincial stock savings plan (REA) are especially relevant:
“In addition, the REA has literally enabled the public financing industry to
take shape. Before the REA was introduced, few brokerage firms were
really active in this field in Montreal. Expertise was generally lacking and
little research was done locally. In 1986, there were at least eight Quebec
firms active in public financing, up from two a few years earlier.” (Secor,
1986)
This structural change in the Quebec securities industry, characterized by the emergence of a significant
number of independent firms, is one of the key factors explaining the large number of IPOs made under
the REA program between 1983 and 1988. These independent securities firms have, for the most part,
disappeared from the scene in Quebec but are still quite present in the other provinces. In theory,
Canadian firms specializing in small cap financing should view Quebec as a promising market without
much competition. In practice, the dearth of IPOs is a signal that the Quebec environment is IPO‐
unfriendly—if not downright hostile. As a result, according to the executives of these companies, the
chances of success are not commensurate with the resources and efforts that would have to be
expended.
We asked executives of public and private companies the following questions: Do you think the quality
of advisors in Quebec is comparable with that of advisors elsewhere in Canada and do you think there
are enough such advisors (publicly traded companies)? As regards financing, would you have trouble
identifying experienced advisors in Quebec (privately held companies)? The private company executives
were considerably more positive (71%) than their public company counterparts (56%). The aspect that
virtually everyone agreed on was that the vast majority of financial analysts are located outside Quebec.
This has various consequences. First, it imposes English as the language of communication, which
penalizes some management teams and the stock prices of the companies they manage. In addition,
distance does nothing to promote informal relationships between analysts and company management.
This situation has a greater impact on small cap companies because valuations place a certain weighting
on management team quality in relation to the company’s business plan. Finally, analysts’ reports
contribute significantly to promoting trading in shares, thus promoting liquidity.
4
An analysis of securities market performance following IPOs made between 1980 and 2000 in the US concluded
that companies whose IPOs were underwritten by the main brokerage firms (“top‐tier underwriters”) or financed
by a venture capital company demonstrated relatively higher volatility and had a lower rate of survival than those
whose IPOs had been underwritten by specialized brokerage firms (Peristrani, 2003).
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1.4.2 Institutional investors and small cap companies
Liquidity, that is, the ability to quickly trade a security at the posted price, is one of the most important
factors in determining the price of a security. Obviously, the greater the market value of a company and
the greater the number of shareholders, the more liquid the market for its shares will be. Small cap
companies thus face an unfavourable market dynamic. This impact on share price can be substantially
mitigated by the adoption of certain market management measures or, in the absence of such
measures, it may be exacerbated.
All major stock markets have mechanisms in place to support market liquidity. Specialists or market
makers are obliged to buy or sell securities at the posted prices in the absence of a third party. Thus,
share prices are not unduly influenced by patterns of buy or sell orders. Such a mechanism exists, for
example, at the TSX and NASDAQ but not at the TSX Venture Exchange. This absence is hard to explain,
at least for shares trading above a minimum price level.
Success in financing a small cap company depends on the liquidity of the secondary market for its
shares. To achieve this liquidity, special conditions must be created, both at the time of the IPO and later
on. These conditions may be summarized as follows:
‐ Significant participation by individual investors is a critical success factor because it
increases the number of stakeholders.
The oft‐stated notion that due to market transformation, individuals no longer own
company shares directly but rather through mutual funds and other investment vehicles,
simply does not stand up to scrutiny. The data show that other than shares held in self‐
directed retirement funds, 9.9% of Canadian families own shares, a proportion that has held
steady since 1999. In this respect, Quebec basically reached the Canadian average back in
1984. By late 2010, the value of Quebecers’ equity portfolios (other than mutual funds) held
by securities brokers stood at $81.6 billion.
However, it is correct to state that the major securities brokerage firms prefer to “manage
the financial assets” of their clients and impose severe restrictions on the securities they can
recommend to them. This does not promote the distribution of shares issued by Quebec
SMEs because generally, they do not meet the brokerage firms’ cross‐Canada compliance
criteria.
