Concerns are mounting over the dwindling number of public operating companies and initial public offerings (IPOs) on the Toronto Stock Exchange (TSX), yet the state of the TSX Venture Exchange (TSXV) remains a largely overlooked topic. The TSXV has a significant historical role in nurturing early-stage ventures in Canada, particularly in regions where institutional capital is limited.
Canada’s entrepreneurial landscape benefited immensely from its trio of regional exchanges—the Alberta Stock Exchange, the Vancouver Stock Exchange, and the Winnipeg Stock Exchange—all established in the early 20th century. These exchanges provided crucial funding for burgeoning businesses, especially in Western Canada. The innovative spirit of these markets led to initiatives like the capital pool company (CPC) program, which paved the way for national adoption and anticipated the modern special purpose acquisition corporations (SPACs).
In 2001, the regional exchanges amalgamated into what is now known as the TSXV, preserving the legacy of supporting the early-stage ecosystem. However, the TSXV has experienced a noticeable decline in listings, dropping from a peak of 2,504 in 2002 to 1,670 by 2023. This reduction is troubling, especially as the number of IPOs has plummeted from an average of 159 annually in the late 1990s to just 91 in recent years.
Despite these challenges, the TSXV continues to attract more listings than its senior counterpart, the TSX. A critical factor in this ecosystem is the ability of companies to transition from the TSXV to the TSX—a process that provides valuable public-market experience. Research shows that companies that make this leap demonstrate superior long-term performance compared to those that go public directly on the TSX. However, graduations have also diminished dramatically, falling from 72 in 2007 to a mere 12 in 2023.
The declining number of IPOs and graduations raises alarm bells for Canada’s venture capital landscape, which boasts the largest and most successful public venture market globally. Policymakers and regulators must prioritize the development of frameworks that bolster public equity markets, particularly as recent changes have tended to favour private markets. While allowing individuals to invest in early-stage private companies offers benefits, it also poses significant risks, including reduced transparency and liquidity compared to public markets.
The current regulatory landscape creates an uneven playing field for junior public companies, particularly when tax incentives are skewed in favour of their private counterparts. This discrepancy is troubling, especially as both markets cater to similar-sized companies.
To revive the junior public equity market, raising awareness of investment opportunities is crucial. Historically, TSXV companies have primarily attracted retail investors. However, a generational shift has left a gap as younger investors gravitate towards higher-risk crypto ventures and U.S. technology stocks, often overlooking the potential of TSXV investments. Furthermore, performance metrics of the TSXV frequently underestimate returns since graduates to the TSX are excluded from the index.
Enhancing corporate governance is another pressing issue. Many scandals in senior public markets can be traced back to governance failures, underscoring the need for robust governance practices in public venture companies. Unlike private markets, where investors demand effective governance structures, public companies lack similar explicit incentives.
Initiatives to enhance governance knowledge among junior public company founders could bridge this gap. Programs from the Canadian Venture Capital Association, in collaboration with the Institute of Corporate Directors, aim to improve governance capabilities among investors and directors but need to extend to public venture companies.
Without strategic adjustments, Canada’s early-stage businesses will continue to struggle in securing essential development capital. Addressing this issue is vital, especially in light of Canada’s productivity crisis. Strengthening access to capital through public equity markets represents a significant step towards supporting the nation’s entrepreneurial spirit and economic growth.