News

TAX ALERT  |  December 15, 2021

On Dec. 14, 2021, Canada’s Minister of Finance, Chrystia Freeland, released Canada’s Economic and Fiscal Update (the Update), which provides an overview of Canada’s finances, identifies the government’s areas of focus and sets out several proposed new tax measures.

The theme of the Update is finishing the fight against COVID, which the government states is its “most important national project”. To fight COVID, the government targets its resources toward (i) providing medical support, including pediatric vaccines, boosters for adults, and investing in anti-viral drugs to prevent COVID hospitalizations; and (ii) delivering economic support in the form of subsidies and credits for businesses affected by COVID, benefit programs and paid sick leave for certain employees, and credits for businesses to improve indoor air quality.

The government’s other stated goals – fighting climate change, advancing reconciliation with Indigenous peoples, and building a stronger, fairer, and more competitive economy – are secondary. The government states it will turn to these goals as it finishes the fight against COVID, thereby remaining vague in the Update on the measures it will advance to achieve these goals.

There is no indication in the Update that the government will increase corporate tax rates, personal tax rates, or capital gains tax rates, or will further enhance audit and enforcement measures beyond the measures announced in the 2021 Budget. The government may still consider changes to the tax rates and to audit and enforcement measures in the 2022 Budget, which is expected to be released in the spring. However, there are updates on new taxes proposed in the 2021 Budget, specifically the Underused Housing Tax, the Digital Services Tax and the Luxury Tax.

The following summarizes the business and personal income tax measures in the Update relevant to the middle market.

Business income tax measures

The key business income tax measures focus on (i) continuing support for businesses through the pandemic, (ii) introducing a new support program for small businesses to improve indoor ventilation and (iii) helping small businesses and farmers afford the costs of fighting climate change.

No changes are proposed to the federal corporate income tax rates or the $500,000 small business limit.

COVID subsidies and loan programs for businesses: Extending existing programs and introducing new programs

As Canada faces another wave of COVID, the government proposes to extend the Highly Affected Sectors Credit Availability Program (HASCAP) to March 31, 2022. It had been set to expire on Dec. 31, 2021. The HASCAP provides government-guaranteed, low-interest loans of up to $1 million to organizations that have suffered significant revenue declines due to the pandemic. The Business Development Bank of Canada will continue to work with lenders to support access to capital for Canadian businesses of all sizes in all sectors and regions.

The Update also confirms the government’s proposals to extend the Canada Recovery Hiring Program (CRHP) wage subsidy until May 7, 2022. The CRHP is similar to the now-concluded Canada Emergency Wage Subsidy and applies to increases in salaries and to salaries paid to new hires. Eligible employers with revenue declines above 10% are potentially eligible for the CRHP, with the subsidy being as much as 50% of the increased salaries or new salaries, subject to the $1,129 maximum.

The government proposes to introduce three new subsidies for businesses that are hit especially hard by the pandemic:

1. The Tourism and Hospitality Recovery Program, which provides wage and rent subsidies of up to 75% to tourism and hospitality businesses, including hotels, tour operators, travel agencies, restaurants and organizations that plan and host festivals or live performances.
2. The Hardest-Hit Business Recovery Program, which provides wage and rent subsidies of up to 50% to organizations that have suffered “deep losses”.
3. The Local Lockdown Program for businesses affected by new COVID-related lockdowns, which will allow eligible businesses to receive up to the maximum benefit under the wage and rent subsidy programs.

These three programs will be available until March 12, 2022 at the rates set out above, and at half the rates from March 13 to May 7, 2022, as the government anticipates that COVID will be more firmly under control at that time.

Small businesses air quality improvement tax credit

To encourage small businesses to invest in improving indoor air quality, the government proposes to introduce a temporary Small Businesses Air Quality Improvement Tax Credit. The refundable tax credit would be available to eligible entities in respect of qualifying expenditures incurred between Sept. 1, 2021 and Dec. 31, 2022.

The tax credit is 25% on qualifying expenditures up to a maximum of $10,000 per qualifying location and a maximum of $50,000 in total across all qualifying locations. The limits on qualifying expenditures are to be shared among affiliated businesses.

Eligible entities include sole proprietors, Canadian-controlled private corporations with taxable capital employed in Canada of less than $15 million and partnerships through their shareholders.

Qualifying expenditures include expenses directly attributable to the purchase, installation, upgrade or conversion of mechanical heating, ventilation and air conditioning systems, and purchase of devices designed to filter air using high-efficiency particulate air filters. The payments related to these upgrades must be paid to arm’s-length entities.

Qualifying locations would include properties used by an eligible entity primarily in the course of its ordinary commercial activities in Canada (including rental activities), excluding self-contained domestic establishments (i.e., a place of residence).

