|
Similarly, William Robson, president and CEO
of the C.D. Howe Institute in Toronto, is wary of what he sees
as a “tax driven
mass movement”. “We are living in a world where
increasingly there is a motivation to get around that intermediate
later of corporate taxation,” he says. Closing off the
income trust route, says Robson, means that investors are looking
for other ways to get their tax payments down. “If you
are a taxable individual investors, the dividend tax credit
will more or less compensate you for the tax paid at the corporate
level,” explains Robson. “But if you are a tax-deferred
investor(i.e., through an RRSP or a pension fund),
the dividend tax credit is of no use to you. Getting around
the double tax bite is very important because, for pension funds,
they need the returns to pay the pension promises they made.
As we know a lot of pension funds are struggling to do that.”
Like Hamilton, Robson says that
allowing large public sector pension funds to get around the
tax credit by buying large companies that are far too expensive
for other investors to buy, including smaller pension funds,
means that those public sector plans get a vital edge. “What
about the little guy with an RRSP? What happens to the smaller
investor who has no way into this and whose interests aren’t
front and centre when the big public sector plans are lobbying
for changes to help their pension plans?”
What
about the TSX?
Moreover,
with the potential for more and more big listed companies to
go private, there will also be an impact on Canadian public
equity markets. Steve Bonnar, a consultant with Towers Perrin
in Toronto, isn’t as concerned about the short-term impact
of a major Canadian public sector pension fund such as CPP or
Teachers’ taking over a company like BCE—it’s
the longer-term he worries about. “If I’m a large
enough fund with the ability to own a portfolio of public equity
investments, that’s fine. However, smaller pension funds
could  potentially
be squeezed out as the public equity market possibly becomes
smaller as major organizations go private.” While he notes
that it would be extreme to think that 50% of the TSX is going
to be privatized overnight, he does believe that deals such
as the BCE deal could have an impact down the road. “Right
now the Canadian stock market doesn’t reflect the Canadian
economy all that well,” he says, noting that many large
subsidiaries of foreign companies such as the Big Three automakers
and IBM Canada are not listed on the TSX and yet are still integral
to the Canadian economy. “As private equity picks off
more companies, there is the potential for the Canadian market
to become even less representative of the Canadian economy,”
he says. “It also provides less ability for other than
the very large players to get a chunk of the Canadian economic
action apart from the stock market. My main concern is that
the medium- and small-sized pension funds get in some fashion
squeezed out of the market because they don’t have access
to a significant portion of the market.” It won’t
happen right away, Bonnar says, but it could happen over time.
| “As
private equity picks off more companies, there is the
potential for the Canadian market to become even less
representative of the Canadian economy.” - Steve
Bonnar |
Robson also
chimes in on the impact taking big companies like BCE would
have on the TSX, noting that it could lead to loss of price
discovery. “With more and more pension funds owning illiquid
stakes in [these companies], will we get decent reads on the
market value of these things?” Delisting could lead to
a more opaque market in Canada and, says Robson, that’s
not necessarily the best route—“I think having a
lot of listed securities is a good thing.”
Not
that big a deal
For his
part, Mark Wiseman, senior vice-president, private investments
with the CPPIB, says that, although this deal is making headlines,
private equity deals are nothing new for the mega-fund, which
he says, doesn’t distinguish between public and private
equity when it comes to asset allocation. Wiseman, who was unable
to comment directly on the BCE deal, notes that, “If we
were making an investment of $100 million in a public equity
investment no one would notice. It’s just the fact that
we happen to be doing a transaction on a privately negotiated
basis—obviously these days it garners more headlines.”
He also counters the argument that BCE equals a big tax break
for the fund. “There’s no tax break involved,”
Wiseman says, noting that CPPIB should not be viewed as a “monolithic
entity making rapacious returns” since their investments
are made on behalf of all Canadians covered by the plan. “Who
are we? We’re you,” he explains.
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