Since the 2008 global financial crisis, the Canadian economy has re-emerged as one of the strongest advanced economies in the world.” That's a quote from the folks at EconomyWatch.com, the world's largest online community of economists. These days, it's taken as Gospel truth around the world. “Canada has led a charmed life. Our economy has led the developed world in growth and stability,” writes “futurist” Richard Worzel. The Economist extols “the charms of Canada: good policies, good behaviour and good fortune: if only others could be as lucky.” And the brain trust at the Davos World Economic Forum keeps on ranking the Canadian financial system atop the world's heap.
That's the global consensus: Canada's sitting pretty. It's emerged from the 2008 Great Financial Crisis with its banks intact, its government stable, the balance sheets of most of its leading companies in fair shape, and its economy, if not untouched, at least mostly undamaged. Which means it's poised to…do what?
Something big. Significant. Unprecedented. “This is a window of opportunity that there is a collective consensus that we need and should take advantage of,” says Janet Ecker, President, Toronto Financial Services Alliance (TFSA) and Ontario's former finance minister. “It will not come again.”
Big words, big dreams. But, in 2012, they aren't just hyperbole. “Inadvertently or advertently, we are possessed of some of the thinking required to keep a financial system afloat,” says Andrew Fleming, senior partner with Norton Rose Canada LLP. Suddenly, people want to hear not from the ailing American beast, but its formerly insignificant little brother. Bank of Canada Governor Mark Carney heads the Swiss-based Financial Stability Board. Finance Minister Jim Flaherty's a star at G-8 meetings (plus, Euromoney's Finance Minister of the Year for the painful 2009); more importantly, as Fleming says, simply, “When Jim talks, people listen now.” The Office of the Superintendent of Financial Institutions is playing a visible, large role in the workings of the Financial Stability Board and shaping the Basel Committee on Banking Supervision agenda.
To Fleming, the opportunity presented is not just palpable — it's screaming to be seized in Canada. “That's one thing we can clearly capitalize on: we can sell our wares in terms of expertise in financial services. There is tremendous interest in us. The world wants to know: how did you survive when we didn't?”
But that's only half – maybe a third or a fifth – of the story. Or, as Stikeman Elliott LLP's Edward Waitzer calls it, the cart. “Canadian financial services are not the star attraction,” he says. “People are looking at Canada for other reasons, and the financial sector has an opportunity to take advantage of that. We have to put the cart and the horse in the right order.”
The horse is – what else? – Canada's natural resources: oil and gas and energy; mining and metals and minerals. For Waitzer, the definition is even broader; he throws in water and food. But global attention and appetite is focused on the first set of culprits.
“China, India and the usual culprits are out there screaming for natural resources, the technology industry is screaming for metals which have never been used before — there is a huge opportunity for Canada there,” agrees Fleming. “I don't know if that opportunity evolves from the crisis.”
It doesn't. The appetite for Canada's raw products predates it — it fuelled the boom and balanced Canada's budget during the upswing. It cushioned the fall too. And right now, to use Waitzer's metaphor, Canada's natural resources are the horse that's pulling the Canadian financial services cart into the global spotlight. The opportunities that Fleming sees, the economic brass ring that Flaherty and other champions of the Canadian economy want to run for — they are most numerous where these two industries meet — at their intersections.
It's blindingly obvious to anyone who's spent any time counting the number of mining companies listed on the Canadian exchanges, or the billions in foreign investment flowing into the Alberta oil sands. Or tracked the export of Canada's natural resource intellectual capital – the mining and energy management teams, consultants and professional advisors, including lawyers and bankers – servicing the extraction industries around the world.
Yet despite the glaring complement, the two sectors don't necessarily view themselves as partners. Not necessarily competitors, of course — but two different sectors. At worst, occasionally dismissive, contemptuous of the other; at best, not sufficiently aware of their interdependence and integration. But to score big in 2012 and beyond – to really capitalize on what the crisis offers – they need to recognize, flout and use this interdependence. Canada's financial services sector and capital markets owe their strength to the global desirability of Canada's natural resources and the export of Canada's intellectual expertise in natural resources. The continued attraction of this nation as the jurisdiction of choice for natural resource deals and financings, meanwhile, owes its success to the stability and regularity of the financial sector.