Consistent with the general treatment of business tax credits, this credit should be included in the taxable income in the taxation year the business claims the credit.

Return of fuel charge proceeds and eligible farming expenses

The Update introduces a new credit available to eligible farming businesses. Under the federal carbon pollution pricing system, the government applies a price on pollution in jurisdictions that do not have their own system. Recognizing that many farmers use natural gas and propane in their operations, the government proposes to return fuel charge proceeds directly to farming businesses in backstop jurisdictions via a refundable tax credit, starting for the 2021-22 fuel charge year.

The return of fuel charge proceeds would be available to corporations, individuals and trusts that (i) are actively engaged in the management or day-to-day activities of earning income from farming and (ii) incur total farming expenses of $25,000 or more, all or a portion of which are attributable to backstop jurisdictions (currently Alberta, Saskatchewan, Manitoba and Ontario). 

The credit amount in respect of an eligible farm business for an applicable fuel charge year would be equal to the eligible farming expenses attributable to backstop jurisdictions in the calendar year when the fuel charge year starts, multiplied by a prescribed payment rate.

Consistent with the general treatment of business tax credits, credit amounts would be included in the taxable income of the business in the taxation year the credit is claimed. 

A business can claim the refundable tax credits on its tax returns related to the 2021 and 2022 taxation years.

The government also intends to return a portion of the proceeds from the price on pollution to small and medium-sized enterprises in backstop jurisdictions through federal programming, beginning in 2022-2023. Further details will be announced in early 2022. 

Update on business tax measures from the 2021 Budget

Digital Services Tax. The 2021 Budget proposed a temporary Digital Services Tax (DST) on large businesses (both foreign and domestic) at a rate of 3% of revenue generated from digital services that rely on data and content distributions from Canadian users. It is proposed as temporary because it is intended to serve as an interim measure until an acceptable common international approach – the multilateral tax regime – is developed and implemented. The Update confirms that, because the multilateral tax regime is not yet in force, the DST will be imposed on revenues earned by large businesses as of Jan. 1, 2022 at a rate of 3%, but that the tax will not be payable until 2024 and will only be payable if the new multilateral tax regime has not come into force by that time.

Investment tax credit for carbon capture, utilization and storage. The Update confirms the government’s commitment to the introduction of an investment tax credit for capital invested in carbon capture, utilization and storage projects with the goal of substantially reducing emissions. The government will outline the proposed investment tax credit in Budget 2022.

Personal income tax measures

The Update does not propose any changes to personal income tax rates, the capital gains inclusion rate or the principal residence rules. There are several new measures announced to help individuals, but the main personal tax measures are (i) extensions of current credit and benefit programs and (ii) clarity on the Underused Housing Tax, which goes into effect on Jan. 1, 2022.

Home office expenses

As many Canadians close in on a second year of working from home, the government confirmed that employees can use the simplified process for deducting home office expenses in 2021 and in 2022. The government previously introduced the simplified process in respect of the 2020 taxation year, allowing employees to deduct home office expenses without burdening the employer to complete for T2200. This simplified claim process allows employees to claim a flat rate deduction based on the amount of time spent working from home and eliminates the need to track specific costs or retain receipts. Employees will be able to deduct up to $500 of expenses on their 2021 personal tax return, an increase from last year’s maximum deduction of $400.  

Employees that worked from home in 2021 should analyze whether the flat rate method is beneficial for their tax situation rather than obtaining a signed T2200 and deducting the home office expenses incurred.

Underused housing tax

In the 2021 Budget, the government proposed a tax on vacant and underused residential real estate owned by non-residents. After consulting with stakeholders in the summer, the Update provides details on the new Underused Housing Tax (UHT). The UHT is an annual tax equal to 1% of the value of the vacant and underused property owned by non-residents. 

However, the Update provides for two exclusions from the UHT. A non-resident property owner would be exempt from the UHT for a calendar year if the property, or a residence that is part of the property, is:

1. The primary place of residence of (i) the owner, (ii) the owner’s spouse or common law partner or (iii) a child of the owner (or the owner’s spouse or common-law partner) provided the child is in Canada for the purposes of authorized study and the child’s occupancy relates to that purpose.
2. A vacation or recreation property that is (i) located in an area of Canada that is not an urban area within either a census metropolitan area or census agglomeration having 30,000 or more residents and (ii) is personally used by the owner (or the owner’s spouse or common-law partner) for at least four weeks in the calendar year.

The UHT goes into force in the 2022 calendar year, therefore, non-resident homeowners will be required to file a UHT return for the 2022 tax year and pay any tax owing on or before April 30, 2023. Non-resident homeowners who meet either of the exemptions must still file a UHT return to claim the appropriate exemption.

