Canada’s Capital Markets Crisis: Why Innovation is Leaving for the U.S.
Canada is facing a quiet crisis. While headlines focus on interest rates and inflation, a fundamental shift in our financial landscape is pushing innovation – and the wealth it creates – south of the border. Since the late 1980s, the dominance of Canada’s “Big Six” banks in underwriting has steadily strangled competition, leaving entrepreneurs with fewer options and ultimately hindering our ability to fund the next generation of groundbreaking companies. The result? A shrinking number of publicly listed Canadian companies and a worrying exodus of talent and intellectual property.
The Rise of the Big Six and the Decline of Diversity
The story begins with a seemingly innocuous change to Canada’s Bank Act in 1987. Allowing commercial banks to enter the securities underwriting business unleashed a wave of consolidation. By 1988, all six major Canadian banks had either started or acquired investment banks, effectively transforming the market. Before this, Canada boasted a diverse ecosystem of independent underwriters – firms like Gordon Capital – known for their innovative “bought deal” underwriting, lower fees, and speed. These firms were crucial for helping smaller companies access capital.
Today, the Big Six control, on average, 60% of public equity underwriting on the TSX, peaking at a staggering 80%. This concentration isn’t just about market share; it’s about a homogenization of risk assessment and a lack of specialized expertise. Smaller issuers now face higher costs, less support, and fewer choices when seeking public funding. As a result, the number of operating company IPOs on the TSX plummeted from 84 in 1986 to just 13 between 2001 and 2024 – a decline of over 80%.
The Intangible Asset Gap: Canada Falling Behind
This consolidation coincides with a global shift towards intangible assets. Today, 90% of the market value of S&P 500 companies is tied to intellectual property, technology, and brand value. Canada, however, remains stubbornly focused on physical industries and financials. Technology stocks represent a mere 10% of the S&P/TSX market value, compared to nearly 50% for physical assets and over 30% for financials.
This imbalance isn’t accidental. The Big Six, traditionally focused on resource-based industries, haven’t demonstrated the same appetite for funding and nurturing the disruptive technologies that are driving growth globally. Consequently, Canada’s most promising tech companies – Shopify, for example – often choose to list on U.S. exchanges to access deeper capital pools and a more supportive investment environment.
Regulatory Barriers and Entrenched Advantages
The problem isn’t solely about investment preferences. Canada’s regulatory framework actively reinforces the Big Six’s dominance. Banking regulations grant systemically important banks benefits based solely on size, creating a barrier to entry for smaller, more agile financial institutions. While recent amendments to the Competition Act are a step in the right direction, much more needs to be done to level the playing field.
Future Trends and Potential Solutions
The trend of companies staying private for longer exacerbates this issue. Private markets, while growing, are insufficient to offset the decline in public capital. This means fewer opportunities for retail investors to participate in the growth of Canadian companies and a further concentration of wealth.
So, what can be done? Several targeted actions could reverse this trend:
Unwinding Incumbent Advantages
Policy makers must confront the outsized influence of the Big Six and dismantle industrial policies that favour incumbents. This includes revisiting banking regulations to remove size-based advantages and fostering a more competitive landscape.
Incentivizing De-consolidation
Tax-free spinoffs of subsidiary shares could encourage the de-consolidation of the financial sector, creating new, independent entities. Equity tax credits, modeled after the UK’s successful Enterprise Investment Scheme, could catalyze regional investment and support the formation of innovative companies.
Unlocking Capital for Intangible Assets
Flow-through shares, championed by figures like Mark Carney, could unlock fresh capital streams for the intangible sector, incentivizing investment in intellectual property and technology.
Did you know? The UK’s Enterprise Investment Scheme has been credited with fostering a thriving ecosystem of early-stage investment and driving significant economic growth.
Promoting Regional Investment
Targeted incentives and regulatory changes can encourage investment in underserved regions, fostering a more geographically diverse innovation ecosystem.
The Stakes are High: A Crossroads for Canada’s Economy
Canada’s economy isn’t destined to decline, but it is at a crossroads. The current trajectory – a shrinking public market, a lack of investment in intangible assets, and a dominance of a few large institutions – is unsustainable. Rebalancing our financial system requires bold and creative solutions. It’s not about undermining the strengths of our banks, but about ensuring that entrepreneurs, investors, and innovators across the country have access to the capital they need to thrive.
Frequently Asked Questions
Q: What is the role of venture capital in addressing this issue?
A: Venture capital is crucial, but it’s not a complete solution. While VC funding can support early-stage companies, the lack of robust public markets limits opportunities for growth and liquidity.
Q: Are there any international examples of successful capital market reforms?
A: The UK’s Enterprise Investment Scheme and regulatory reforms in Australia offer valuable lessons for Canada. These initiatives demonstrate the power of targeted incentives and a commitment to fostering competition.
Q: What can individual investors do to support Canadian innovation?
A: Advocate for policy changes that promote competition and investment in Canadian companies. Consider investing in Canadian ETFs that focus on innovation and technology, and support crowdfunding campaigns for promising startups.
Q: How long will it take to see meaningful change?
A: Meaningful change will require sustained effort and a long-term commitment from policymakers. However, implementing targeted incentives and regulatory reforms can begin to yield positive results within a few years.
What are your predictions for the future of Canada’s capital markets? Share your thoughts in the comments below!