Nothing illustrates this interdependence better than the foreign investment flows into Canada.
Follow the Foreign Money Trail
An interlude to allow the federal government to toot its own horn: “The prudent macroeconomic and fiscal stewardship in Canada going into and coming out of the recession is a positive in the eyes of investors. That, coupled with Canada's relatively strong economic outlook among the developed economies, has made Canada an attractive place to invest. Accordingly, investment into Canada was on the rise in 2010, led by North American and Asian investors.” This from the Canada's State of Trade: Trade and Investment Update 2011 Report issued by Foreign Trade and International Trade Canada.
But “attractive,” post-2008, does not translate into pre-2008 numbers. The financial crisis was global — and for most stakeholders, in most jurisdictions, it ain't over yet. Consider: in 2007, foreign direct investment (FDI) into Canada reached a record $123.1 billion. In 2008, it halved, then halved again for 2009. The improvement between 2009 to 2010 that led to the Foreign Trade Ministry's enthusiastic characterization of Canada as a “positive place to invest” was a modest 5.4 per cent, for a total net FDI of $22.5 billion — about a fifth of what Canada attracted in 2007.
A poignant reminder that saying Canada came through 2008 unscathed is inaccurate if not delusional. “We can't escape what goes on in the rest of the world,” says Waitzer. “In today's world, if there are imbalances, they will affect Canada. The feedback loops are too tight.”
Nowhere are they tighter than between Canada and the US, which still accounts for most of Canada's foreign direct investment. Canada-bound FDI stock ticked in at $561.6 billion in 2010, and American investors accounted for $306.1 billion of that, or 54.5 per cent of the entire foreign investment pie. Less than in the past – in 1999, the US accounted for 69.7 per cent of Canada's FDI, and that percentage has been trending downward since – but still a lion's share. That means, as Waitzer puts it, “When the US economy sneezes, we catch a cold.”
It's still sneezing. That being said, US investors did invest something in Canada post-crisis as did the rest of the world. In which sectors? Canada may talk an economic diversification game; the world doesn't see it. In 2010, almost 65 per cent of all the FDI went to natural resources and financial services — with more than two-thirds of that total going to resources. (See box above: “Where does the foreign money flow?”)
The natural resources horse is pulling the cart — but for whom?
The Real Diversification?
To talk of diversification in a situation where two sectors are attracting 65 per cent of inbound investment is amusing. Still, the diversification may be coming to Canada in terms of where the investment's coming from, swapping the historically dominant American investor for “the rest of the world” — or at least parts of the rest of the world. But perhaps more slowly than the most enthusiastic reapers of opportunity would like.
Matthew Cockburn, co-head of the M&A practice group at Torys LLP in their Toronto office, sees both the opportunity and present barriers. “For people outside of Canada, there is a heightened recognition of the benefits of this country and what this country has to offer, absolutely,” he says. “This will lead to increased interest and investment in Canada going forward.” But right after that premise, everything gets, as Cockburn puts it, “squishy.” Who will these people or organizations be that will invest, where will they come from and, most important of all, given the overall fragility of the global economy, what money will they invest with?
For Paul Belanger, partner in the corporate law and securities groups at the Toronto office of Blake, Cassels & Graydon LLP, that is the key question here. “Who is in a position to be doing those kinds of expansions?” he says. Opportunities require two parties, as the Canadian banks had found out in 2009, when they announced they were ready to lend…but nobody was able to borrow. If Canada's touting its wares – be they natural resource assets or financial expertise – who's in a position to buy? Anybody betting on a big influx of Greek investment? Or anything of note from the EU in the short term?
Belanger isn't. He's not even too sanguine about the US. “The second part of the process – who will come – will take longer than the first,” he says — the first being the recognition that “Canada is a reasonable, rational place to carry on a financial services [or other] business.” Granted, but who can seize it?