Extension of COVID benefit programs for individuals

The government proposes to extend the Canada Recovery Caregiving Benefit (CRCB) and the Canada Recovery Sickness Benefit (CRSB) until May 7, 2022. Each benefit provides recipients with $500 per week ($450 after taxes are withheld). 

In addition to extending the programs to May 7, 2022, the government proposes to increase the maximum duration for which an individual can receive each benefit. For the CRCB, an individual will be able to receive the benefit for up to 44 weeks (up from 42 weeks). For the CRSB, an individual will be entitled to receive the benefit for up to six weeks (up from four weeks). 

New economic support for individuals

Canada Worker Lockdown Benefit (CWLB). The government proposes to introduce the CWLB to provide $300 per week to workers who are unable to work due to government-imposed public health lockdowns at their place of employment. If the legislation is passed, this benefit is available to eligible workers from Oct. 24, 2021 to May 7, 2022.

Support for workers in the live performance sector. Despite gradually easing public health restrictions, the live performance sector has been slow to recover, with many individuals in the live performance sector struggling with reduced opportunities, hours and income. The government proposes to establish the Canada Performing Arts Workers Resilience Fund, a temporary program that will fund new or enhanced initiatives to improve the circumstances of workers in this sector. The government will fund this program, and Canadian Heritage will administer the fund.

Paid sick leave. Employees in federally-regulated industries can expect to receive 10 days of paid sick leave if the proposed legislation passes. One of the purposes of this proposal is to allow workers to stay home when sick, thereby reducing the likelihood of COVID outbreaks in the workplace.

Other measures

Other measures in the Update that relate to individuals are as follows: 

• Enhanced support for teachers and early childhood educators, allowing them to claim a refundable tax credit of 25% (increased from 15%) up to $1,000 on the purchase of school supplies.
• The proposed Luxury Tax on luxury vehicles, boats and personal aircrafts, proposed in the 2021 Budget, is still in its early stages of development, with draft legislation to be released early in 2022.

INSIGHT ARTICLE  |  November 30, 2021

Driving transformational infrastructure projects with innovative solutions

What is the most effective way to close the infrastructure gap in Canada? We believe it starts with new ways of thinking. As discussed in our recent engineering trends podcast with the Association of Consulting Engineering Companies’ (ACEC) President, John Gamble, and RSM Canada’s Engineering Sector Leader, Jeff Lutzak, closing the infrastructure gap will require a focus on projects and programs that are holistic, innovative and future looking. Currently, the public procurement process for infrastructure projects presents a barrier to innovation because it rewards the lowest bid and minimally interprets the scope of work. The result of this race-to-the-bottom mentality is that there is downward pressure on margins at engineering firms resulting in fees that are too low to cover the true scope of work. To compound this, the changing economic landscape is making it increasingly challenging to retain skilled professionals. Meanwhile, the infrastructure gap remains.

To encourage the types of projects that will be most effective in closing the infrastructure gap, engineering firms can think about quantifying the value of taking on risk and spurring innovation in their pricing models – while finding ways to work with all the service providers and appropriately sharing risks and rewards with all parties involved. In addition, government bodies can consider ways to focus on qualifications, rather than pricing during the public procurement process.

Table of contents

• Understanding the Canadian infrastructure gap
• Talent retention
• Capturing value through the procurement process
• Collaborative contracts
• Innovative procurement models

Understanding the Canadian infrastructure gap

Despite governmental financing commitments through programs like the Investing in Canada Plan and the Canadian Community-Building Fund, an infrastructure gap in Canada still exists.¹ However, the government of Canada acknowledges the need to quantify this gap and actively reduce it.

In a recent RSM article exploring how the public-private partnership model links infrastructure and ESG, “data from the Organisation for Economic Co-operation and Development shows that Canada spends a larger share of its GDP on infrastructure than most developed countries. Current estimates from an April 2021 article from the Council on Foreign Relations put the U.S. infrastructure gap near US$2 trillion, while the maximum estimated infrastructure gap in Canada is near CA$570 billion according to CanInfra. Adjusting for GDP, infrastructure spending in Canada was about 1.14% of GDP, 30% higher than the 0.9% figure in the United States” says Alex Kotsopoulos, Partner, Projects and Economics at RSM Canada.²

On July 29, 2021, the government of Canada introduced the National Infrastructure Assessment, which will evaluate Canada’s infrastructure needs and establish a roadmap up to the year 2050. The engagement report cites several large-scale changes including climate change, population growth and aging, and fast-paced technological advancement, as reasons for why the infrastructure serving Canadian communities today is not sufficient for the future.³

Despite the government’s current commitment to assessing Canada’s infrastructure needs, historically there has been a tendency for governments to promise investments on the back end of a program cycle, notes Gamble. Therefore, it has been difficult for the parties involved in infrastructure projects to hire talent and procure the appropriate materials and technology all at once. Moving forward, it will be important to flatten the investments over a longer period to help firms manage their resources. According to Gamble, the other issue is that project approvals often happen one by one rather than as a sum— reducing the ability to assess how all the projects fit together.

