Diane Francis on Business Issues

Wednesday, July 05, 2006

Canaccord's Coup

Diane francis column friday June 28 out of LONDON

This spring, Toronto's Bay Street stood to attention when the Toronto Stock Exchange was bypassed and Waterloo Ontario technology star, Sandvine, did a C$300 million IPO on to London Stock Exchange's AIM junior market.

Its lead underwriter, called a NOMAD on AIM, was Canaccord Capital Inc. of Vancouver through its London operation called Canaccord Adams.

"Sandvine is a world class company with global ambitions which can list on any exchange," said London managing director Neil Johnson. "That certainly sent a message. We are also working on a Silicon Valley venture which will shortly be listed on AIM and probably no where else."

In fact, he predicts that the next wave of listings, by venture capital start-ups that have matured, will go on AIM for a variety of reasons and not traditional stock exchanges where red tape and costs are excessive.

"Many of these companies are ready for an exit and AIM has become an ideal, and the most reasonable, exit strategy for ambitious companies," he said.

What's most unique and controversial about AIM is its leaping success (twice as many listings last year and this year so far as the Nasdaq and NYSE combined). Canaccord is the biggest investment banker on AIM and the only Canadian one.

AIM (Alternative Investment Market) began in 1995 and is now Europe's second largest with 1,650 listed companies, and three times' the market capitalization of the TSX Venture Exchange.

Roughly 16% of listed companies are Canadian but these companies represent nearly one-third of the value of the exchange.
What Toronto officials should note, and others in Europe have, is that AIM's governance model is more effective, translates into cheaper listing costs and provides a nifty way for smaller entities around the cumbersome Sarbanes Oxley.

"The one-size-fits-all regulatory framework is a problem for smaller companies when it comes to Sarbanes Oxley," said Mr. Johnson.

Governance on AIM, essentially, has been outsourced to professionals and not bureaucrats without real world experience.

Each listed company is brought into the market by a NOMAD, or Nominated Advisor, which is responsible for its compliance thereafter. NOMADs are carefully scrutinized by the London Exchange and British regulatory authorities and must be licensed and established for some time in Britain.

In return for monitoring and mentoring, NOMADs make fees and get underwriting opportunities.

"We are on the hook every day for our listed companies. My license to do business is at stake," said Mr. Johnson.

Of the 85 people in Canaccord's London office (it has 1,500 worldwide), 22 people are in its NOMAD department. Each of its dozens of listings have two persons assigned who monitor and sign off on financial or news release information.

AIM also requires research for all its listings, unlike other exchanges. NOMADs must assign a research analyst to report on the progress of the listed companies in their stable.

The system depends on the quality and integrity of AIM's 85 NOMADs which is why it takes months for interested brokers to pass muster. Some four licenses have been lifted since 1995, but none in recent years, said an AIM spokesperson.

Savings are significant for companies like Sandvine: AIM listings cost US$900,000 compared to US$2 million on NASDAQ and slightly less on the TSE.

Ongoing compliance costs can be as high as US$2.5 million per year south of the border and less than US$1 million a year on AIM.

"Nine of 20 biggest AIM companies are Canadian such as First Quantum, Yamana, Bema Gold, First Calgary, Oilexco, Sandvine and Canaccord Capital Inc.," said Mr. Johnson. "Since we bought Adams Harkness in the U.S. last year, we have sensed great interest this year in the U.S. from boutiques that want a relationship with a NOMAD to take companies public to law firms there just checking out the AIM process."

The world's biggest institutional investors have also taken notice.

"They are here now investing," said Mr. Johnson. The biggest participants are Fidelity, Artemis, Schroder Investment Management, Merrill Lynch, UBS, Invesco, Goldman Sachs, JP Morgan and Prudential, to name a few.
AIM is also now very efficient, he said.

"We measure liquidity to capitalization and 90% of AIM's value (L74 billion) is traded annually," said Mr. Johnson. "This is more liquidity than the TSE and TSX."

The system of NOMADs deploys the old boys' network to police the market by deputizing them to mentor and monitor their listings. By contrast the U.S. system is a rules-based one which has become too expensive and a field day for lawyers. Toronto is somewhere inbetween.

But the Toronto Stock Exchange, with its old boy network, could easily adopt the AIM system and perhaps offer a more convenient alternative to American companies than London has, he said.

Members of the TSE should take note.



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