On the financial front in particular, definitely not the Yanks. “The large US institutions are either here in some fashion already or they are not looking to expand — quite the opposite, they're looking to get out of businesses that won't be allowed when the new US capital regime comes into force,” says Belanger. Who's left? In the North American space, niche players. That's a trickle of cash, not a pipeline, let alone a waterfall. Which leaves, as Belanger puts it, “Asian players that don't have a particular need to de-leverage.”
Not to mention investors and players specifically interested in Canada's resource plays. The state-owned enterprises from China, sovereign wealth funds from the Middle East (parenthetically, the reason the Toronto Financial Services Alliance's working to position Toronto as a centre for financial excellence in Islamic finance) and Fleming's “usual suspects” from India, Brazil and elsewhere.
For these investors, the opportunities at the intersection between the financial sector and the natural resource industry are particularly palatable.
Buying TSX
They're palatable to Western enterprises too. In the drama surrounding the battle for the TMX Group, no one wondered why the London Stock Exchange wanted it. One could argue that the LSE's interest in the TMX demonstrates that Canada is a jurisdiction where there is good intellectual capital available for investors — or, more prosaically, financial-services assets for sale and money to be made. Yet the technological and competitive efficiency arguments for the scuttled merger aside, among the draws for the LSE was not just the stability of Canada's handful of banks, but surely the 1,531 mining issuers listed on the TSX and the TSX Venture exchange, and the billions upon billions of money they raised and continue to raise globally.
There's another wrinkle here. Waitzer, from the outside, stresses this: “The LSE was acquiring the TMX, not the other way around,” he says. Despite its strength in mining and other resource sectors, the TMX was a target, not a buyer. Graham Gow, partner with business law group of McCarthy Tétrault LLP and on the legal team for the Maple Acquisitions Group still working to buy the TMX and keep it Canadian, agrees. “The TMX would have been a sale to London,” he says. Yes, it was a merger of equals on paper — but where was the head office? “So here is an example of a Canadian institution that came through the crisis in '08 intact, and profitable, and almost got sold to London.”
Is this a winning model, the kind of opportunity that should be extolled and seized? Part of the Maple sales job to shareholders and regulators is to suggest that their TMX, with the integration of Clearing and Depository Services Inc. and Alpha Group into the package, will be a stronger player on the global stage. Maybe an acquirer instead of a target. “Will the new TMX rush out and buy the LSE? Probably not,” says Gow. “But — it could joint venture, from a position of strength. Or buy something smaller.”
The Opportunity Equation
In perhaps typical Canadian fashion, the focus of many post-2008 has been, how can we attract foreign investment? What can we sell? But as Stephen Halperin, partner and member of the executive committee and co-chair of the corporate securities group at Goodmans LLP, notes that perhaps the most potent advantage offered by Canada's survival of the crisis is that its companies are now in a position to buy and expand.
“Canadian companies are in good shape,” Halperin says. “They are in a position to take advantage of beaten-up valuations in the world.” In an environment with, frankly, not that much competition given the state of some of their competitors.
Cockburn agrees. “Yes, people are interested in us, because we have our act together, but also, we are finally capable of looking abroad in a serious way,” he says. He points to the continued strategic forays of Canadian banks — capitalizing as perhaps no others could on the weakness of their US counterparts and their need to divest for both balance sheet and regulatory reasons. Then there are the Canadian pension funds, continuing their wave of global acquisitions, establishing offices everywhere from Brazil to troubled Europe.
And, of course, the miners.
Entering 2012, mining is Canada's leading post-crisis success story — leveraging natural resources into intellectual resources; expertise with rocks into globally-desired intellectual expertise. Other natural resource sectors – the oil patch, for example – are similar, but post-2008, mining is the case study for how opportunity flourishes at the intersections. As Halperin points out, “In a lot of the resource plays in Canada, you're buying a Canadian business that is incorporated in Canada but its assets have virtually no connection in Canada — they're all in Africa, China, god knows where else.”
