As the Canadian economy emerges from its greatest crisis since the Great Depression, the number of companies seeking to go public through initial public offerings has exploded. While an economic rebound was to be expected, the current resurgence is on pace to reach record levels by years’ end. However, given the unprecedented situation in which the country finds itself, uncertainty abounds. We asked the team at Dentons to survey the current state of the IPO market, give insights into its future, and guide us through the opportunities and perils we should look out for in 2021.
What trends have you seen in IPOs during the first two quarters of 2021? Are there any markets that are particularly thriving or are unexpectedly quiet? What insights do you have into the causes of these patterns?
The resurgence of appetite in the capital markets, domestically and globally, observed in 2020, has continued into 2021. The number of Canadian IPOs announced so far this year already exceeds last year’s figures and, despite mixed results, there remains many active IPOs in the pipeline. It is difficult to flip through the financial press these days without seeing reports of companies going public, including by way of IPO. We have also been receiving an unprecedented volume of inquiries from clients concerning listing requirements and IPO strategies.
In our view, there are several factors fuelling the IPO trend. Raising capital in public markets is becoming less expensive than in private markets. Many retail investors, having spent less during the COVID-19 pandemic, are deploying some of those savings, thus driving more buoyant markets. Increased usage of online brokerage platforms has made participation in capital markets more accessible and has fuelled interest from younger investors seeking high-growth opportunities. Also, low yields on debt and easy monetary policy are making equities more attractive.
Not surprisingly, the technology sector has been one of the areas leading the pack in IPOs during the first half of 2021. As of May 31, 2021, 10 of the 20 TSX-listed IPOs involved technology companies. The COVID-19 experience has changed the way we live and work. Most of those changes are predicated on the adoption and evolution of modern technologies, such as AI, autonomous vehicles, AgTech and HealthTech, which could permanently reshape the future of our economy. Also, many technology companies have already been funded by private equity, venture capital and other institutional investors and are ripe to go public, allowing their investors to reap returns from liquid markets. In addition, we have seen a shift in investor mindset, with investors favouring growth-oriented companies, even if they are currently unprofitable, over traditional blue chip stocks. The strong stock performance of Canadian technology companies, such as Shopify (now the most valuable company in Canada), in recent years has no doubt been influential on this change in mindset.
Have there been any Canada-specific IPO patterns that you have detected that are not found in the wider international market? What advice do you have for clients seeking to invest in newly-public Canadian businesses?
The trends seen in the Canadian IPO market (e.g., increased volume of listings, technology focused) are generally in line with the wider international market. An exception would be that we have not seen as much activity on the SPAC front in Canada compared to, for example, the U.S. It appears that many Canadian issuers have recently opted to go public through the traditional IPO route instead. One reason is that Canada is generally a small-to-mid-market environment, while the SPAC regime caters to larger private companies with more sizable financing requirements. The minimum IPO size for a SPAC on the TSX or the NEO Exchange, for example, is $30 million. On the other hand, our TSX Venture Exchange Capital Pool Company program remains very popular, especially with its streamlined policies that came into effect earlier this year. The NEO Exchange also recently introduced its new Growth Acquisition Corporation program, which is targeted at mid-market growth companies seeking an alternative to a SPAC listing.
It is important for clients seeking to invest in newly public Canadian companies to conduct thorough research by reading the offering documents (including the prospectus and financial statements) and having a clear understanding of the competitive advantage of the business. Many of these newly public issuers have not generated any profits so it is important to pay attention to other indicators of future profitability, such as revenue growth, an experienced leadership team, product/service/operational innovation and any other factors that set the company apart from its competitors. It is also important to set reasonable expectations as many IPOs tend to underperform against benchmark indexes in the short term. In terms of after-market performance, the majority of IPOs announced in 2021 are trading below the IPO issue price. Patience is key.
Do you have any predictions for how 2021 Q3 and Q4 will play out in the IPO market? What is your confidence level in these forecasts, and what signs have you identified that lead you to these conclusions?
Subject to increased vaccination rates across the country, the reopening of major Canadian business hubs and generally getting COVID-19 under control, we are cautiously optimistic that the momentum we have seen in the first half of 2021 will sustain throughout the rest of the year. We already have a number of IPOs in the pipeline set to launch in the near future, but we are also keeping an eye on new issues that have been postponed such as Q4 Inc. Although technology will remain the darling, we will likely see a more diversified group of industry sectors going public.
One potential headwind that we are keeping our eye on, however, is the spectre of rising inflation rates and the economy being overheated as a result of the expansive fiscal and monetary policies adopted since the onset of the pandemic. If inflation becomes sustained, rather than transitory as many are hoping, this could result in central banks raising interest rates and increased market volatility, which would make it more difficult for companies on the verge of going public to complete their IPOs.
