Cantech Article We have seen access to capital for small and mid-cap companies swing around wildly with the volatility in the markets.
In the spring of this year, access was at its highest level it has been in many years – but only for the right companies. That criteria took a little time to shape itself but has become abundantly clear as the broader market faces volatility but certain companies are still able to successfully complete financings.
Market capitalization is often the driver of which companies can access equity capital and which cannot, especially in the Canadian institutional market. And that remains an important factor – certain institutional funds will not invest in companies under $100 million market cap and others under $50 million market cap – but we have observed other drivers in this market.
Specifically, growth.
Growth doesn’t just mean technology companies, we have seen the biggest small cap returns in the first half of the year from the high growth healthcare stocks like Concordia (CXR-T), Nobilis Heath (NHC-T), CRH Medical (CRH-T) and others. What has set these names apart from others, and has traveled over to other sectors, has been acquisition-driven growth. Companies like TIO Networks (TNC-V) and Diversified Royalty (DIV-T) are just two examples of companies that have announced big/transformative acquisitions and have either seen their stock price rise materially or have tapped the equity market with a large transaction.
Drilling down on this criterion, we have found a number of factors common to most if not all of the acquisition-driven growth companies that have performed the best:
• The transaction is “transformative” or at least substantial – amounting to at least 30% of the buyer’s market capitalization
• The seller takes some significant portion of the consideration in the form of shares of the Buyer. They may also receive a Note for a further portion of the consideration (a so-called VTB or Vendor Take Back note)
• The company announces the transaction as complete – not subject to financing
• The transactions are all accretive in one way or another – in other words, contributing to EPS or EBITDA not just done for strategic reasons
As we move into the fall, I believe access to capital will open up again but the criterion for companies that Canadian institutional investors will be most willing to buy will be tighter than it was in the spring. The specific factors laid out above will all remain relevant as the drivers of investor interest, specifically accretive acquisition-driven growth, but minimum market cap thresholds will rise.