‐ The success of a new IPO is often based on obtaining one or more recognized lead investors.
Regulatory and liquidity requirements generally limit an institutional investor’s participation
to 10% of the IPO. One quickly recognizes the problem that this creates for large
institutional investors: 10% of an IPO of $5 to $10 million means an investment of $500,000
to $1 million—well below such institutions’ minimum threshold for investments in listed
equity portfolios. The less imposing portfolio value of various pension funds should
theoretically favour such investments. According to our interviewees who know this sector
well, “pension committees are reluctant to make such investments.”
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17. Toward more democratic corporate financing
We met with two specialized fund managers who met this lead investor requirement. The
first, specializing in the technology, industrial and commercial sectors, ceased this type of
activity at the express request of the institutions that contributed to its new funds under
management and which, at the end of the financial crisis, adopted “capital protection” as
their watchword. The second manager focuses on the mining sector, mainly in financing
mineral resource exploration and development companies and junior mining companies.
This type of institutional fund’s contribution to the success of IPOs and subsequent public
financing of small cap companies is considered essential by the principal players in this
market segment. The problem, according to our interviewees, is that these institutional or
private investors are the exception rather than the rule in Quebec.
‐ Liquidity of shares on the secondary market is essential for maintaining fair value.
Regulations prevent issuing companies from trading their own shares and thus influencing
market liquidity; this leaves executives mostly powerless to correct “market anomalies” that
may have a serious impact on company value. This prohibition does not apply to financial
sector stakeholders, insofar as their trading activities are not designed to manipulate the
market.
Firms that act as “specialists” or market makers must devote a substantial amount of capital
to this activity. Generally, brokerage firms specializing in public financing of small and
medium‐sized companies do not commit the financial and human resources required for
proprietary trading and the tight risk controls these activities demand. On the other hand,
the experience of one Quebec institutional fund specializing in the shares of junior mining
companies demonstrates that market‐making activities adapted to the market
characteristics of securities traded on the TSX Venture Exchange can be both very beneficial
for listed Quebec companies and their shareholders, as well as profitable for the investor in
question.
1.4.3 Institutional corporate financing in Quebec
The equity financing situation in Quebec is unique. It is characterized by an abundant supply of capital
from government organizations and tax‐advantaged funds. These features have already been pointed
out in the report of the task force on the Quebec government’s venture capital role (Rapport Brunet,
2003), which at the time estimated that the Quebec government’s activities represented 70% of the
supply of venture capital, not including the Caisse de dépôt et placement du Québec (CPDQ).
During our consultations, some executives of private venture capital funds expressed reluctance to
compete with public or tax‐advantaged funds or even to associate with them in an investment. This
reluctance was not due simply to “ideological” considerations but rather to hard‐to‐reconcile
differences vis‐à‐vis the performance objectives and development orientations of the companies in
which they invest.
The comments we heard about the role and behaviour of public and tax‐advantaged funds with respect
to financing small and medium‐sized companies with high growth potential raised a number of
questions. Some executives indicated that they put up with the participation of public and tax‐
advantaged funds “because they are silent and undemanding partners as long as value is created.”
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Given the limited size of the Quebec economy, the success of a dynamic company necessarily requires
breaking into external markets. The contributions of individual and institutional investors who
successfully finance SMEs are based essentially on their intimate knowledge of the sector in which
“their” SME operates and on their ability to promote closer relationships with industry leaders. They
also have access to other experienced CEOs, whom they do not hesitate to call on to guide the
executives of the companies they are financing. Some were critical of the ability to integrate Quebec
SMEs within North American industrial and financial networks: “When you compare the results obtained
by US managers with those of Quebec managers in similar businesses of the same size and in the same
industry segment, the performance of US companies is substantially better than that of Canadian
companies, both in terms of growth rate and performance.” On the same topic, a financial executive
noted that Quebec entrepreneurs/managers were not “connected” to North American industrial and
commercial networks, partly because the sources of private placements in Quebec do not maintain ties
with such networks and partly because the importance of the language barrier is generally
underestimated. According to a recent study conducted by the Institute for Competitiveness and
Prosperity (2010), one of the effects of this segregation is that creativity is a less important competitive
factor for Quebec companies than it is for companies in Ontario and the US.