What benchmarks will you be alert for as you seek to identify the market’s health and its future trajectory?
Some of the key indicators to identify the IPO market’s health include whether issuers are more commonly reducing their final offering sizes and share prices to complete their IPOs (which was the case, for example, with Boat Rocker Media Inc., MDA Ltd., ABC Technologies Holdings Inc., and Dentalcorp Holding Ltd.) and whether companies are more frequently withdrawing their IPOs and raising money through alternative methods or putting their IPOs on hold (which was the case with Vendasta Technologies Inc. and Q4 Inc.). In general, issuers file their final IPO prospectus (or supplemented PREP prospectus where the post-receipt pricing (PREP) procedures are utilized) and close the offering within a month after filing the preliminary prospectus. If that timeframe widens, that could be another indication of a softening market.
Another marker to gauge the IPO markets is after-market performance, for example, the rates of return delivered by newly listed companies relative to the broader markets. If a trend develops where the share price of a company after its IPO underperforms as against the stock market indexes, this could soften investor demand for new issues. We can also look to the general performance of the stock markets to gauge the future trajectory of the IPO market. Since the lows reached in the spring of 2020, the domestic and international stock markets have been on a strong upswing and the IPO market has followed suit. If markets start trending downwards, that could be a sign that IPO market activity may soften.
How do you anticipate the reopening of Canada’s economy and society will affect the IPO space? Do you expect this to carry on into 2022 and the “new normal”?
The COVID-19 pandemic has undoubtedly posed unprecedented challenges to the IPO space and capital markets generally. The rollout of vaccines and gradual reopening of our economy will fuel optimism in the investing public, and in turn, create more opportunities for IPOs.
Certain changes in the IPO process that stemmed from the pandemic are likely here to stay, notwithstanding the anticipated reopening of the economy. For example, virtual roadshows will likely be the norm, not only for the time and cost savings, but also to protect the issuer from market volatility and pricing strategy disruption. Also, the “new normal” will likely include a more cautious approach with earnings forecasts and guidance. In an IPO, the private company would normally provide a forecast of future performance to financial analysts. However, because of the pandemic and the difficulties associated with providing meaningful insight into future financial performance, many companies have ceased to do so, or limited disclosures associated with same. After the economy reopens, we would expect a more thoughtful and balanced approach to deal with earnings guidance, including with additional assumptions built into disclosure.
Bennett Wong is a partner in Dentons Calgary office. He is the Calgary lead for the Securities and Corporate Finance and Mergers and Acquisitions groups. Bennett advises clients in a wide variety of sectors, including oil and gas, mining, cannabis, agribusiness, chemical, life sciences, healthcare, e-commerce, technology and real estate. He has substantial experience in both domestic and international corporate transactions, particularly in the Asia Pacific region, as well as in public and private mergers and acquisitions (including plans of arrangement, takeover bids and reverse takeovers), securities offerings (public offerings and private placements of equity, debt, hybrid and royalty securities), domestic and foreign stock exchange listings and filings, initial public offerings, going-private transactions, cross-border acquisitions and restructurings, real estate financings, proxy fights, special committees, corporate governance, continuous disclosure and regulatory compliance matters.
Ora Wexler is a partner in Dentons Toronto office. She co-leads the Toronto Corporate group and leads the office’s Securities and Corporate Finance group. Ora advises on public and private capital market transactions and securities regulatory matters, including stock exchange listings, corporate governance, continuous disclosure obligations and other regulatory compliance matters. She acts on behalf of both underwriters and issuers in initial public offerings and subsequent private placement and public offerings. Ora is a member of the Ontario Securities Commission (OSC) Securities Advisory Committee, which provides advice to the OSC on legislative and policy initiatives, and capital markets trends.
Eric Lung is a partner in Dentons’ Vancouver office and lead of the office’s Securities and Corporate Finance group. His practice is focused primarily on corporate, securities and transactional matters, with a particular emphasis on mergers & acquisitions, financings and corporate reorganizations. Eric has assisted public and private companies in various types of transactions, including acquisitions and divestitures, arrangements, public offerings, private placements and joint ventures. In addition, he has comprehensive experience advising clients on a variety of securities law, corporate governance and strategic matters, as well as general corporate and commercial matters. Eric’s industry experience includes mining, cannabis, manufacturing, health care and consumer products.
Danny Wakeling is a partner in Dentons’ Edmonton office and leads the office’s Securities and Corporate Finance group. His practice consists of broad-based transactional work with an emphasis on mergers and acquisitions, capital markets and corporate finance. Danny represents a range of public and private companies in various share and asset transactions, strategic investments, capital raising, and general corporate and governance matters. During the fall of 2016, Danny was seconded to the Office of Mergers and Acquisitions at the Ontario Securities Commission, providing him with critical industry insight that has informed and elevated his practice.