Hunting for IPOs – An Elusive Species In New Brunswick’s Economic Ecosystem
Andrew McLaughlin is the VP-Legal Affairs, General Counsel and ESG lead at Moncton-based Major Drilling Group International Inc., which has more than 3,500 employees and drilling operations on five continents. He and CEO Denis Larocque appear on the latest Huddle “Insights” podcast to chat about the pros and cons of being a publicly-traded company. McLaughlin has written a thoughtful, well-researched piece on the topic, which we’re publishing as “The Saturday Huddle” this week. Pour a cup of coffee, with the pot handy for a refill. This is a long but worthwhile weekend read.
New Brunswick businesses are great at a lot of things: resource extraction, exports…and leaving money on the table.
At a macro level, the narrative about the New Brunswick economy has remained largely unchanged for over half a century: it’s a story dominated by a few family-run titans, a smattering of quietly successful private companies, and a host of small businesses and service companies of varying sizes and success, all of it set against a backdrop of a struggling, undynamic, resource-based economy.
A current snapshot of today’s economic landscape fits squarely into this mold, with the privately-held Irving and McCain groups of companies towering unrivalled at the top; Cooke Aquaculture, another family-run privately-held company, quickly coming into the frame with its dramatic recent growth through a breakneck series of acquisitions; some privately-held hidden gems in the manufacturing, processing and transportation industries spread all over the province; and then a modest ground level made up of start-ups, small businesses, and a small, mostly unremarkable, service sector.
What’s missing from this story is the middle layer that expands into titan status, i.e. companies with $250-million+ in revenue that grow to $1-billion+ in revenue. It’s this layer of companies that are the drivers of wealth creation and economic dynamism in other provinces.
It’s also the realm where public companies can play a particularly prominent role, and where New Brunswick’s middle layer deficit comes into sharp relief: there are currently only three N.B. headquartered publicly-traded companies on the TSX (and an additional three on the TSX venture exchange).
Podcast: Why More Local Companies Should Consider Going Public
The ratio of public versus private companies in New Brunswick is far lower than Canada as a whole, or even our neighbours. For example, Nova Scotia, a province that has only a slightly larger population, has 13 TSX-listed companies (and 16 on the venture exchange). The per capita comparisons only get bleaker as you move west.
Over the past couple of decades, the barometer of corporate success in New Brunswick has been measured by lucrative exits to large multinational buyers. But what if those New Brunswick success stories had gone public instead of becoming divisions or branch locations? Why did those companies choose to sell while similar companies in other areas of Canada might have opted to go public? Does the lack of public companies in New Brunswick contribute to the province’s economic stagnation, or does its economic stagnation play a role in impeding the creation of public companies?
These questions were posed to a broad swath of experts across the fields of business, government and academia to examine the role of the public company model and to consider whether it is an avenue that might help New Brunswick begin to fill this critical gap in the middle and create more opportunities for “titan class” companies to emerge.
Public v. private: New Brunswick’s starting point
A company is public if its shares are traded on a stock exchange such as the Toronto Stock Exchange or the New York Stock Exchange. In Canada, Shopify, the Big Five Canadian banks, and Enbridge are among the largest and most well-known public companies.
The shares of private companies, on the other hand, are not traded on public stock exchanges; rather they are privately held by the business owners (e.g. founders of a family business or private equity). A great example of a well-known private company based here in New Brunswick is McCain Foods – best known for their French fries, with global sales of $10-billion.
New Brunswick is home to the following three TSX-listed publicly-traded companies, listed in order of revenue: i) Major Drilling Group International Inc. (MDI), a Moncton-based global drilling services provider to the mining industry; ii) Plaza Retail REIT (PLZ), a Fredericton-based real estate developer, owner and manager; and iii) OrganiGram Holdings Inc. (OGI), a Moncton-based cannabis producer.
Each of these companies’ leadership teams had their own reasons for going public at specific junctures in their company’s lifecycle. For example, OrganiGram, the newest player to join New Brunswick’s public company mix, was part of the wave of Canadian producers that capitalized on legalization in October 2018. OrganiGram had to rely on equity through the public market to fund its rapid growth as traditional banks largely shied away from providing loans to the cannabis space at that time.
The case for going public
Access to capital is the lifeblood of any private company on a growth path. There are five main ways to fuel this growth: organically, by taking on more business; through venture capital and private equity; assuming bank debt; tapping into government grants/subsidies; and, going public by way of an initial public offering (IPO) of the company’s shares.