Although there are a number of public and tax‐advantaged funds in Quebec, some of our interviewees
pointed out that they tend to consult each other when making investment decisions. For example,
Teralys, a fund of funds, is funded by an investment of $250 million by the Caisse de dépôt et de
placements du Québec (CDPQ), $250 million from the Fonds de solidarité des travailleurs du Québec
(FSTQ) and $200 million from Investissements Québec. GO Capital is another case in point. Managed by
the BDC, this venture capital fund, which was established to support the creation of companies in all
science and technology sectors in Quebec, includes FIER Partners, BDC, CDPQ, FSTQ and Fondaction
CSN. We have no doubt that the instigators of these groups were well intentioned. However, this
oligopolistic structure and the propensity of the main players to band together have certain
consequences: in the niches they target, independent decision‐making centres have been eliminated.
The primary advantage of a market comes from the fact that decisions are made by a large number of
individuals motivated by distinct and independent evaluations and considerations. It appears that the
main funds’ management teams are aware of this problem and have taken steps to mitigate these
consequences by acquiring interests in a number of private venture capital funds and companies.
Apparently due to the significant amounts that public and tax‐advantaged funds must invest, they tend
to discourage private company executives from accessing the securities markets. When voiced by
investment bankers, this criticism might be seen as aimed at the competition. However, when private
company executives themselves confirm that these institutions “put quite a bit of pressure on me not to
go public and offered to give me whatever capital I needed instead,” questions about their responsibility
in the under‐representation of Quebec companies on stock exchanges takes on a whole new meaning.
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19. Toward more democratic corporate financing
1.5 CONCLUSION
Data on the Quebec economy reveal that Quebec companies remain under‐capitalized compared to the
situation prevailing in Canada as a whole despite the Quebec government’s large‐scale efforts to
stimulate the supply of equity through various programs and agencies.
This relative under‐capitalization invariably translates into chronic under‐investment in information
technologies, communications, machinery, innovation‐related marketing and the development of export
markets compared with our main competitors. It also results in lower productivity than in Ontario and
the US and in the gradual erosion of our competitiveness. This situation requires us to conduct a
rigorous diagnosis of the Quebec economy’s relative performance aimed at better identifying the issues
at stake and taking a clear‐eyed look at the Quebec financial ecosystem’s strengths and weaknesses.
A number of interviewees suggested that eliminating a large number of direct government initiatives
was a necessary condition for better allocating venture capital to dynamic companies, which are
responsible for most economic growth and job creation. Without subscribing to this view, we believe
that a public capital market‐oriented approach would yield much better results than those obtained to
date in Quebec.
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2. THE GROWTH ENGINES OF THE QUEBEC ECONOMY
Many of the executives we consulted expressed concerns about the strength of the Quebec economy
and its ability to compete and generate increases in collective wealth over the medium and long terms.
This feeling reflects a sense of unease precipitated not only by their experiences at the helm of their
firms, but also by the competitive challenges they face and by Quebec society’s lack of recognition of
successful business leaders.
While we take comfort in the fact that the employment situation over the last three years meant that
Quebec was relatively sheltered from the worst of the economic crisis that struck hard in other regions,
we must not delude ourselves: Quebec’s public finances face major challenges and cannot
accommodate a significant increase in debt. The accelerated decline in the proportion of the workforce
(individuals 16‐64 years of age) compared with the total population will inevitably result in a serious
slowing of economic growth. According to the Quebec Department of Finance, the average real GDP
growth rate, which stood at 2.1% from 1982 to 2008, will gradually drop to 1.4% between 2021 and
2025. That means we will experience a drop in per capita wealth unless there is a substantial increase in
productivity, which will only occur through innovation and better penetration of external markets.
