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A Toronto Stock Exchange sign decorates an entrance at the Exchange Tower building in Toronto on January 23, 2019.Chris Helgren/Reuters
The Cranberries' song “Zombie” had just been released the last time Canada's IPO market experienced a year as bad as 2023.
Since Lithium Royalty Corp. While LIRC-T was the only notable IPO last year, a recent Bank of Nova Scotia report said it was Canada's “worst year since at least 1994.” Almost three decades later, Zombie was able to adequately express the current state of the Canadian IPO market.
But the nationwide outlook for IPOs in 2024 is perhaps best expressed by the title of another popular song from 1994: Green Day's “When I Come Around.”
Companies that planned to go public in 2023 or even earlier have started redesigning their IPO plans. Buoyed by calmer markets and growing investor confidence, private companies have begun turning to lawyers and bankers in hopes of putting their IPO plans into motion.
“In November and December, particularly in December, we started to see a pickup in this activity among companies looking to be prepared for 2024,” Ramandeep Grewal, co-head of the financial services practice at Stikeman Elliott LLP, said in an interview. “When we were first contacted about six weeks ago I was a little surprised, but a certain pattern is now emerging. There is an expectation that the market will be there.”
Rosalind Hunter, co-head of the capital markets practice at Osler, Hoskin & Harcourt LLP, said that in conversations with bankers who typically handle IPOs, she and her team have “sensed this change in tone where they have a more positive outlook.” the deal activity for 2024.”
Of course, preliminary discussions with lawyers and a more positive tone from bankers are far from enough to guarantee that Canada's long-struggling IPO market will finally recover in 2024. After all, experts have only been predicting an end to the IPO drought since August last year, but these predictions turned out to be premature.
This time around, as consensus builds around the belief that interest rates have peaked and market volatility continues to ease, the ideal conditions are beginning to form for private companies considering an IPO.
“We actually have a great IPO pipeline, but the timing is a little uncertain because IPOs are once in a lifetime for a company and they want to make sure their business is doing well and the economic outlook is very good,” Tyler said Swan, Head of Equity Capital Markets at CIBC Capital Markets, in an interview. “We're moving in that direction, but I think it might take a few quarters for a lot of companies to want to move forward.
“But we will see a significant recovery in the IPO market in the second half of next year and will certainly be very strong after that,” Mr Swan said.
While many of the tech companies that went public during 2021's market frenzy have struggled to survive since then, the tech sector is still expected to lead the eventual IPO recovery. Ms. Grewal said some companies have shifted their business strategies to the point where they “find themselves in a more positive cash flow situation than a typical growth startup technology company.”
“They could be the ideal candidates to stimulate the market when it comes back,” she said.
The S&P/TSX Capped Information Technology Index is up 55 percent year-to-date, a sign that investor interest in the space is returning, according to Rob Peterman, chief commercial officer of the Toronto Stock Exchange at TMX Group Inc.
“What we've seen is that tech companies are working hard to adjust their cash burn as investors moved from demanding growth to demanding better results in terms of EBITDA,” Peterman said, referring to a commonly used acronym for operating profit, which stands for earnings before interest, taxes, depreciation and amortization.
“We believe a lot of IPOs will come from the technology sector,” he said.
The increasing number of equity financing deals in recent weeks is another encouraging sign for the IPO market, Mr. Swan said, as “this type of activity is coming back more quickly.”
At the end of December, for example, Ivanhoe Mines Ltd. closed. Pembina Pipeline Corp. completed a $575 million private placement. closed a purchase agreement worth nearly $1.3 billion and Boardwalk Real Estate Investment Trust (REIT) raised nearly $251 million out of pocket. The Boardwalk transaction involved the full exercise of an over-allotment option, meaning investor demand was stronger than originally expected.
One element of the market that could reduce the chances of an IPO recovery is the extent to which mergers and acquisitions are also recovering. Private companies often pursue a so-called “dual-track” strategy, in which they plan to go public while simultaneously planning to sell the company entirely before committing to either path.
“If history is any indicator, M&A deals typically tend to prevail,” Ms. Grewal said. “The types of multiples they provide and the valuations they use are simply higher.”
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