It’s no secret that beyond being a global health crisis, the COVID-19 pandemic has caused massive economic disruptions across the world. As a result, we’ve seen heightened volatility in the public markets—leading to both the worst financial losses in decades and the best month since 1987.
As scientists work to develop a vaccine, there’s no clear road map for how long this crisis will last or when the global economy will rebound. Despite these levels of uncertainty, our public markets continue to demonstrate how crucial they are to creating wealth, spurring capital formation and providing liquidity to your clients when they need it the most. Here’s how.
The Need for Capital Formation in Times of Crisis
The economic impact of the pandemic has put many companies in a position where they desperately need access to capital. At the same time, it’s also minimized the availability of traditional financing avenues like debt options and private venture capitalists. In fact, VCs are either choosing to fund later-stage companies or keep their powder dry—making the future of growth-stage companies quite bleak.
The public markets present a more sustainable avenue to capital formation during times of instability. Instead of relying on just one source of funding, public companies have the flexibility to rotate shareholders, bringing a diverse group of new investors who are willing to fund the company’s recovery. Recovering from the economic fallout of the pandemic is going to require that companies have access to enough capital to bring them back to profitability, fund their continued business operations and support opportunistic acquisitions that may present themselves. This is where your clients come in.
Investors should also consider funding new companies that help provide solutions to the challenges we face today. Whether it’s a clean technology helping emission reductions or a new business model like telehealth proving relevant during COVID-19, these companies all need funding to navigate today’s unique business environment. Investments such as these will also help drive job creation and growth that ultimately spurs economic recovery.
Personal and Collective Fortunes Are Tied
The public markets represent a symbiotic relationship between companies and investors. Just as they offer a path to recovery for companies, they also present a safer investment avenue for individual investors who may be impacted by the pandemic.
In the U.S. alone, the economic impact of COVID-19 has driven the unemployment rate to highs we haven’t seen since the Great Depression. In the space of widespread job insecurity, clients may need access to their savings to cover basic expenses and avoid defaulting on any debts. Public markets provide that liquidity.
The pandemic has also led to a massive reduction in consumer spending, putting businesses at risk as they navigate how to operate in the midst of ever changing regulations. In all likelihood, as the pandemic continues, small companies will continue to bear the brunt of the economic damage, further contributing to the record-high levels of unemployment. This vicious cycle can ultimately result in long-term contractions in supply and demand, creating more uncertainty for individuals and further reductions in consumer spending.
As we all navigate these volatile economic times, the public markets offer a way for your clients to continue building and protecting their wealth while still being able to easily access their funds if they need them. Meanwhile, they can continue to contribute to the capital formation that public companies currently need. This is where financial advisors can help.
How to Be a Port in the Storm
For financial advisors, the current market climate represents a significant challenge—but you’re also in the unique position to help your clients generate value in the midst of volatility.
Here are three steps you can take to do exactly that.
- Assess your clients’ risk appetites. In these tumultuous times, financial advisors can help their clients by pointing to companies that are likely to survive—and thrive. A low risk appetite can present an opportunity for investors to take positions in more established companies that are bound to weather the storm. Some Canadian banks, for instance, have seen a 30% return on their share price since March. For clients who have a higher risk profile, you can explore emerging technologies that are reshaping how people operate during the pandemic—think telehealth, e-commerce or remote work solutions.
- Help your clients stay agile. Part of the investor appeal of the public markets is that they offer liquidity when needed. But as we’ve seen this year, investors who opted to sell low and go to cash in early April missed out on one of the best months on record. Depending on your client’s confidence in a company, a private placement could present an interesting opportunity to invest in a company they’ve followed for some time. Despite the four-month hold period, these financing strategies offer a way to support the long-term growth of a company through capital formation.
- Understand the opportunity for capital formation. As I mentioned above, companies of all sizes are focusing their efforts on capital formation so they can continue to operate their business models and pursue opportunities in their industry. Evaluate companies and determine which present viable opportunities for your customers to participate in their financing activities. This way, your investors can build positions in quality companies while their valuations are depressed, which could ultimately reward them in the long run.
A Look at the Big Picture
The COVID-19 pandemic is still very much in the picture. But across industries and sectors, companies are building a path to economic recovery, and for many, capital formation is at the core of that journey. As your clients reevaluate their investment priorities, you have the opportunity to match your investors with public sector companies that are positioned to emerge successfully on the other side of this pandemic. By supporting the capital formation of those companies, investors will have the opportunity to see returns in the long run—a win-win for everyone.
Brady Fletcher is managing director of TSX Venture Exchange, a public venture market. The views provided in this article reflect those of the individual author. This article is not endorsed by the TMX Group or its affiliated companies.