Among other things, this will require a much better record in developing, adopting and marketing
innovations. Given the nature of the challenges looming on the horizon, a concerted effort will be
required by our entrepreneurs and Quebec’s private sector to reverse the probable course of events.
The structural nature of the economic challenges confronting Quebec means that growth is an
unavoidable necessity. A society may pride itself on its history; however, its future will be uninspiring if
its economy is weak. Given business’s central role in ensuring sustained economic growth, we have
sought to validate the diagnosis offered by corporate leaders. The framework of economic growth
analysis and a comparison of the situation in Quebec with what is happening elsewhere in Canada with
respect to access to capital, one of the most critical growth factors provide a strong basis to assess their
concerns.
The conclusions from the following analysis confirm a number of corporate executives’ observations and
comments, particularly as regards the undisputable advantages of public capital markets and their
motivating effect on company performance. Furthermore, some conclusions refute certain widespread
beliefs concerning public and private corporate financing.
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21. Toward more democratic corporate financing
2.1 GROWTH ENGINES
The understanding of job creation mechanisms took a decisive turn in 1981 with the publication of the
results of an exhaustive study conducted by David Birch of the Massachusetts Institute of Technology.
Since then, it has been generally assumed that about two‐thirds of new jobs are created by SMEs. That is
not the whole story, however. Subsequent studies, based on more comprehensive longitudinal
databases, have made it possible to refine the analysis and better identify the sources of job creation.
The main conclusions from these studies cast a more balanced light on this complex reality and identify
the growth engines :
‐ Differences in regional growth rates in North American and Western Europe are explained by
the fact that rapid‐growth regions are those in which the pace of job creation is most vigorous
because the rate of job loss is substantially the same from region to region.5
‐ A minority of companies (between 4% and 7% of the total) are responsible for creating most net
jobs. Between 2002 and 2006, these high‐growth or “dynamic” companies created 84% of net
jobs in the US (Acs et al. 2008). In Canada, dynamic companies with continuing operations
between 1985 and 1999 created 56% of net jobs during that period, even though they
accounted for only 6% of all companies.
‐ Dynamic companies come in all sizes: small, medium and large. They are found throughout the
country in various regions and are present in all industries. They are not concentrated in the
high technology sectors. They are generally quite successful exporters. Between 1993 and 2002,
high‐growth export companies created 47% of jobs even though they accounted for only 5.5% of
Canadian companies (Parsley et al. 2008).
‐ New companies are generally oriented toward local markets. Because they respond generally to
local demand (the market), their contribution to the increase in collective wealth is marginal.
These new companies create plenty of jobs but, since their failure rate is so high, the net result
is minimal. Only a minority of them will grow larger than 20 permanent jobs.
‐ The creation rate of new companies depends on the population growth rate, not the other way
around, as is often claimed. Between 1989 and 2009, the annual average growth rate of the
Quebec population was only 44% of the rate in Ontario, so the relative vitality of the Quebec
economy in terms of company creation must have been affected accordingly. Indeed, in
December 2009, there were in Quebec 3,930 fewer employer establishments than in July 2002,
whereas during that period, the number in the rest of Canada increased by 56,177.
The results of productivity and innovation studies are fully consistent with these observations.
‐ Dynamic companies post the highest productivity growth rates (Leung et al. 2008). This is
because they generally use the most advanced technologies and displace less productive
companies.
5
From 1977 to 2005 in the US, the annual average rate of new job creation was 18% of total jobs while the job loss
rate was 16% (Haltiwanger et al. 2008).
