A growing and largely unregulated market where shares in privately held companies are bought and sold is proving to be both a reason to stay out of public markets and a launching pad into them for the oil patch.
The over-the-counter trade in private oil and gas producers on the so-called grey market is estimated to be worth as much as $1-billion annually, when private placements of shares are factored in. It has proven to be a handy way for early investors in a company to exit their positions.
A murky corner of the business of raising capital – and one that is highly dependent on relationships with executives running the companies – it is dominated in Canada by energy producers. By contrast, the U.S. grey market is largely used by technology startups.
Oil-patch players traded on the Canadian grey market run the gamut from some that have no intention of going public to those that have structured themselves almost as public companies, and aim to launch IPOs.
"In the past couple of years, with the volatility in the energy index, there's tremendous value in some of the private-equity names that are out there, and we've built a book around a couple of these names. We continue to source out opportunities there," said Adam Woodward, a Calgary-based investment adviser with Richardson GMP who counts both institutions and individuals as clients.
In the absence of detailed financial data, much of the currency for the companies is the credibility of their management and directors and their past record of success. Some funds, such as Calgary-based Priviti Capital Corp., have managed impressive returns by concentrating solely on the private market.
Private-equity-backed companies traded on the Canadian grey market include United Hydrocarbon International Corp., Petrus Resources Ltd., Seven Generations Energy Ltd., Spur Resources Ltd., Coral Hill Energy Ltd. and several others.
Dan Polley, chief executive of Broadview Energy Ltd., told a group of financial professionals at a Calgary luncheon to discuss the growth of the grey market last week that his company aims to avoid regulatory burdens as well as the quarter-to-quarter expectations of public investors as it develops early-stage explorations plays.
Broadview shares recently had a price indication of 85 cents a share, according to grey-market broker Liquidity Source.
Unlike the public stock markets, many of the companies traded offer little financial information or other disclosure. In fact, the brokers trading in private securities often are the best sources of information on the companies, when there is little or no analyst coverage.
Dann Cushing, chief executive of Liquidity Source, said the companies it deals in have market values of at least $100-million. "And they are all, or almost all, backed in some way by a management team or board that has a significant track record of creating value, and that is why they are able to raise money and be private," he said.
Gear Energy Ltd., a heavy-oil producer founded by former Peyto Energy chief Don Gray, was actively traded on the private market before going public last November at a price of $2.80 a share. It has recently fetched nearly twice that amount on the Toronto Stock Exchange.
Investors are hoping for a repeat performance with Petrus, another privately held company in Mr. Gray's stable, which recently sold for $2.75 a share on the grey market.
Seven Generations, a Montney liquids-rich gas explorer backed by a host of pension and private equity funds, is also expected to go public this year.
Share prices are largely determined between buyer and seller. TMX Group is nearing the start of a new business called TSX Private Markets, which will be a kind of stock market for private companies with the aim of increasing liquidity to make raising capital easier.
The unit, which will be run by TMX's Shorcan Brokers Ltd. subsidiary, is due to start up in the third quarter.