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Canada's SPAC-esque vehicle shows signs of rebound

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At the outset of 2021, Toronto Stock Exchange-owner TMX Group revamped its capital pool company program in hopes of reviving listing interest.
Source: George Rose/Getty Images via Getty Images

Canadian investment vehicles resembling special purpose acquisition companies are showing signs of a rebound.

TMX Group Ltd., the Canadian exchange giant, has injected new interest into its 35-year-old capital pool company structure through a series of changes it made at the outset of 2021 to curb a recent decline in listings.

Nine capital pool companies, or CPCs, listed on the TMX-owned TSX Venture Exchange in the first quarter, raising C$4.7 million in the process, according to TMX data provided to S&P Global Market Intelligence. And though it is nowhere near the frenzy of activity that has taken place in special purpose acquisition companies in the U.S., TMX's CPC program will surpass 2020 levels by year-end at this rate.

"We've seen a significant uptick already in Q1 of companies leveraging the CPC route to go public," said Loui Anastasopoulos, TMX Group's president of capital formation, in an interview.

Since 1986, CPCs have offered smaller private companies both within and from outside Canada a structure to tap into public market liquidity on the TSX Venture Exchange at an earlier stage in their growth. TMX has long pitched its venture exchange to management teams as an alternative to raising funds from venture capitalists or private equity firms. By listing on the venture exchange, the pitch goes, the companies then have a clear pathway to follow to graduate onto the coveted Toronto Stock Exchange.

More than 700 companies have stepped up from TSX Venture to the Toronto Stock Exchange since 2000. CPCs have historically played a critical role in that evolution, too. About a third of the currently listed graduates on the Toronto Stock Exchange began as CPCs, according to TMX.

A CPC operates under a similar premise as a SPAC, though each carry its own unique characteristics. The biggest crossover between the two structures is their lifecycles. Just as a SPAC would on the New York Stock Exchange or Nasdaq, CPCs list on the TSX Venture Exchange with no business operations or assets in place other than some cash and a plan to go out and acquire a private company. The CPC and that company then conduct a qualifying transaction, which is effectively a reverse merger between the two companies. The private entity then takes over the CPC's TSX Venture Exchange listing. One notable distinction between CPCs and SPACs is that TMX says the founders of a CPC tend to be more actively involved in the company's operations post-merger than the founders of a SPAC.

Yet, while SPACs have boomed in the U.S., the CPC structure has seen waning demand north of the border. In 2020, for instance, 31 CPCs debuted on the TSX Venture Exchange, less than a third of the 95 that did so two years earlier, according to TMX. The drop-off has been caused by what Anastasopoulos calls long-standing "pain points" bemoaned by some in the industry, including many serial CPC founders.

So, in late 2020, TMX rolled out a series of changes to the structure that were focused on increasing flexibility, cutting down on the regulatory burdens in the process and improving the economics of launching a CPC.

It relaxed the requirements around who could run CPCs, a significant step as TMX has upped its push to market the product to companies outside of Canada. The exchange lowered the number of shareholders that a CPC needs. And, perhaps most notably, TMX increased the maximum amount of funds a CPC can raise from C$5 million to C$10 million, opening up a realm of larger merger targets that CPCs could go after.

While it has only been a quarter, the changes seem to be working.

TSX Venture Exchange is on pace to add about 36 new CPC listings in 2021, based on the first-quarter numbers. That would represent a 16% bump in new CPC listings from 2020, according to TMX data.

"All indications early on is that it's a significant market increase in participation versus what we've seen over the last three years," Anastasopoulos said.