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‐ The productivity level of companies is a function of their size. This positive correlation between
company size and productivity applies to all sectors. In Canada, it has been observed that
companies with more than 500 employees and those with 100 to 500 employees have
productivity levels that are 30% and 20% higher, respectively, than that of companies with fewer
than 100 employees. This productivity gap also increases over time. It stems from the fact that
productivity gains depend on the assimilation of expertise, competencies and best practices
within companies and from their continuous adaptation. This process takes time.
‐ Increases in productivity according to company size are linked to better capitalization. Indeed,
productivity differences between exchange‐listed companies of different sizes are much less
pronounced (Lee and Tang 2001).
‐ R&D spending increases with company size. However, the data are less convincing with respect
to the intensity of R&D, which is generally measured in terms of R&D spending per employee or
as a function of revenue. In some industries, intensity grows with company size, while the
opposite may occur in other cases. In any event, R&D entails major risks and requires a lot of
capital—but it cannot be debt‐financed because of factors such as the intangible nature of the
assets it uses and generates. The ability to convert R&D results into genuine commercial
innovations is a key success factor for dynamic companies.
‐ In all industrial sectors, the volatility and variability of job growth rates are significantly higher in
private companies than in public companies (Davis et al. 2006).
2.2 PERFORMANCE OF THE QUEBEC ECONOMY: A DISTURBING DIAGNOSIS
Over the last decade, the number of jobs in Quebec has grown from 3,402,000 to 3,844 000, an increase
of 13%. This compares favourably with that for Canada as a whole (14%). The GDP per capita trend in
Quebec is also in line with the Canadian average. These comparisons are reassuring for many observers
and no doubt account for the apparent lack of concern about our dwindling competitiveness and the
magnitude of the challenges that Quebec will have to face with growing urgency in the next few years.
A more detailed analysis of the situation paints a more disturbing picture.6 It has been noted that:
‐ Quebec’s population, which accounted for 25.27% of the Canadian population in 1990, dropped
to only 23.2% in 2010.
‐ From 2001 to 2010, Quebec’s real GDP increased by 15%, compared with 20% in the rest of
Canada.
‐ Between 1981 and 2009, Quebec created only 16.8% of the full‐time jobs in Canada. Since 2000,
full‐time jobs have increased by 10% in Quebec, compared with 13% for the rest of Canada.
6
Several analyses have examined the Quebec economy’s performance in recent decades. See in particular “Le
Québec économique 2009: Le chemin parcouru depuis 40 ans” (CIRANO 2010), “La performance et le
développement économiques du Québec : Les douze travaux d’Hercule” (CIRANO 2009) and “Le Québec
économique 2010 : Vers un plan de croissance pour le Québec“ (CIRANO 2010).
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23. Toward more democratic corporate financing
‐ Quebec is facing a substantial challenge in the form of the rapid demographic decline of its
workforce. Despite this worrisome evolution, we observe that in 2009, the participation rate of
55‐64 year olds in the workforce was only 51.2%, compared with 59.4% in the rest of Canada
and 62.1% in the US.
‐ Commercial bankruptcies in Quebec in 2009 accounted for 35% of the Canadian total. In relation
to GDP, the rate of commercial bankruptcies in Quebec is double that in the rest of Canada.
Quebec’s competitive environment is not limited to other provinces; we are North Americans. In terms
of productivity, Canada has lagged behind its main commercial partners, principally the United States,
while Quebec lags behind Ontario and the Canadian average. We have no choice: we must compare
ourselves to the top‐performing Canadian and US regions.
Empirical data indicate that the most productive companies are characterized by:
‐ Larger investments in machinery and equipment, especially in information technologies and
communications (ITC).
‐ A presence in foreign markets.
‐ A greater willingness to invest in research and development (R&D) and innovation.