However, the infrastructure gap is not all about the financial return on investment; there are several other factors that need to be considered, as every community has differing needs such as aging populations, population growth, priority industries, etc. Since each community’s needs are intricate and constantly evolving, approving projects one by one is not an efficient way to close the overall infrastructure gap. It’s important to understand the bigger picture and see how all the projects fit together to add the most value. The key to addressing the infrastructure gap will be to tackle the priority projects first and then execute on future looking, transformational projects.⁴

Talent retention

In the engineering trends podcast with ACEC, Gamble notes that the younger generation is entering the engineering field with diverse skill sets and have more interest in the well-being of society overall. Engineering is thought to be the nexus between science, technology and societal needs. However, occasionally, the profession can neglect the societal portion while increasingly focusing on the science aspects.

Currently, engineering firms are switching from hierarchal organizational structures to flatter ones where senior leaders are collaborating with junior staff on a regular basis. The younger generation is also adept at utilizing technology with a desire to focus on interesting, innovative, dynamic projects.

To close the infrastructure gap, it will be vital to retain the talent of the younger generation of architects and engineers who are increasingly able to integrate the societal aspects into their work. However, without transformational projects in the pipeline, it will be challenging to engage and properly compensate young talent, which can lead to turnover and higher cost to retain talent. In the time of “The Great Resignation,” where 11.5 million people quit their jobs during the 2021 months of April, May, and June in the United States,⁵ there is more urgency than ever to overhaul the procurement process to motivate firms to take on transformational projects and retain talent.

Capturing value through the procurement process

When it comes to engineering consulting for public clients, there are relatively few buyers, but many service providers. The higher ratio of supply compared to demand reduces fees for services. As is currently done within the industry, valuing projects based on time spent does not take into consideration the cost of a firm for taking on risk. This pricing method can work for basic commoditized jobs, but it is a poor metric to measure value creation and the burden of taking on risk.

As Gamble points out in the podcast, there are several factors that can impact risk such as complexity, scale, nature of the job, litigious level of a certain jurisdiction and the personality of the client. Once the project is finished and accounts are settled, the client reaps benefits of the asset for years to come such as through financial benefits, satisfying an objective, advancing public policy and mitigating risk, etc. The client is often the prime beneficiary of the innovation that was created by the external engineering firm, as seen in intellectual property (IP).

Engineering firms often will turn over all IP to the client once they have completed the project. The client needs the IP to maintain their asset for things like reproducing drawings for a renovation. In our engineering podcast with the ACEC, Gamble points out that there is a lot of value in the IP, which the client capitalizes on for years down the road. An alternative discussed was for engineering firms to build in a royalty free license into the project contract where the client can benefit from the IP with an upfront fee instead of spending per use; there is also an opportunity for firms to keep ownership of the IP – to capture additional value.

Collaborative contracts

The infrastructure gap can also be decreased through innovative project delivery methods like collaborative contracts – a delivery method, which is gaining traction with large-scale, complex, infrastructure projects. At the 2021 ACEC Virtual National Leadership Conference, integrated project delivery (IPD) was mentioned as an effective way to allocate risk between parties involved in the project and to stabilize cost variances. IPD is a project delivery approach that integrates all aspects of a project in a collaborative fashion to harness the talents and insights of all participants. The goal of IPD is to create harmony with the various stakeholders, who by nature, are more focused on individual goals than the overall project goals.⁶

Another similar collaborative contracting approach is known as alliance contracting. In this approach, owners, contractors and consultants work collaboratively as an integrated team with a common alignment on commercial interests and objectives of the project. This type of contracting approach is less common in North America although it is popular in Australia where one-third of the total value of public sector infrastructure is delivered through alliance contracting; it is also commonly utilized in New Zealand and Europe.