Why do these companies get listed on the TSX, incorporated in Canada — employing Canadian lawyers, investment bankers and management teams? Same reason the Canadian financial system is suddenly the favourite child of a troubled world. “Foreign entities do business in Canada to take advantage of our capital market system,” says Halperin simply. The whole package: “the disclosure system, the legal and financial infrastructure that we have, the rule of law that we take for granted,” he says. “Canada is a place where you absolutely take it for granted that if you sign a contract, you honour that contract.”
Managing Risk
Opportunity inevitably involves risk. So here's a post-2008 quandary. Among the things that got Canada to its current enviable position is a cultural attitude towards risk. Right?
“We are more risk-averse,” agrees Waitzer, comparing Canada's business and banking culture to
the United States. No argument there. So in the current climate — will this risk aversion stand Canadians in good stead, or will it prevent them from taking the leap?
Waitzer counsels humility. “Our reach shouldn't exceed our grasp, and we should manage
expectations,” he says. “We should focus on what we do well as opposed to this notion that we got through this crisis better than others and therefore we should be the centre of the universe.”
Don Hathaway, the CEO of the Global Risk Institute of Financial Services, does not think there's much danger of that happening. “I suppose there is a theoretical possibility, but it is pretty modest,” he says. He ruminates over the expansions of the banks and the commodity companies, and worries not. “I don't think they are going beyond their capabilities,” he says.
And he knows about risk. The Global Risk Institute is another example of a Canadian attempt to use its post-crisis stability to sell its expertise – and its financial markets and approach – to the world. Like the TFSA, it's a public-private partnership between governments, the chartered banks, major insurance companies, the largest pension funds, equity managers, professional organizations, academia and others. Its goal: “to seek the understanding that could lead to the management of risk across the system,” by applied research into financial-industry risk, education about risk and informed discussion about risk.
One can't help but say: how utterly Canadian, eh?
A Mine Takes a Decade
About as Canadian as our dependence and focus on natural resources. Robert Yalden, partner with Osler, Hoskin & Harcourt LLP in Montréal points to Québec's Plan Nord as an example that Québec's economy is, in a way, coming full circle. It used to be a natural resources-based economy. It's gone through several iterations, including a prolonged stint as Canada's financial centre and experimentation and investment in various industry clusters. Now, natural resources are in ascension again.
Here's the thing about natural resource-based economies: to really exploit them, to really seize the opportunity they present, you need to think in terms of decades, not reporting quarters. “When you look at the Alberta oil sands, when you see the scale of those projects, the pace at which they are now growing, and consider the 30 to 40 years of planning that went into creating this opportunity once it became economically viable to develop it, you can't help but be struck by the amount of forward thinking required,” Yalden says. By governments. By investors. He sees the same characteristics at play in Plan Nord. Natural resource money has to be patient money.
Patient money survives 18-month tempests. Even half-decade ones. And it needs – it absolutely needs – political and regulatory stability. “The investment timeline and profile on those deals is very, very long,” echoes Cockburn. “You need to know you're not going to have your mine expropriated.” In Canada, you've got that certainty. “You can make long-term, significant bets in Canada with a high degree of confidence that it will be protected by law.”
Here's another intersection, and a critical contribution of the natural resources mindset to Canada's financial system. “The capital markets and the headlines in the paper, they're about what can you do for me today,” says Gordon Chambers, partner with Lawson Lundell LLP in Vancouver. People who invest in natural resources, who understand mining, oil sands and related projects, need to take a longer-term perspective.
Financial institutions that work with such an industry, financial systems that serve it — they learn that lesson too.
Now, are they now going to export it to the world?
The Canadian success story is, in a way, a story of Waitzer's “managed expectations,” or what TFSA's Janet Ecker calls the “You may not make a trillion dollars with us, but you're not going to lose two trillion either” mentality. “We're a pretty stodgy lot, really,” echoes Hathaway. (See box below: “Stodgy Is the New Sexy”)
The trillion-dollar, if you like, question: Will the stodginess that kept Canada intact post-2008 keep it from taking flight in 2012?
