Covid hasn’t slowed capital markets

From traditional IPOs, to reverse takeovers, to CPCs and a growing number of SPACs, there seem to be more options than ever for companies to access public capital markets

Twenty-twenty was a boom year for initial public offering activity in Canada, with more than 70 IPOs completed on Canadian stock exchanges and more than $5.5 billion total gross proceeds raised.

From traditional IPOs to reverse takeovers to capital pool companies and a growing number of special purpose acquisition companies, there seem to be more options than ever for companies to access public capital markets and more reasons to invest.

“It’s been an incredibly busy year, and we’re seeing a flurry of IPO activity so far in 2021,” says Ora Wexler, a partner at Dentons Canada LLP in Toronto. “With so many success stories, it spurs other companies to want to do the same.”

Companies that have launched successful IPOs will often make follow-on offerings, she adds, and investors continue to support those companies post-IPO, “which gives companies even more reason to go public in the first place.”

Why have public markets been so active? There are myriad reasons, say lawyers in the field.

Cost of raising capital

This activity is partly due to popular transaction vehicles such as special purpose acquisition companies. SPACs are companies with no commercial operations that investors form solely to raise capital through IPOs to acquire existing companies. Although SPACs have been around for many years, they have recently become more popular and have raised record amounts of IPO money. As of August, more than 50 SPACs had reportedly been formed in the U.S., raising some US$21.5 billion.

SPACs can be a more efficient and less expensive method of raising capital because “you don’t have to go on a road show,” says Shevaun McGrath, a partner at McCarthy Tétrault LLP in Toronto. The regulatory process in the U.S. is more streamlined, she says, and there’s no concern about attracting public investors because the funds are raised via the SPACs. The process of preparing disclosure documents and receiving regulatory approval is ideally less time consuming and costly.

Caitlin Rose, a partner at Fasken Martineau DuMoulin LLP in Montreal and co-leader of its private equity group, says she doesn’t “ever remember it being quite as busy in the capital markets space. . . . When people have joked about a SPAC attack, it’s definitely been [true] in addition to more traditional capital markets activity. By the end of this year, I expect there’ll be quite a number of new Canadian issuers relative to last year.”

   SPACs are “the senior exchanges’ response to the Capital Pool Company regime,” says Wexler. The SPAC regime allows seasoned corporate directors and officers to lend their expertise to the SPACs they form. If a SPAC can’t find a qualifying acquisition within three years of its IPO and the IPO is then liquidated, the shareholders are entitled to their pro rata share of the aggregate amount then on deposit in the trust account that holds the IPO proceeds. “Because of the strict regulation of SPACs, including with respect to escrow requirements, there is a high level of protection for investors,” she says.

Investors and companies looking for liquidity

Companies seek liquidity in going public, which gives them freely tradeable shares, says Scott Rozansky, a partner at Dentons in Montreal.

Direct listings on public exchanges, as compared to IPOs, can offer even more liquidity, he notes. There are no new shares in the direct listing method of raising capital, and only existing, outstanding shares are sold, with no underwriters involved. In an IPO, says Rozansky, an investment banker can limit an issuer’s liquidity for 180 days by limiting its ability to transfer shares, “but if it’s a direct listing, you avoid that.”

Low spending during COVID-19 and ‘dry powder’

When COVID-19 restrictions first kicked in in March, “there was a momentary stall where investment committees at private equity firms, institutional investment arms, wanted to see where things settled out, and we weren’t sure how long that would last,” says Ally Bharmal, a corporate finance, mergers and acquisitions and corporate/commercial partner at Fasken’s in Vancouver.

The caution was short-lived. “Within six to eight weeks, the transaction flow was incredibly active again,” says Bharmal. First, many private equity firms and institutional investors had a lot of dry powder available and looked for good opportunities to deploy that money. Second, interest rates are low, which creates a market for increased M&A and capital markets activity. Combined, this means “a lot of activity and competition for investing in or acquiring good companies; specifically, what I’ve seen is in the technology sector.”

The tech sector is (still) hot

Many tech companies have benefited from the lockdown environment and have done very well, says McGrath. These include telehealth, delivery services and data security businesses. The latter “were important before we were all locked up at home, but [they] are especially important now” while employees work remotely.

Similarly, in the consumer market, the businesses that could pivot to online sales and some B2B businesses have done well.

“It seems that there have been more windows open in 2020 and 2021 for optimal opportunities to go public,” says Rozansky, citing a combination of the above and the strength of the COVID-boosted technology sector. Payments and fintechs were active because consumers are not using cash and making more purchases online. And, “a bit of a lull in technology companies going public” last year may also mean “there’s a bit of catch-up going on,” he adds.

Valuations for public tech companies have significantly increased since COVID-related restrictions began a year ago, Wexler notes. Consumers are using the internet more for learning, remote health care, shopping — from groceries to clothes to sporting equipment and office supplies — and communicating with others.

“I think there’s a general consensus that these stay-at-home trends will continue,” says Wexler. That’s in part because it will take time before vaccines become widely distributed enough to inoculate most of the population and the economy can fully reopen. “I think there is a widespread belief that even once we’re over and done with this pandemic, companies will increasingly digitize their operations, which inevitably will benefit tech companies — and people are really looking for ways to invest in companies that can capitalize on this.”

Indeed, tech IPOs will likely be “the primary driver this year, surpassing mining issuers, which led all sectors in number of IPOs last year,” according to Dentons’ newly launched Going Public in Canada Resource Centre.

Bharmal also sees good growth on the private equity side for the technology sector.

“We’re seeing this level of activity on the private M&A side that I don’t think has been there for . . . a few years,” he says. They’re called unicorns or, in Canada, narwhals: those mythical or rare beasts that are the billion-dollar deal. Canada has not ranked as high in producing unicorns and narwhals as other OECD countries.

“You’d always hear talk about this in the markets, but you weren’t seeing anything that got close to that on the private M&A side,” says Bharmal. “About 10 days ago, we advised one of our clients, Galvanize, which is a Vancouver-based software company that’s been around for about 25 years now [and has] seen some incredible growth over the last 10 years.

“They signed a deal on Feb. 22 to be acquired based on an enterprise value of US$1 billion,” he says. “So, we have very recently seen a private deal going over that ‘unicorn’ status in Canada, which has been quite incredible. There’s been lots of talk about it, but now it’s actually happening given the buoyant markets we’re seeing.”

Canada’s place in 2021

“I think people like our country and the stability,” says McGrath. In the tech sector in particular, “exceptional talent is coming out of our universities and think tanks. A lot of tech companies have had a harder time recruiting international talent. We’ve had an easier time doing that. . . . Canada has a positive regulatory environment in terms of immigration, which gives our companies, including tech companies, the ability to attract competitive talent. That, according to our clients, is a real draw.”

Fasken’s Rose expects to see the volume and size of deals continuing to rise, bolstered by the many capital options available. When companies “are looking for the next stage of their growth, to either look for additional investment — whether it be from local players or abroad — to sell outright or to go public,” including through a backdoor listing such as a SPAC or reverse takeover, “or doing a traditional IPO — it really presents some nice options for further growth to our clients.”

McGrath says this is an exciting time to be involved in capital markets, “whether public or private, because of the air of creativity among market participants.”

People are thinking outside the box, she adds.

“What will come, we’ll see, but, in the meantime, it makes for a very interesting experience.”