Alliance contracting stemmed from the realization that in the typical two-party contract between client and service provider, there is often an adversarial relationship with the parties involved in the project due to the transfer of risk from one party to another, with one party maintaining a larger portion of the reward. Alliance contracting attempts to create an environment where risks and rewards are shared equally among stakeholders.⁷

Innovative procurement models

Further, the government has a role to play in providing opportunities to firms. Gamble uses an example of a Canadian municipality that was known for having a slow permit issuance process. The municipality produced an innovative solution and created an express line for permits, with the caveat that firms had to “seal” (assume responsibility for) their drawings. Although engineering firms were taking on more risk to “seal” the plan, they were creating value for their clients, who in turn would finish the job sooner and see returns on investment at a quicker pace. At first glance, this new system seems to be disadvantageous for engineering firms since time spent would be reduced (back and forth time with permit issuer), lowering the firms’ overall project fees since less time can be billed. However, looking at it through a value-capture lens, the engineering firm is taking on more risk and adding value to the client, which can be shared between the client and the firm.

Another solution Gamble brings up is qualification-based selection (QBS). Variations of QBS have been adopted and implemented in the U.S. by 47 states.⁸ Currently, the common method used for public procurement in Canada is price-based competition, where price is the determining factor for accepting proposals. The process for QBS starts at understanding the needs of the client and then works backward to determine the overall scope and budget of the project. Pricing is not discussed until bidders understand the needs of the client, and the client holds discussions with the bidders to see if their qualifications, culture and vision are aligned with their needs.⁹

A study done by the University of Colorado and Georgia Institute of Technology determined that QBS-based projects exhibit better measures than the national average in terms of lower construction costs (cost of change orders as a percentage of final construction costs) and lower schedule growth (actual time spent on project compared to budgeted time allotted to a project). In the study, QBS projects exhibited 3% construction cost growth compared to a 10% industry average. QBS projects had an average of 8.7% schedule growth compared to the industry average of 10%. The study also found that QBS procurements were more likely to address emerging societal needs, impacted more stakeholders and promoted a higher level of innovation.  The study also confirmed that design firms were satisfied that the intellectual property (IP) included in the innovative projects was properly protected. Furthermore, 93% of clients surveyed on QBS projects rated the success of their final project as high or very high.

“From the client’s perspective, the up-front cost should be thought not as a cost to be minimized (but) as an investment to be leveraged”

—John Gamble, President, ACEC

Although, the up-front costs are higher with QBS due to the larger amount of design and operational discussions during the procurement stage, clients will experience savings on the smaller delta between budgeted costs vs. actual costs. From the client’s perspective, the up-front cost should be thought “not as a cost to be minimized (but) as an investment to be leveraged,” says Gamble. From the design firms’ perspectives, the reduction in the delta between budgeted and actual time and cost will improve the quality of their projects, and it should also reduce stress on the professionals working on the projects since the scope of the project is appropriately defined.

In conclusion, the infrastructure gap is being recognized as a serious policy priority in Canada. Closing the gap will require deep collaboration between an enormous number of stakeholders and industry players. It is vital that the industry leverages different procurement methods and collaborative contracts to spur smart, innovative projects that will benefit society in the short and long term. To execute on these projects, engineers will need to be as engaged and motivated as ever and prioritize an innovation-first mindset.

¹ https://www.caninfra.ca/insights-6

² https://rsmus.com/what-we-do/industries/private-equity/Cross-border-insights-for-alternative-assets.html

³ https://www.infrastructure.gc.ca/nia-eni/index-eng.html

⁴ https://rsmcanada.com/what-we-do/industries/business-and-professional-services/current-trends-in-the-engineering-sector-audiocast.html

⁵ https://www.inc.com/phillip-kane/the-great-resignation-is-here-its-real.html

⁶ https://www.constructiondive.com/news/the-strengths-and-challenges-of-integrated-project-delivery/519561/

⁷ https://www.nap.edu/catalog/22202/alliance-contracting-evolving-alternative-project-delivery

⁸ https://sajo.com/insights/qbs-qualification-based-selection-the-evolution-for-selecting-contractors-suppliers-professionals

⁹ https://www.acecma.org/committees-forums/qualifications-based-selection-qbs

INSIGHT ARTICLE  |  November 22, 2021

Rethinking corporate structures and business models

Industrial companies are rethinking corporate structures and business models as they assimilate their experiences from the pandemic. Like any crisis, the pandemic has accelerated certain trends, and industrial companies are exploring strategies to create sustainable value to their stakeholders.

Many large and midsize industrial companies cater to multiple industries and sectors, and hold diverse product and business portfolios. Such companies have long faced the question of whether to diversify and expand into new markets or simplify and focus on their core business. Before the pandemic, larger industrial companies were rushing to sharpen their focus via asset sales and spinoffs. Companies such as Johnson Controls, Honeywell, Ingersoll Rand and General Electric have shed business units and created more focused organizations. The pandemic has served as a trigger point to galvanize some of the focus on business simplicity for the middle market, too, as midsize companies increasingly reevaluate which of their existing business units complement the “core” of what they do. Midsize companies are entering into carve-out deals to spin off business units or products and rationalize operations, hoping to maximize value.