As Andrew Fleming sees it, that's the only way that the nation, its institutions and business people can piss away the crisis' silver lining. “That we don't want to do anything different in case we go south on it — in the risk-averse model, you don't change anything,” he says. But…“Nothing ventured, nothing lost — but nothing gained,” he says.
Carpe diem? But very carefully?
Marzena Czarnecka is a Calgary-based freelance writer and a regular contributor to Lexpert.
That's the global consensus: Canada's sitting pretty. It's emerged from the 2008 Great Financial Crisis with its banks intact, its government stable, the balance sheets of most of its leading companies in fair shape, and its economy, if not untouched, at least mostly undamaged. Which means it's poised to…do what?
Something big. Significant. Unprecedented. “This is a window of opportunity that there is a collective consensus that we need and should take advantage of,” says Janet Ecker, President, Toronto Financial Services Alliance (TFSA) and Ontario's former finance minister. “It will not come again.”
Big words, big dreams. But, in 2012, they aren't just hyperbole. “Inadvertently or advertently, we are possessed of some of the thinking required to keep a financial system afloat,” says Andrew Fleming, senior partner with Norton Rose Canada LLP. Suddenly, people want to hear not from the ailing American beast, but its formerly insignificant little brother. Bank of Canada Governor Mark Carney heads the Swiss-based Financial Stability Board. Finance Minister Jim Flaherty's a star at G-8 meetings (plus, Euromoney's Finance Minister of the Year for the painful 2009); more importantly, as Fleming says, simply, “When Jim talks, people listen now.” The Office of the Superintendent of Financial Institutions is playing a visible, large role in the workings of the Financial Stability Board and shaping the Basel Committee on Banking Supervision agenda.
To Fleming, the opportunity presented is not just palpable — it's screaming to be seized in Canada. “That's one thing we can clearly capitalize on: we can sell our wares in terms of expertise in financial services. There is tremendous interest in us. The world wants to know: how did you survive when we didn't?”
But that's only half – maybe a third or a fifth – of the story. Or, as Stikeman Elliott LLP's Edward Waitzer calls it, the cart. “Canadian financial services are not the star attraction,” he says. “People are looking at Canada for other reasons, and the financial sector has an opportunity to take advantage of that. We have to put the cart and the horse in the right order.”
The horse is – what else? – Canada's natural resources: oil and gas and energy; mining and metals and minerals. For Waitzer, the definition is even broader; he throws in water and food. But global attention and appetite is focused on the first set of culprits.
“China, India and the usual culprits are out there screaming for natural resources, the technology industry is screaming for metals which have never been used before — there is a huge opportunity for Canada there,” agrees Fleming. “I don't know if that opportunity evolves from the crisis.”
It doesn't. The appetite for Canada's raw products predates it — it fuelled the boom and balanced Canada's budget during the upswing. It cushioned the fall too. And right now, to use Waitzer's metaphor, Canada's natural resources are the horse that's pulling the Canadian financial services cart into the global spotlight. The opportunities that Fleming sees, the economic brass ring that Flaherty and other champions of the Canadian economy want to run for — they are most numerous where these two industries meet — at their intersections.
It's blindingly obvious to anyone who's spent any time counting the number of mining companies listed on the Canadian exchanges, or the billions in foreign investment flowing into the Alberta oil sands. Or tracked the export of Canada's natural resource intellectual capital – the mining and energy management teams, consultants and professional advisors, including lawyers and bankers – servicing the extraction industries around the world.
Yet despite the glaring complement, the two sectors don't necessarily view themselves as partners. Not necessarily competitors, of course — but two different sectors. At worst, occasionally dismissive, contemptuous of the other; at best, not sufficiently aware of their interdependence and integration. But to score big in 2012 and beyond – to really capitalize on what the crisis offers – they need to recognize, flout and use this interdependence. Canada's financial services sector and capital markets owe their strength to the global desirability of Canada's natural resources and the export of Canada's intellectual expertise in natural resources. The continued attraction of this nation as the jurisdiction of choice for natural resource deals and financings, meanwhile, owes its success to the stability and regularity of the financial sector.
Nothing illustrates this interdependence better than the foreign investment flows into Canada.
