Expert Perspective featuring Phil du Heaume

A 3-Question Series on the Canadian Private Markets

Phil du Heaume

1. What is the right balance between capital formation and investor protection?

This is probably the most difficult question in front of policymakers, not just in Canada but everywhere.  It inevitably leads to friction between industry and investor advocates because they believe they have opposing needs, which just isn’t true.  I think part of the problem is that we’re so entrenched in talking about this issue as a “balance”.  That approach inevitably leads to administrative overburden and red tape creation through constant regulatory stacking.   We should instead be focusing on the complementary nature of capital formation and investor protection mandates toward their shared goal of economic growth.  How do our capital formation policies improve investor protection and how do our investor protection policies result in capital formation?  To use a biological analogy, we need to be evaluating these objectives from the perspective of mutualism instead of parasitism.

The theory behind this is that highly efficient capital formation markets will naturally generate investor protection because they create a competitive environment where the best companies will come to raise capital with the lowest amount of regulatory cost drag on their actual business objectives.  At the same time, properly constructed investor protection regimes will guard the market from bad actors, which ultimately attracts good issuers seeking to raise capital because they’re sheltered from situations where investors lose faith or trust in the system and refuse to participate.  

2. When is a company too big to be private and too small to be public?

A company is too big to be private if continuing to be private is detrimental to its success and a company is too small to be public if becoming public is detrimental to its success.    I know this is a lazy answer, but the markets generally need to stop looking at “public” vs. “private” as fixed points on a linear scale.  It will always come down to the nature of the enterprise itself and recognizing that “public” and “private” regimes are tools to create strength within the business rather than goalposts to be blindly pursued. Obviously, there are common themes that will influence each company’s decision: regulatory cost and burden, access to capital and market-determined liquidity all play into this decision, but it requires unique analysis for each enterprise.  There are multi-billion dollar private companies and funds that won’t ever entertain going public because the cost-benefit analysis just doesn’t make sense for them or their investors.  At the same time, there are million-dollar private companies that would be better served by entering public market environments to establish their market values and utilize market sentiment to fund future growth.

3. What affect do you see greater interest rates having on capital raising in the Private Markets?

I will leave it to financial analysts far smarter than I am to really dive into this question, but one area I’m very interested to see the impact is in private mortgage lending. Historically, private mortgage investment entities like MICS or lending trusts were very popular in the private markets because they offered a strong yield and relatively secured balance sheets to support those distributions.  Unfortunately for them, the last 10 years of “free money” interest rates created an environment where they struggled to compete and were forced to lower their yields significantly or take on disproportionate risk by dealing with deep subprime borrowers or high loan-to-value ratios.  With fixed-rate mortgage rates for prime borrowers now in around 6% per year, private mortgage lenders are again entering an economic environment where they can lend to near-prime and sub-prime borrowers at rates that create attractive yields for their investors.  When you couple this with other regulatory impacts like the mortgage stress test that only applies to federally regulated lenders, I think we will see an environment where the risk-return profile of private mortgage investment entities become very attractive again.  


The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or opinions of Olympia Trust Company, Olympia Financial Group Inc., or any of its affiliates. The author’s views and opinions are based upon information they consider reliable, but neither Olympia Trust Company, Olympia Financial Group Inc. nor any of its affiliates, warrant its completeness or accuracy, and it should not be relied upon as such.

Phil du Heaume
Lawyer, Philip du Heaume Professional Corporation

Phil du Heaume is a corporate and securities lawyer and provides legal advice to private issuers, dealers, advisers, and fund managers. In addition to his independent legal practice, he is a longstanding member of the Alberta Securities Commission’s Exempt Market Dealer Advisory Committee, a director and executive member of the Private Capital Markets Association of Canada (PCMA), and a member of the board of directors of Olympia Trust Company. Phil is the founder and president of River Valley Regtech, which invests in, creates and administers financial and regulatory technologies for the Canadian financial marketplace, including the DropLoss platform that allows Canadian investors to utilize tax-loss harvesting strategies for their illiquid private market securities through an automated investment disposition platform.