Companies realize complexity makes it difficult to navigate downturns. Successfully growing diversified businesses across geographic regions is no easy task. However, as past crises and the current pandemic have demonstrated, multi-industrials or diversified businesses are generally more stable due to risk diversification across sectors, some of which may be registering high growth and some of which may faring poorly at a given time. Diversified companies such as Pentair highlighted diversification as an asset in their third-quarter earnings. In contrast, companies focused on a single sector or business line are more prone to economic swings.

Carbon pricing policies—aimed at applying a market price or a monetary value to carbon emissions—are already in place in many countries, including Canada, Europe and even some parts of the United States, forcing companies to take the impact of these emissions into account in their decisions to make carbon-intensive goods. Making green products can be more expensive than the status quo, but also creates the opportunity for companies to invest in advanced technologies to garner a greater share of the market. But given the focus on sustainability by countries around the world, companies ranging from glass to steel to automotive are left with no choice but to rethink product design and process.

As companies assess whether to embrace a diversified or simplified corporate structure, leaders should question efforts to diversify without strategic thought. A company seeking to diversify primarily because target multiples are low or for the sake of commanding a valuation premium, for instance, will lack the more holistic approach needed in the current environment.

Midsize companies with limited operational, managerial and financial resources should think through the expected value proposition, model out scenarios of varying levels of success, and evaluate the strategic purpose when acquiring what they consider synergistic businesses or when divesting business units they may not consider synergistic. Take, for example, Roper Technologies, a pump and valve manufacturer that successfully diversified into software solutions because it figured out an asset-light, cash-generative strategy with an aggressive focus on software acquisitions across various end markets. An intentional framework behind each acquisition or divestiture or a management strategy that glues together diversified businesses is critical.

Diversifying with technology-enabled business models

Companies are taking a closer look at their existing business models to exploit potential opportunities in an industrial ecosystem shaped by emerging technologies and changing customer preferences. Manufacturers are exploring alternate business models that can provide sustainable growth, provide recurring streams of revenue and/or reduce the asset intensity of a traditional industrial business. Some machinery manufacturers, for example, are considering “equipment as a service” offerings, where the customer pays for use of machine time rather than purchasing the machine itself. This provides the company with deeper customer relationships, recurring streams of revenue and critical data on customer behavior to improve their products, services and business model.

Large and midsize industrial companies alike have introduced industrial Internet of Things-enabled platforms that combine products, expertise and data to improve customer productivity. One example is Rexnord, a midsize bearings and couplings manufacturer that introduced a digital productivity platform to help customers maximize production uptime and lower maintenance costs. Such platforms, which are still complementary to the traditional business model, have helped companies experience the benefits of asset-light, “as-a-service” business models that enable revenue growth without traditional levels of capital investment.

On the cusp of so much change, companies need to take a closer look at their corporate structure and business models to ensure they align with the long-term strategy of the business and will be adaptable in the transforming industrial ecosystem.

Online marketplaces and direct-to-customer e-commerce business models are almost table stakes in today’s environment. Midsize industrial companies that have not developed their online delivery and data-capture capabilities are consequently forgoing huge market potential. According to Forrester Research, U.S. business-to-business e-commerce transactions are expected to reach $1.8 trillion by 2023. The industrial buyer will increasingly be a millennial, and as the “typical” buyer changes, so does the business sales process.

On the cusp of so much change, companies need to take a closer look at their corporate structure and business models to ensure they align with the long-term strategy of the business and will be adaptable in the transforming industrial ecosystem.

Here are some questions that may help leadership teams assess their readiness for change:

• Does the company have access to relevant data and insights to help determine which markets and products it should be investing and operating in?
• How can the company capitalize on the direct-to-customer trend with online sales and distribution capabilities? How can the organization glean better customer insights from such online capabilities?
• Has the company performed thorough due diligence in evaluating all operational, financial, market and strategic considerations when selling or acquiring business units?

Any decisions around corporate structure or business model will have both pros and cons. While no decision is foolproof, what is important is the intentional thought process that takes into consideration long-term goals and objectives, industry and sector trends, and the realistic investments and resources needed to realize expected benefits.

INSIGHT ARTICLE  |  November 12, 2021

The technology ecosystem has continued its strong performance as deal-making, fundraising and exits have either established, or are on pace to establish, new records. Here is a detailed look at private equity and venture capital fundraising and deal-making, as well as an overview of the state of the public markets for TMT companies.