Follow the Foreign Money Trail
An interlude to allow the federal government to toot its own horn: “The prudent macroeconomic and fiscal stewardship in Canada going into and coming out of the recession is a positive in the eyes of investors. That, coupled with Canada's relatively strong economic outlook among the developed economies, has made Canada an attractive place to invest. Accordingly, investment into Canada was on the rise in 2010, led by North American and Asian investors.” This from the Canada's State of Trade: Trade and Investment Update 2011 Report issued by Foreign Trade and International Trade Canada.
But “attractive,” post-2008, does not translate into pre-2008 numbers. The financial crisis was global — and for most stakeholders, in most jurisdictions, it ain't over yet. Consider: in 2007, foreign direct investment (FDI) into Canada reached a record $123.1 billion. In 2008, it halved, then halved again for 2009. The improvement between 2009 to 2010 that led to the Foreign Trade Ministry's enthusiastic characterization of Canada as a “positive place to invest” was a modest 5.4 per cent, for a total net FDI of $22.5 billion — about a fifth of what Canada attracted in 2007.
A poignant reminder that saying Canada came through 2008 unscathed is inaccurate if not delusional. “We can't escape what goes on in the rest of the world,” says Waitzer. “In today's world, if there are imbalances, they will affect Canada. The feedback loops are too tight.”
Nowhere are they tighter than between Canada and the US, which still accounts for most of Canada's foreign direct investment. Canada-bound FDI stock ticked in at $561.6 billion in 2010, and American investors accounted for $306.1 billion of that, or 54.5 per cent of the entire foreign investment pie. Less than in the past – in 1999, the US accounted for 69.7 per cent of Canada's FDI, and that percentage has been trending downward since – but still a lion's share. That means, as Waitzer puts it, “When the US economy sneezes, we catch a cold.”
It's still sneezing. That being said, US investors did invest something in Canada post-crisis as did the rest of the world. In which sectors? Canada may talk an economic diversification game; the world doesn't see it. In 2010, almost 65 per cent of all the FDI went to natural resources and financial services — with more than two-thirds of that total going to resources. (See box above: “Where does the foreign money flow?”)
The natural resources horse is pulling the cart — but for whom?
The Real Diversification?
To talk of diversification in a situation where two sectors are attracting 65 per cent of inbound investment is amusing. Still, the diversification may be coming to Canada in terms of where the investment's coming from, swapping the historically dominant American investor for “the rest of the world” — or at least parts of the rest of the world. But perhaps more slowly than the most enthusiastic reapers of opportunity would like.
Matthew Cockburn, co-head of the M&A practice group at Torys LLP in their Toronto office, sees both the opportunity and present barriers. “For people outside of Canada, there is a heightened recognition of the benefits of this country and what this country has to offer, absolutely,” he says. “This will lead to increased interest and investment in Canada going forward.” But right after that premise, everything gets, as Cockburn puts it, “squishy.” Who will these people or organizations be that will invest, where will they come from and, most important of all, given the overall fragility of the global economy, what money will they invest with?
For Paul Belanger, partner in the corporate law and securities groups at the Toronto office of Blake, Cassels & Graydon LLP, that is the key question here. “Who is in a position to be doing those kinds of expansions?” he says. Opportunities require two parties, as the Canadian banks had found out in 2009, when they announced they were ready to lend…but nobody was able to borrow. If Canada's touting its wares – be they natural resource assets or financial expertise – who's in a position to buy? Anybody betting on a big influx of Greek investment? Or anything of note from the EU in the short term?
Belanger isn't. He's not even too sanguine about the US. “The second part of the process – who will come – will take longer than the first,” he says — the first being the recognition that “Canada is a reasonable, rational place to carry on a financial services [or other] business.” Granted, but who can seize it?
On the financial front in particular, definitely not the Yanks. “The large US institutions are either here in some fashion already or they are not looking to expand — quite the opposite, they're looking to get out of businesses that won't be allowed when the new US capital regime comes into force,” says Belanger. Who's left? In the North American space, niche players. That's a trickle of cash, not a pipeline, let alone a waterfall. Which leaves, as Belanger puts it, “Asian players that don't have a particular need to de-leverage.”