As regards investments in machinery, equipment and ITC, Quebec does not fare well, and this has been
the case for decades. The difference in the ratio of private investments to real GDP in Quebec compared
with the rest of Canada between 2000 and 2008 represents an under‐investment of $66.6 billion over
the entire period and $7.9 billion in 2008 alone. This gap is leading to a gradual deterioration of our
production and innovation capacity and is having an adverse effect on our competitiveness. For
example, it has been observed that the reduction in investments in machinery and equipment has been
accompanied by a relative reduction in the productivity of the Quebec economy, especially since 2000.
But the real problem is that comparisons with the Canadian average mask the scale of the accumulated
lag compared with the United States. Between 1987 and 2009, investments per worker in
machinery/equipment and in ITC in Canada were on average 77% and 59% respectively of US
investments. In 2009, Canadian workers enjoyed on average only one‐half of the value of capital
investments in machinery and equipment and ITC of their US counterparts.
The main flagships of Quebec industry have an impressive international presence. But that does not
alter the fact that only 4.2% of Quebec companies export abroad. Since 2000, Canada’s share of exports
to the US has declined from 20% to 14% (this trend has accentuated since 2005), while the share of US
imports from China has risen from 8% to 19%. Our declining share in our largest market is, in several
respects, attributable to our dwindling productivity. The emerging economies account for approximately
two‐thirds of global economic growth and one‐half of the increase in global imports. If we cannot
maintain our market share in the markets of our closest neighbour, how can we hope to achieve greater
success in new Asian and Latin American markets or even in Europe?
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Quebec’s performance in R&D investments offers proof that well‐designed public policies can change
the course of events. In 1982, R&D spending represented 1.1% of Quebec GDP; in 2007, it was 2.53% of
GDP, higher than in Canada as a whole (1.91%), the EU (1.77%) and the OECD countries (2.28%) and very
close to that in the US (2.66%). Worth noting is that most R&D investments here are made by
companies, which is not the case in the rest of Canada. On the other hand, our record with respect to
innovation is not quite so stellar. The World Economic Forum ranks Canada 19th, far behind the United
States, Germany and Japan, with respect to our ability to convert R&D into commercial success.
2.3 ACCESS TO PUBLIC CAPITAL MARKETS BY CANADIAN COMPANIES
Surveys of owners of small and medium‐sized Canadian and US companies reveal that gaining access to
financing is more difficult in Canada than in the United States. The proportion of debt in the capital
structure of Canadian and American SMEs is comparable, but the sources of funds are different.
Canadian SMEs turn less often to financial institutions; they make up for this by making greater use of
loans from individuals, family members and friends (Leung et al. 2008). The increasing number of angel
investor networks constitutes a growing source of financing across Canada.
Acquiring this essential start‐up capital is not enough to ensure that dynamic companies will develop to
their full potential. There comes a time when a company must solidify its financial base and consolidate
its past growth, which may be threatened by an excessive debt ratio; it must facilitate future growth
either organically, by making consistent investments in machinery and equipment and expanding into
external markets, or through acquisitions. Equity financing needs can be met by private placements
from large investors or by issuing shares on public capital markets.
2.4 PRIVATE PLACEMENTS
Private placements are an importance source of external capital for companies. These financing
transactions are conducted in the exempt market in accordance with securities regulations, which are
generally more liberal in Canada than in other industrialized countries.
Empirical studies demonstrate that in Canada, most private placement is a local, intra‐provincial activity.
The data in Table 5 are quite revealing. Between 2003 and 2010, Quebec venture capital investors
carried out 90.7% of their private equity investments in Quebec; these investments represented 88.6%
of the venture equity capital invested in private placement in Quebec (the corresponding figures are
78.6% and 83.7% for Ontario and 85.5% and 53.0% for British Columbia). The data signify that this
source of capital brings less knowledge and fewer connections to North American and international
industrial networks in Quebec than it does elsewhere in Canada.