The pull forward of productivity-enhancing technologies by enterprises, continued innovative progress in areas like health care, finance and education, and the promise of frontier technologies and space, electric and autonomous vehicles continue to provide fertile investment ground for PE, VC and corporates that have an abundance of capital. As technology becomes essential and forms the core of every business and business model, our analysts expect the growth trends of fundraising, investing and exits to continue for many years to come.

Venture capital: Venture fundraising is showing no signs of a pullback, with 503 venture funds closing through the end of September and more than $97 billion raised. That amount has already eclipsed the total raised during 2020, a record year for VC fundraising, by more than $15 billion. A primary driver of the growth is the number of VC firms closing $1 billion funds and the frequency at which they’re doing so. This year has seen 19 such funds close to date, raising more than $42 billion in capital, and 41 billion-dollar funds have closed since the start of 2019, raising a total of nearly $84 billion.

The explosive growth in venture funding and the availability of capital for technology startups is driving smaller-tier firms to specialize in niche investing strategies, while companies at all stages of the fundraising cycle continue to see larger and larger median deal sizes. We expect this strong growth in overall VC fundraising to contribute to continued record deal-making for both early-stage and late-stage VC-backed tech companies. Data tracked by PitchBook reveals that tech has accounted for more than 80% of all VC deals in terms of deal value since 2014.

Fresh investing rounds and promising economic conditions have led tech companies to return to pre-pandemic spending and increase cash burn rates for the first time since the start of the pandemic, when spending was quickly pulled back to preserve what cash was then available for as long as possible. For example, a recently published study from Silicon Valley Bank showed that cash runway has decreased from 45 to 36 months for fintech companies, and from 41 to 34 months for enterprise software businesses.

We expect venture fundraising and deal-making to remain robust and active well into 2022 as the technology to provide innovative solutions in sectors like energy, security, finance, health care and enterprise software continues to show promise. High-growth technology companies continue to be well received in the public markets and serve as targets for mergers and acquisitions by large corporations. All of these factors contribute to the robust environment VC and technology companies are currently experiencing.

Private equity: Private equity firms have taken a fond interest in technology companies and the possibility for outsize returns. Historically, firms have achieved those returns primarily in the form of controlling stakes in the companies they invest in, but a recent trend has seen private equity participating in more than 50% of all venture capital deals by total deal value through the first half of 2021, up from just 37% in 2018. According to data monitored by PitchBook, total fundraising by private equity in growth and expansion funds, which typically focus on making minority, venture-like investments, has eclipsed the record set in 2019 of $39 billion in total fundraising. So far, through the end of the third quarter, 55 growth funds have closed this year, raising nearly $44 billion in capital to deploy as minority investments into the tech ecosystem. This year has seen a sharp uptick from 2020, which saw 58 funds close and $27 billion in capital raised. Private equity’s growing participation in venture-backed companies has been a leading contributor to the increase in median deal values across all stages of venture funding, especially late-stage VC.

Additionally, PE has continued its focus on investing in software companies, as total deal counts and deal values through the first half of the year are on pace to surpass the total investment amounts seen in the previous three years. The years 2018 through 2020 saw total PE investment in software companies nearing $100 billion per year, and the first half of 2021 saw nearly $61 billion invested across 407 deals.

Public markets: The public markets—both initial public offerings and special purpose acquisition company transactions—are enjoying a strong year, with technology startups utilizing their growth capital to build business and generate revenue totals that have led to record valuations. According to a study from Silicon Valley Bank, seven of the 25 largest VC-backed tech companies to go public since 2000 have done so this year, and 17 of those IPOs have occurred since the start of 2019. PitchBook data shows that the median revenue of VC-backed technology IPOs this year has grown to $233 million, attracting record-high median valuations at 18.5 times revenue. Altogether, 2021 has seen 34 TMT IPOs or direct listings completed, with the likes of Robinhood, Toast, Duolingo, Coursera and Marqeta all completing their public listings since the start of the year.

SPACs also continue their pursuit of TMT companies, and the same data from PitchBook shows that 31 TMT companies have completed reverse mergers with SPAC vehicles since the start of the year.

We expect IPO and SPAC activity with TMT companies to remain strong through the end of 2022, aligning with the 18- to 24-month time frame for SPACs that had their IPOs during the 2020-2021 craze—which spawned nearly 700 empty shell companies that raised $210 billion in total capital. VC- and private equity-backed TMT companies, especially those that have experienced revenue and customer growth through the pandemic, will have options to evaluate as they contemplate a liquidity event for their investors and employees.

INSIGHT ARTICLE  |  October 29, 2021

For years, the labour shortage has challenged many Canadian contractors’ ability to be shovel-ready.