Not to mention investors and players specifically interested in Canada's resource plays. The state-owned enterprises from China, sovereign wealth funds from the Middle East (parenthetically, the reason the Toronto Financial Services Alliance's working to position Toronto as a centre for financial excellence in Islamic finance) and Fleming's “usual suspects” from India, Brazil and elsewhere.
For these investors, the opportunities at the intersection between the financial sector and the natural resource industry are particularly palatable.
Buying TSX
They're palatable to Western enterprises too. In the drama surrounding the battle for the TMX Group, no one wondered why the London Stock Exchange wanted it. One could argue that the LSE's interest in the TMX demonstrates that Canada is a jurisdiction where there is good intellectual capital available for investors — or, more prosaically, financial-services assets for sale and money to be made. Yet the technological and competitive efficiency arguments for the scuttled merger aside, among the draws for the LSE was not just the stability of Canada's handful of banks, but surely the 1,531 mining issuers listed on the TSX and the TSX Venture exchange, and the billions upon billions of money they raised and continue to raise globally.
There's another wrinkle here. Waitzer, from the outside, stresses this: “The LSE was acquiring the TMX, not the other way around,” he says. Despite its strength in mining and other resource sectors, the TMX was a target, not a buyer. Graham Gow, partner with business law group of McCarthy Tétrault LLP and on the legal team for the Maple Acquisitions Group still working to buy the TMX and keep it Canadian, agrees. “The TMX would have been a sale to London,” he says. Yes, it was a merger of equals on paper — but where was the head office? “So here is an example of a Canadian institution that came through the crisis in '08 intact, and profitable, and almost got sold to London.”
Is this a winning model, the kind of opportunity that should be extolled and seized? Part of the Maple sales job to shareholders and regulators is to suggest that their TMX, with the integration of Clearing and Depository Services Inc. and Alpha Group into the package, will be a stronger player on the global stage. Maybe an acquirer instead of a target. “Will the new TMX rush out and buy the LSE? Probably not,” says Gow. “But — it could joint venture, from a position of strength. Or buy something smaller.”
The Opportunity Equation
In perhaps typical Canadian fashion, the focus of many post-2008 has been, how can we attract foreign investment? What can we sell? But as Stephen Halperin, partner and member of the executive committee and co-chair of the corporate securities group at Goodmans LLP, notes that perhaps the most potent advantage offered by Canada's survival of the crisis is that its companies are now in a position to buy and expand.
“Canadian companies are in good shape,” Halperin says. “They are in a position to take advantage of beaten-up valuations in the world.” In an environment with, frankly, not that much competition given the state of some of their competitors.
Cockburn agrees. “Yes, people are interested in us, because we have our act together, but also, we are finally capable of looking abroad in a serious way,” he says. He points to the continued strategic forays of Canadian banks — capitalizing as perhaps no others could on the weakness of their US counterparts and their need to divest for both balance sheet and regulatory reasons. Then there are the Canadian pension funds, continuing their wave of global acquisitions, establishing offices everywhere from Brazil to troubled Europe.
And, of course, the miners.
Entering 2012, mining is Canada's leading post-crisis success story — leveraging natural resources into intellectual resources; expertise with rocks into globally-desired intellectual expertise. Other natural resource sectors – the oil patch, for example – are similar, but post-2008, mining is the case study for how opportunity flourishes at the intersections. As Halperin points out, “In a lot of the resource plays in Canada, you're buying a Canadian business that is incorporated in Canada but its assets have virtually no connection in Canada — they're all in Africa, China, god knows where else.”
Why do these companies get listed on the TSX, incorporated in Canada — employing Canadian lawyers, investment bankers and management teams? Same reason the Canadian financial system is suddenly the favourite child of a troubled world. “Foreign entities do business in Canada to take advantage of our capital market system,” says Halperin simply. The whole package: “the disclosure system, the legal and financial infrastructure that we have, the rule of law that we take for granted,” he says. “Canada is a place where you absolutely take it for granted that if you sign a contract, you honour that contract.”