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25. Toward more democratic corporate financing
Table 5
Source and destination provinces of investments
by Canadian venture capital companies in Canada
(January 2003–April 2010)
Companies financed % of % of investments % carried out in
(no.) Canadian received from the same the same
total province province
Alberta 87 3.7 79.0 60.9
British Columbia 365 15.7 53.0 85.5
Saskatchewan 100 4.3 84.1 58.0
Manitoba 57 2.4 83.6 80.7
Ontario 859 36.8 83.7 78.6
Quebec 778 33.4 88.6 90.7
Atlantic provinces 86 3.7 46.4 60.5
Total: 2332 100 81.6 81.6
Source: Suret, Jean‐Marc and Céline Carpentier, “Réglementation des valeurs mobilières au Canada: un réexamen des
arguments avancés pour justifier la commission unique,” report prepared for the Autorité des marchés financiers du
Québec, June 20, 2010.
Over the years, the Canadian venture capital industry has not generated the returns necessary to attract
Canadian and foreign institutional investors. In the past decade, the annual return of Canadian venture
capital companies was below the return of Treasury bills in every year except 2001. As Table 6 shows,
the rates of return are unsustainable. That explains why the amounts invested annually by the venture
capital industry in Canada have levelled off at about $1.0 billion, the same level as in the mid‐ 1990s.
Table 6
Rate of return of venture capital companies in the US,
Europe and Canada, 1995‐2005
All companies (%) First quartile (%)
US 27.6 76.6
Europe 6.5 38.1
Canada ‐3.0 19.2
Fonds de travailleurs ‐1.4 n/a
Private independents ‐3.9 23.3
Others ‐3.6 14.5
Source: Duruflé, Gilles, “La performance du capital de risque au Canada, en Europe et aux États‐Unis, éléments de
comparaison,” Canadian Venture Capital Association, Canada‐France Forum, February 13, 2007.
Private and independent venture capital companies (PIVCs) have amassed about 62% of the new capital
allocated for this purpose in Canada since 2005; government funds and tax‐advantaged funds make up
the difference. These two groups contribute more or less equally to investments in Canadian companies
because PIVCs invest about 40% of their capital abroad, mainly in the United States. For the past few
years, foreign venture capital funds have accounted for about one‐third of venture capital investments
in Canada.7
7
Data on venture capital companies are from “Canada’s Venture Capital Industry in 2009”, Thompson Reuters.
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As regards investments by venture capital companies in Canada, we note that:
‐ Most investments are made in information technologies (53%), biopharmaceutical and life sciences
(20%) and energy/environment (9%). The non‐technological sectors account for less than 20% of
investments.
‐ The average investment per company by a Canadian venture capital company is $3.1 million, much
less than the average investment of foreign companies in Canada ($8.5 million).
‐ Between 2008 and 2009, 35% of the value of venture capital company investments in Canada was
invested in Quebec ($411 million/year). During that period, Ontario’s share was 36% and British
Columbia’s was 17%.
‐ In 2009, four of the 10 largest venture capital investments in Canada were made in Quebec
companies (three biopharma/one ITC). It is noteworthy that 65% of the capital invested in these 10
companies came from outside Canada.
‐ Between 2003 and 2009, venture capital companies liquidated their investments in 264 Canadian
companies. Of this number, an IPO was used in 46 cases (17%), whereas in the US, this option was
used in more than 30% of cases.8
‐ Selling the company to other interests is thus the route preferred by risk capital companies in
Canada, including public institutions and tax‐advantaged funds. This exit strategy has long‐term
consequences for the Quebec economy. First, selling eliminates any possibility that they will become
large independent companies, except in rare cases of consolidation of Quebec companies. Second,
analyses conducted in the US indicate that most jobs created by companies supported by venture
capital companies come after the IPO, that is, after the company has gone public.