According to the second quarter 2021 Job Vacancies Report by Statistics Canada, vacancies in the construction industry increased by 46.7 per cent, from the second quarter of 2019 (this is the highest number of vacancies since 2015). The majority of the vacancies are in the specialty trades and buildings sectors.

While vacancies increased, so too did building demand. According to the same report, “total investment in building construction increased 7.3 per cent in the second quarter of 2021. “The Q2 2021 Canadian Survey on Business Conditions also noted that the construction industry is expected to face workforce challenges like retention and overall, labour shortages.

“And that’s not new,” according to Cyndi Mergele, a senior director in RSM’s national construction practice. “You’ve got an aging workforce. You’ve got jobs that are never filled. And the labour demand is driving wages higher.”

We spoke with Mergele about how contractors can get creative and appeal to new talent.

Q: What’s the biggest challenge of attracting new talent for contractors?

CM: Part of the challenge is around benefits and the work experience. If we are going to compel students to forgo college in exchange for the construction trades, then the perceived value beyond wages has to be more comparable to what a college education and professional career look like.

For example, vacation benefits. Many contractors still don’t provide paid time off. If I’m talking to my buddy who just graduated from college, got a job, and now they’re going to get two or three weeks of vacation a year, and I’m thinking about the trades, it’s tough. Yes, I can make money—but if I don’t work, I don’t get paid. That wears thin over time.

Q: How can the industry improve this?

CM: That’s where union shops have an advantage, because whether it’s vacation, sick leave, pension or retirement, it’s generally been bargained. Regardless of how you may feel about an open shop or a union environment, is the benefits are being negotiated for employees.

I think that’s one challenge. The other is that there isn’t always a clear career path progression for skilled-trades professionals in construction companies.

Q: Meaning promotion?

CM: Advancement and growth. Promotion is one way, but people can also grow in their roles. There should be an opportunity to have progression in your career earlier and more effectively.

It’s a vicious cycle when companies, including human resources teams, have to spend exhaustive hours and resources to fill positions. Maybe we need to refocus the strategic effort on what can we do to enhance the long-term employee experience—perhaps through compensation, benefits or career development—so we can negate the turnover and enhance the quality of hire.

Q: What can contractors learn from one another?

CM: Many specialty trade contractors have apprenticeship programs. These can provide a clear line of sight to wage progression and training progression. You can say, “I started as an apprentice and within X number of months, I will be 25 per cent of the way through the training program, and I’ll get 25 per cent of the journey level pay.” People clearly see their path.

Companies should take advantage of those apprenticeship programs. In trades where there’s licensing, contractors are more likely to have those programs.

But I think the question is if a trade doesn’t require journey level positions, why couldn’t they mirror something similar? Structure a program in terms of training and pay to mirror an apprenticeship program. That shows employees where they can go.

Q: Have any niches of the industry handled the labour crisis well?

CM: Communities that have earlier outreach to high school students—such as construction trade high schools or partnerships with technical colleges that have construction trade programs—are showing some results.

It’s harder in communities that don’t have these programs. For years, it’s been communicated to kids that the pathway to success is a college degree. And they have college fairs, college day and night programs. We, as an industry, should be participating in similar events to include high school vocational jobs. It’s crucial to get in front of these kids as early as possible. When they’re contemplating what’s next after high school and as a senior in high school, it’s probably too late.

Imagine all the kids that are working in jobs that may not be their lifelong dream—working in fast food, for example. Why wouldn’t we get in front of them to say, “Instead of thinking about a short-term job, why not think about a long-term career?”

Q: Have any types of companies shown themselves to be adept at winning over new talent?

CM: Larger companies have some resources, but I’ve seen smaller companies that have been creative and successful. Regardless of size, they’re able to communicate the value proposition to working—maybe just not in the industry, but for their companies. Maybe it’s around their culture, their approach to developing their employees, or maybe they just pay better.

As an example, the president of a company I know started as an entry-level technician and tells the story of their journey. Imagine you’re 18 years old, starting in a blue-collar, entry-level position, and 30 years later, you’re president of the company. That’s inspiring.

Q: What’s the biggest lesson contractors must take from the labour shortage, regardless of what kind of shop they are?

CM: Something has to change. Somebody needs to dare to be creative. We can’t be afraid of the higher-wage earners in construction being those team members in the field. Everybody’s position is valuable, but the folks in the field are the lifeblood of a construction company.

And on creativity, contractors should offer a compelling alternative for employees, especially when they’re having to work in the elements. You are going to have days where it’s hot, you’re going to have days where it’s cold, you’re going to have days where it’s wet, where it’s icy. What compels people to say, “This is a really good job”?

If I can help people understand the lifestyle they could have in entering a construction career, it would definitely change the landscape.