Managing Risk
Opportunity inevitably involves risk. So here's a post-2008 quandary. Among the things that got Canada to its current enviable position is a cultural attitude towards risk. Right?
“We are more risk-averse,” agrees Waitzer, comparing Canada's business and banking culture to
the United States. No argument there. So in the current climate — will this risk aversion stand Canadians in good stead, or will it prevent them from taking the leap?
Waitzer counsels humility. “Our reach shouldn't exceed our grasp, and we should manage
expectations,” he says. “We should focus on what we do well as opposed to this notion that we got through this crisis better than others and therefore we should be the centre of the universe.”
Don Hathaway, the CEO of the Global Risk Institute of Financial Services, does not think there's much danger of that happening. “I suppose there is a theoretical possibility, but it is pretty modest,” he says. He ruminates over the expansions of the banks and the commodity companies, and worries not. “I don't think they are going beyond their capabilities,” he says.
And he knows about risk. The Global Risk Institute is another example of a Canadian attempt to use its post-crisis stability to sell its expertise – and its financial markets and approach – to the world. Like the TFSA, it's a public-private partnership between governments, the chartered banks, major insurance companies, the largest pension funds, equity managers, professional organizations, academia and others. Its goal: “to seek the understanding that could lead to the management of risk across the system,” by applied research into financial-industry risk, education about risk and informed discussion about risk.
One can't help but say: how utterly Canadian, eh?
A Mine Takes a Decade
About as Canadian as our dependence and focus on natural resources. Robert Yalden, partner with Osler, Hoskin & Harcourt LLP in Montréal points to Québec's Plan Nord as an example that Québec's economy is, in a way, coming full circle. It used to be a natural resources-based economy. It's gone through several iterations, including a prolonged stint as Canada's financial centre and experimentation and investment in various industry clusters. Now, natural resources are in ascension again.
Here's the thing about natural resource-based economies: to really exploit them, to really seize the opportunity they present, you need to think in terms of decades, not reporting quarters. “When you look at the Alberta oil sands, when you see the scale of those projects, the pace at which they are now growing, and consider the 30 to 40 years of planning that went into creating this opportunity once it became economically viable to develop it, you can't help but be struck by the amount of forward thinking required,” Yalden says. By governments. By investors. He sees the same characteristics at play in Plan Nord. Natural resource money has to be patient money.
Patient money survives 18-month tempests. Even half-decade ones. And it needs – it absolutely needs – political and regulatory stability. “The investment timeline and profile on those deals is very, very long,” echoes Cockburn. “You need to know you're not going to have your mine expropriated.” In Canada, you've got that certainty. “You can make long-term, significant bets in Canada with a high degree of confidence that it will be protected by law.”
Here's another intersection, and a critical contribution of the natural resources mindset to Canada's financial system. “The capital markets and the headlines in the paper, they're about what can you do for me today,” says Gordon Chambers, partner with Lawson Lundell LLP in Vancouver. People who invest in natural resources, who understand mining, oil sands and related projects, need to take a longer-term perspective.
Financial institutions that work with such an industry, financial systems that serve it — they learn that lesson too.
Now, are they now going to export it to the world?
The Canadian success story is, in a way, a story of Waitzer's “managed expectations,” or what TFSA's Janet Ecker calls the “You may not make a trillion dollars with us, but you're not going to lose two trillion either” mentality. “We're a pretty stodgy lot, really,” echoes Hathaway. (See box below: “Stodgy Is the New Sexy”)
The trillion-dollar, if you like, question: Will the stodginess that kept Canada intact post-2008 keep it from taking flight in 2012?
As Andrew Fleming sees it, that's the only way that the nation, its institutions and business people can piss away the crisis' silver lining. “That we don't want to do anything different in case we go south on it — in the risk-averse model, you don't change anything,” he says. But…“Nothing ventured, nothing lost — but nothing gained,” he says.
Carpe diem? But very carefully?
Marzena Czarnecka is a Calgary-based freelance writer and a regular contributor to Lexpert.
