No IPO? No problem! How Canadian retail investors can buy private companies

Investing in private companies has long been the protected fiefdom of wealthy accredited investors, angels and venture capitalists. But no longer: It’s now becoming possible for the masses.

Today, there are new platforms that connect retail investors with startups looking for seed capital, along with publicly-traded investment firms that hold stakes in private companies that are nearly ready to go public themselves.

Those options are increasingly necessary for retail investors, as the number of publicly-listed operating businesses has been dwindling for decades. The number of operating businesses listed on the Toronto Stock Exchange, for example, has fallen to just 712 by the end of 2023, down from 1,166 in 2002.

Virtually every major public market globally has experienced a similar decline, as ballooning sums of private capital have allowed startups to stay private for longer – denying retail investors from participating in what is often the most lucrative period of a company’s growth.

When Peter-Paul Van Hoeken started his equity crowdfunding platform, FrontFundr, in 2015, his mission was to change that.

“We are basically turning anyone into an angel investor,” he said in an interview.

“Providing companies with the opportunity to raise capital from a much wider group of investors, and of course for the public, which has traditionally been locked out from investing in private companies, access to these opportunities, that just made a lot of sense to me.”

Because the concept was novel in Canada nearly a decade ago, Mr. Van Hoeken said getting licensed to trade securities that are not listed on stock exchanges in British Columbia took about 18 months.

But after that first approval, the company was able to quickly expand across the country. Today, FrontFundr is available in eight provinces and the Yukon, with plans to reach Newfoundland, Prince Edward Island, Nunavut and the Northwest Territories soon.

There are roughly 50,000 Canadian retail investors registered on the platform. Together, they have invested $200-million worth of stock in Canadian startups through 175 individual capital raises. The minimum investment for each campaign on FrontFundr is usually a few hundred dollars and can be as low as $100.

“Even if the total amount you have to invest is around $5,000, you could still make 10 to 20 investments through our platform,” Mr. Van Hoeken said.

Getting access to the same opportunities as angel investors, however, comes with the same limits on liquidity.

“Typically you invest longer term, which could easily be five or 10 years. Of course, the desired outcome is that the company is either acquired in the future or goes public and that provides the liquidity event for those investors.”

Some companies that have raised money on FrontFundr have gone public relatively quickly, though Mr. Van Hoeken said those are the outliers.

Agricultural technology company Hempalta Corp. HEMP-X, for example, raised $443,494.05 on FrontFundr in 2022 and ended up debuting on the TSX Venture Exchange in March, 2024.

Other notable startups that have raised money on FrontFundr include organic mushroom producer Stay Wyld Organics and ridesharing app Hovr, which recently garnered attention for going up against Uber by offering better wages for drivers.

For investors looking for private company exposure with the ability to get their money out whenever they want, options such as Stack Capital Group Inc. might be more attractive. Stack trades on the TSX and invests in some of the most well-known private companies in the world. Space X, Australian graphic design software maker Canva and Montreal-based travel platform Hopper are among its largest holdings.

“A lot of companies are staying private for longer and longer before they IPO and retail investors can’t get access to that value in the private markets,” said Jeff Parks, co-founder and chief executive officer of Stack, in an interview.

“That is why we wanted to bring a public vehicle out there so people can put it in their personal account, an RRSP, TFSA, doesn’t matter if it is registered or not. We really tried to think about what the barriers were for people to get access to these kinds of investments.”

Another difference from the FrontFundr model is that Stack only invests in later stage private companies that are between six and 36 months from going public themselves. Stack also differentiates itself from the growing number of private credit funds, according to Mr. Parks, by ensuring a consistent level of liquidity.

Increasingly common redemption halts have left many investors wary of alternative funds. Mr. Parks said many alternative fund managers have been forced to tell their investors that “we can’t give you your money back” because they are often unable to quickly sell their underlying holdings to create liquidity.

“You can’t do this private trading stuff within a fund,” he said.

As for why private funds continue to attract so much attention relative to Stack, “I just don’t think a lot of people know that we are out there right now. They don’t know that we exist and that we have assets like Canva and Space X.”

But the idea is starting to catch on, and competitors are coming.

One is AIP Asset Management, a Toronto-based investment manager that has offered a private debt fund to accredited investors for more than a decade. AIP is preparing to launch a new portfolio company on the TSX Venture Exchange called Access Pre-IPOs.

Set to trade under the ticker, “XIPO,” the company will seek to invest in high-profile private companies such as Open AI, Epic Games and Stubhub. As for how to acquire those stakes, AIP co-founder and senior portfolio manager Jay Bala has a plan.

There are always private company employees who receive stock as part of their compensation that they need to cash out “because life happens,” Mr. Bala said. “People get married, divorced or have kids heading to medical school.”

He offered the example of a 29-year-old who has been working at a private company for five years and holds a million dollars worth of stock.

“Say they are getting married next year, thinking, ‘if I cash this out, I can pay off my student loans and start fresh without a mortgage.’ They are unsure when the company will go public, and then we come along with an offer of $900,000 cash today,” he said. “That’s a deal they won’t pass up.”

The key differentiator for XIPO, Mr. Bala said, will be offering “daily liquidity to an illiquid asset class that is typically reserved for institutional investors and high-net-worth family offices.”