2.5 ACCESS TO PUBLIC CAPITAL MARKETS
Quebec accounts for about 21% of the Canadian economy and 23.2% of Canada’s population. However,
the Quebec companies listed on a Canadian stock exchange represent only 10% of listings and 11% of
the total capitalization of Canadian listed companies. This under‐representation is hardly surprising
given that Quebec companies were involved in only 8% of the public offerings in Canada and account for
only 17% of the total value of IPOs launched between 1993 and 2004. And the under‐representation of
Quebec companies continues to grow. Only three of the 74 new companies listed on the TSX in 2010
were from Quebec, including two graduating from the TSX Venture Exchange. As regards the TSX
Venture Exchange, Quebec companies account for only eleven of the 206 new Canadian companies
listed in 2010.
The ratio of companies’ market capitalization to GDP is a good indicator of the development and
efficiency of public capital markets. According to this ratio, Canada leads the developed countries. In
2009, this figure was 1.45 for Canada as a whole, nearly double that for Quebec (0.79). This is another
clear indication of deficiencies and weaknesses in the operations of public capital markets in Quebec.
8
Between 1991 and 2004, venture capital companies in Canada monetized their investment through an IPO in
5.85% of cases, compared with 35.65% in the US.
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27. Toward more democratic corporate financing
The TSX ranks eighth in the world in terms of capitalization; it is without doubt the main stock exchange
in Canada. Nevertheless, its listing criteria are less demanding than those of most stock exchanges
around the world. They are comparable, for example, with those of the Alternative Investment Market
in London, which was established precisely to facilitate stock market access for medium‐sized
companies. Against that backdrop, the relative shortage of Quebec companies listed on the TSX raises
many questions about the impact on Quebec’s growth prospects.
Given the characteristics of the companies listed on the TSX Venture Exchange, this market is dominated
by individual investors. Institutional investors are generally absent because the capitalization levels
involved are small. In 2009, the average value of an IPO for an issuer listed on the TSX was $69.5 million,
compared with $4.0 million on the TSX Venture Exchange. This has prompted some to disparage the TSX
Venture Exchange—an attitude that deprives Quebec entrepreneurs, especially those with young
dynamic companies, of access to public and private markets, in which dynamic companies have
benefited handsomely.
Investments in TSX Venture Exchange companies certainly involve a higher risk level; the rate of failure
and disappointing results is high. To a large extent, this inherent level of risk stems from the age and size
of these companies and the nature of their activities. The returns of venture capital companies shown in
Table 6 make this point clear. In the case of the TSX Venture Exchange, all results are in the public
domain. In contrast, discretion with regard to failure is more often the rule with respect to the results
obtained by venture capital companies and institutional investors.
A rigorous analysis of the market for shares listed on the TSX Venture Exchange puts matters in
perspective. Studies demonstrate that between 1995 and 2005, the average return of an index
comprised of companies listed during that period was 15.69% for the TSX Venture Exchange, compared
with 10.7% for the TSX (Carpentier et al. 2008). In Canada, compared to the venture capital route, the
TSX Venture Exchange yields better results, in the sense that four times as many companies operating in
sectors other than mining exploration that have chosen to list on the TSX Venture Exchange (rather than
pursuing the private financing option) have achieved the size and performance required to be listed on
the TSX (Carpentier et al. 2008). From the perspective of growth and development by dynamic
companies, the following facts cannot be ignored:
‐ 31.5% of Canadian companies listed on the TSX between 2007 and September 2010 had
previously been listed on the TSX Venture Exchange.
‐ 20% of Canadian companies included in the S&P/TSX index are companies that “graduated”
from the TSX Venture Exchange.
2.6 PRIVATE PLACEMENTS IN PUBLIC COMPANIES
In Canada, private placements in public companies have become the preferred mode for subsequent
share issues by listed companies. In 2010, the value of private equity capital financing by TSX and TSX
Venture Exchange companies was $6,609 and $6,392 billion, respectively. That same year, private
placements accounted for 82% of the value of the equity financing of TSX Venture Exchange companies.
In 2008‐2009, TSX Venture Exchange companies obtained $10.3 billion in equity financing, compared
with $1.2 billion in venture capital investments in Canada during the same period. Other than the
natural resources sector, where they are prevalent, private placements are frequently used by SMEs in
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