The latter option, an IPO, is a risky but powerful vehicle for firms that need to raise substantial capital to fuel rapid growth. Aside from the resulting, potentially massive, interest-free capital infusion that can be deployed across all facets of the business (R&D, capital expenditures, staffing), additional benefits from an IPO can include liquidity for a company’s longstanding shareholders who are looking to cash-out, the potential to acquire other companies with publicly traded stock as the currency, the ability to entice talent with stock option grants, and the potential for heightened public awareness/profile, the latter of which could spur market share growth.
The case against
The downsides of going public are formidable, and on first blush would send any ambitious business owner running for the hills.
It’s expensive: In the world of IPOs, it takes a lot of money upfront to access public market money. The breadth of fees involved in listing is not for the faint of heart. From original listing fees, securities commission fees, professional service fees and sponsorship fees, to investment dealer commissions, which can be in the range of six to 10 percent of the value of securities sold, the amount of money going out the door at the front-end can be staggering. Moreover, once listed, a public company will incur ongoing legal and accounting fees related to reporting requirements as well as the costs of complying with corporate governance standards.
It’s resource-intensive: There is a significant administrative burden involved in meeting ongoing disclosure and reporting requirements that relies on specific financial and legal expertise and professional management to properly execute. Notably, CEOs of public companies dedicate upwards of 30 percent of their productive time tending to the unique needs of being a public company, such as meeting with analysts and ongoing investor relations.
Loss of control: Generally speaking, private companies have more autonomy than public companies. By disseminating company ownership across hundreds, if not thousands of shareholders through an IPO, executive leaders fear losing control over the vision, direction and management of the business.
Short-termism: Public companies are required to publish their results on a quarterly basis, which increases the pressure to demonstrate results for that period. This pressure often results in public companies managing on a quarter-to-quarter basis to the detriment of longer-term planning and growth.
Hyper-transparency: The level of transparency and public scrutiny associated with quarterly and annual disclosures is enough to provoke cold sweats in even the most unflappable of private business owners. This can be particularly troubling for ideas-led start-ups in which secrecy is of critical value.
High-risk: The stakes involved in going public are daunting. If an IPO flops it can land a devastating and potentially fatal blow to the company. One contributor referred to the pursuit of an IPO as akin to embarking across an ice road – you’d better be fully prepared to make the precarious crossing and to survive on the other side, all while knowing that one misstep could land you in the crevasse.
Declining prestige: It used to be an IPO was a mark of success, an indication to the business world that a young company had made it to the big leagues. This distinction no longer carries the cachet it once did.
Alternatives: There are a number of seemingly less painful alternatives to access funds in the capital markets ecosystem, with private equity pulling out ahead of the pack in many instances. Perhaps recent experience with unusually low-interest rates is helping prop up this trend – for the time being.
Proponents of going public would argue that all of the above pales in comparison to the potential growth opportunities of an IPO – and they would have ample real-life examples to back up this claim. That said, IPO candidates are well-advised to embark on this process with their eyes wide open. And while the arduous climb up to an IPO is a monumental endeavour, there’s little time to celebrate once the summit is reached, as a newly-minted public company faces the challenge of adapting to the reality of operating and, ideally, thriving going forward.
Why New Brunswick lacks public companies
Entrepreneurs make decisions for all kinds of reasons. Sometimes it’s based on logic and economics but often it’s on gut feel. Gut decisions come from past experiences, stories they’ve heard, opinions from trusted friends and colleagues. When an entrepreneur’s entire work experience consists of private company, non-profit or government settings – and ditto for everyone in their network – the prospect of going public isn’t even in their lexicon.
In New Brunswick, our stock of people with public company experience is very low by virtue of the very low number of public companies here. No one knows what it’s like to go public so it’s not on anyone’s radar. Currently, there is an abundance of capital in Canada for strong companies to gobble up and it costs less than public money; however, that wasn’t always the case. It’s very possible that there have been companies in New Brunswick over the past 30 years that had all the right features to do a very successful IPO but at that moment it wasn’t part of that gut decision equation.
Talent is another contributor. Even if you went public in New Brunswick, where would you source experienced C-suite, board members, external accountants and lawyers? There is only a handful of each of those with public company experience in New Brunswick and they already have jobs. You’d have to pay a premium to move people from another province or country or open a corporate office in Toronto. These chicken and egg factors are tangible barriers.
