Large initial public offerings (IPOs) in the U.S., and many on deck, have raised speculation that the IPO drought in Canada may soon end.
Canadian exchanges saw 19 IPOs in 2023, down from 42 in 2022, according to EY’s year-end 2023 Global IPO Trends report.
Most of the IPOs in the last two years were on junior exchanges, with the Toronto Stock Exchange (TSX) big board only featuring one IPO in each of 2023 and 2022, according to EY.
“This level of IPO activity is unprecedented on the TSX over the last two decades,” EY said to highlight the extremely low level of IPO activity on Canada’s largest stock exchange.
“Poor performance of the pandemic IPOs has resulted in many of them being taken private at values lower than their IPO price, which is influencing companies’ IPO plans,” EY said.
Recent activity south of the border, however, has many anticipating that the tide may be changing.
When Amer Sports (NYSE:AS) shares started trading Feb. 1 in an IPO that saw the company value itself at about US$6.3 billion, one Vancouverite was watching from the New York Stock Exchange (NYSE) stage: Lululemon Athletica Inc. (Nasdaq:LULU) founder Chip Wilson.
Wilson in 2018 teamed up with China’s Anta Sports Products Ltd. to buy Finland-based Amer Sports as part of a joint venture. He invested the equivalent of $807 million to acquire a 20.65-per-cent stake in the company known for brands such as Wilson, Peak Performance, Salomon, Atomic and Vancouver-based Arc’Teryx, among others.
Wilson’s 79 million shares in Amer were worth approximately US$1.027 billion at the company’s US$13 opening price, which was below the US$16-to-US$18 per-share IPO pricing range provided by the company in January.
Amer Sports' shares today ended trading at US$14.55.
Wilson is not looking to exit his position.
His faith in the company is strong enough that a revised Amer Sports prospectus said Wilson planned to buy an additional US$220 million of stock as part of the IPO.
Because Wilson’s original shares were not part of the IPO, he would not be able to sell them on the NYSE, Leith Wheeler CEO Jim Gilliland explained to BIV.
He may, however, find that his shares are more liquid because the public market would set a value on them. Wilson could then, theoretically, go to a bank or venture capital firm and have that institution buy his shares. Amer Sports could also do a secondary offering if a pre-existing shareholder wanted to sell a large block of shares, Gilliland said.
Amer Sports raised about US$1.37 billion in the IPO and said it planned to use proceeds to repay existing shareholder loans, and generally expand operations.
Amer Sports is one of many large companies that have recently filed to go public in the U.S., but it remains unclear whether that flurry of interest south of the border will eventually extend to Canada.
Some of the large companies that have filed to go public in the U.S. include the social-news aggregator Reddit, canned-food giant Del Monte, bakery-café Panera Bread, and mobile-focused ticket platform SeatGeek.
Recent IPO disappointments, however, cast doubt on how strong of an appetite global stock markets have for newly public companies.
BrightSpring Health Services Inc.’s stock (Nasdaq:BTSG) went public on Jan. 26 at US$13, which was below the US$15-to-US$18 range first proposed. Shares then ended the first day of trading at US$11. The company was left with a US$2.2 billion valuation.
European auto giant Renault SA (EPA:RNO) three days later cancelled the planned IPO of its electric-vehicle division Ampere.
“We certainly have a number of clients who are sort of lining up to access the market when the market turns,” said Vancouver-based McMillan LLP partner Cory Kent, who focuses on securities law.
“I think it will turn in Canada but we’re usually behind the U.S.”
Timing is everything
Corporate executives are most likely to risk taking their companies public when stock markets are strong and capital is widely accessible, according to various people in the industry.
Neither was true in 2022.
North American stock markets had a disastrous year, with the S&P 500 dropping 19.44 per cent and the TSX dropping 8.66 per cent.
This was also the year central banks began hiking interest rates. The Bank of Canada wound up raising interest rates 10 times, to the current rate of five per cent, before announcing four consecutive pauses.
Things turned around in 2023, with the S&P 500 gaining more than 24 per cent, and the TSX rising by nearly eight per cent.
Another positive sign for IPOs was that debate in investment circles at the end of 2023 began to centre on how many interest-rate cuts central bankers would make, instead of whether they would start to make cuts.
“The hike cycle is over,” said Stikeman Elliott LLP partner Jared Bachynski. “Now we’re anticipating, if anything, that we’re going to start to see some rate cuts.”
Bachynski, whose focus is capital markets, said he was looking ahead to see how payment processor Stripe and artificial intelligence (AI) and analytics firm Databricks fare in what are expected to be upcoming IPOs in the U.S.
“If those perform well, that may really open up a window in Canada, as well, for tech IPOs,” he said. “That may really present a great opportunity for B.C. tech companies.”
Rob Goehring, the founding chair of BC Tech’s AI C-Council, said he thinks the IPO climate is beginning to look better for firms in his technology niche.
“We’re starting to already see a number of a brokerage firms in Canada return to life,” he said.
“They’re like, ‘OK, there are deals to be done. There are companies that need capital. We need to get in on this AI train.’”
Valuations remain low
The recent reality for technology companies, however, has been that the market is not valuing them as highly as shareholders believe their shares are worth.
BIV asked Markus Frind if it was likely that online furniture seller Cymax would consider going public. Frind, who said he owns about 70 per cent of Cymax, gave a quick, “No,” adding that the company is looking to hire a new CEO.
KITS Eyecare Ltd. (TSX:KITS) CEO Roger Hardy, who told BIV that he also owns shares in Cymax, said: “I’m hoping that at some point the market opens for that business. It would be great.”
Frind, however, said the market is not valuing businesses as well as it was a few years ago.
“Big startups are trading at a 50-per-cent-to-90-per-cent discount” to the last private-financing-round valuation, he said.
Image: Sarah Huggins is co-founder, general council and COO at Hiive, which has a platform that matches buyers and sellers of shares in private companies | Chung Chow
Hiive co-founder and general counsel Sarah Huggins agreed. Her Vancouver-based, 60-employee company has a platform that matches buyers with shareholders in pre-IPO, venture-backed companies.
“Sellers would place orders to sell, or they would list their stock for sale, and buyers would bid, or place standing bids, indicating an interest to buy,” she explained.
Buyers are only provided with publicly available information about the private firms in which they may buy shares and are not given the chance to examine the company’s financial statements.
“There is not the transparent flow of information that there is in the public market, which is why it’s incredibly risky,” Huggins said.
“Neither the seller nor the buyer is the company. These are parties who hold or wish to increase their position of stock in these companies.”
She estimated the average sale price for shares listed on the platform was about 60 per cent of that seen in the most recent private financing round – a discount that many private company shareholders are not willing to take.
Despite this, Huggins said she saw a bit of a turnaround in sentiment late last year, with more buyers coming to the market, indicating that depressed values may be recovering.
The number of bids created per month – versus the number of listings created – rose steadily through 2023, she said. That bid-ask ratio started 2023 at 1.07 and peaked at 1.7 in December.
“This suggests growing buyer activity,” said Huggins.
More buyer interest has also reduced the spread between bid prices and asking prices, making securities more liquid, she added.
“We saw the return of hedge funds and family offices in the late fourth quarter in anticipation of a warming IPO window,” she said. “This has persisted into 2024.” •