A third factor is certainly less measurable but most New Brunswickers would understand: our businesses are very private about their financial information and there is a certain humility embedded in our culture. These traits are endearing to the rest of the country but are in direct conflict with filing public quarterly earnings reports, prospectuses and annual information forms, including the salary of the C-suite. Most New Brunswickers are too modest to buy a BMW, let alone tell the world they make $300,000 per year.
Potential benefits to New Brunswick of more public companies
There would be undeniable benefits to having more public companies in New Brunswick. Here are a few.
Human capital: Running a public company requires skill sets that are not mandatory in the private world: elite board and governance practices, a different level of internal controls, dealing with elevated visibility, knowledge and connections in capital markets and many others. Imagine the COO of a public company decides to open her own private business and recruits an advisory board because she saw the value of strong governance processes during her public company days. Adding people to our talent pool in New Brunswick with these skill sets would be a positive thing for the whole economy.
Performance culture: For better or worse, public companies must perform or die. Quarterly reporting requirements create an environment of accountability. If a management team becomes complacent, it shows in the quarterly earnings reports and commensurately in the stock price and analyst reports. The cause and effect are more readily observed and accountability is near immediate. In a province with such a high percentage of employment coming from the government, an injection of performance culture can’t be a bad thing.
Visibility: By virtue of the reporting requirements, public companies reveal a lot about themselves. This extra information in the ether will result in more time in the news cycle related to New Brunswick businesses. More exposure sends a message that we are open for business.
Economic ecosystem diversity: The more interesting, vibrant and dynamic the economic landscape of a jurisdiction, the more attractive it is to professionals looking to relocate.
Democratizing wealth creation at home: There is an element of pride in being a part-owner of a company that is in New Brunswick. A teacher can’t easily become a shareholder in a private business but they can choose to invest in a public company, and if that company is in New Brunswick, there might be a higher likelihood they do it. This opportunity allows them to be both an owner and cheerleader for the local team and would help unlock the province’s wealth potential.
New Brunswick companies that should consider going public
Public ownership comes with many risks but the rewards should put it on the radar of entrepreneurs in the right set of circumstances. This includes businesses that require a rapid capital raise in the range of $20-30-million, and a continuous thirst for capital over the short, medium and potentially long term; a business premise attractive to the public market investment community; and a high tolerance for risk.
New Brunswick does have some companies that meet these criteria, however even when going public makes the most economic sense, New Brunswick-based companies may not consider it as an option – even as competitors and colleagues in Toronto, Calgary and Halifax most likely would. Our business culture undercuts our ability to benefit from exploiting the potential opportunities.
How to rethink going public – the IPO incubator
I’d propose a two-pronged approach: the development of an IPO-incubator network coupled with enhancements to the regulatory landscape to make the province a more attractive jurisdiction to set up a public company. Specific elements of this initiative could include the following four components.
One: Undertake an active process to identify companies that might fit the public company profile. This could start with hunting down half a dozen candidates in 2022 with IPO potential.
Two: Strengthen mentorship/professional networks to teach and nurture these companies in their pursuit of an IPO/reverse-takeover.
Three: Advise these companies as they go through a one to two-year process of acting like a public company to gain first-hand experience of what it’s actually like and to help smooth the transition should they ultimately take the leap. This process could involve issuing quarterly financial statements and disclosures, ensuring compliance with public company reporting standards, and establishing board and full committee meeting cadence and board independence.
Four: Conduct an analysis of the current regulatory/tax landscape, and identify measures/programs to incentivize early adopters and their investors to help scale, similar to the small business tax credit regime/flow-through shares.
Admittedly, the Canadian market is saturated with capital at the moment, which means that companies can access private funding at low cost and low risk, irrespective of the province. However economic cycles change.
Will New Brunswick be ready to take advantage of future IPO opportunities? Can we collectively overcome our lack of expertise and risk aversion?
The public company chicken or egg environment we’ve found ourselves in will likely prevent that from happening organically. If this initiative could result in coaxing even one or two companies per year across the ice road to a successful IPO, it could create a domino effect on New Brunswick’s economic landscape and start chipping away at the province’s middle layer deficit.
Now is the time to start the hunt and lay the necessary groundwork to help prospective companies succeed in their journey. To get there, we’ll need to battle against a deep-seated sense of inertia that has kept us dutifully trudging forward along the same well-trodden paths. It’s time to lift our heads up toward the horizon, to rethink where we want to go and what we want to be.
Feedback? E-mail Andrew McLaughlin: [email protected].