For the past couple of summers, I've taken a look, midyear, at how the initial public offering market is shaping up for investors – not just the volume of deals, but how the stocks have done.
This year, I got nothin' for ya.
Well, not quite nothing. There have been a handful of tiny IPOs here in Canada, but we're well behind last year's pace. The folks at PricewaterhouseCoopers say just $1-million has been raised by two companies, compared with $1.4-billion from 13 new issues in the first half of 2015. It's been the lowest half-year total for capital raised "in recent memory." (Because PwC disregards certain types of corporate structures and transactions, it left the $109-million June IPO of Mainstreet Health Investments off its list. It considers it a reverse takeover instead.)
The climate in the United States is not quite as barren, but it's off sharply as well. According to Renaissance Capital, a firm that tracks IPOs, 42 U.S. IPOs raised $6.2-billion (U.S.) so far this year, versus the 104 IPOs that raised $18.4-billion in the first half of 2015.
This news may not surprise you, given the nature of the markets in 2016. Certainly there was little chance of energy-industry IPOs this year, given the doldrums of oil. Yet the overall macro uncertainty caused by oil's fall bled through to almost all other sectors.
Why does this matter, except for investment bankers angling for a bigger year-end bonus? Because I've found, in looking at IPO performance for several years, that the conventional wisdom that IPOs are a sucker bet isn't necessarily true.
Using data from Bloomberg, I've tracked new-issue returns not just from the IPO price, which few retail investors can obtain, but also from the first-day closing price. What I've generally found – and to be clear, this isn't as robust as the conclusions of an academic study – is that the first wave of IPOs in a market on the upswing tends to outperform the broader indexes. In 2015, a breakout year for Canadian IPOs, 12 of 18 outperformed the S&P/TSX composite – using the IPO's first-day close as our base – per the Bloomberg data. Five beat the index by a full 10 percentage points or more.
In the United States, by contrast, 63 per cent of the 209 IPOs of 2015 underperformed the S&P 500 index from their first-day closing price, which I attributed to an aging U.S. bull market. In 2012, more than half outperformed the index, with more than a quarter of the offerings beating the S&P by more than 10 percentage points. The good news continued in 2013, then began to deteriorate.
This is sad because 2016 could've have been a follow-on year of successful returns for Canadian IPOs, given that we seemed to be in an "up" cycle, one in which we'd broken free of the sector-driven environment where a boom in gold or oil was required for robust IPO numbers. There are certainly interesting names on deck that could have confirmed that: Health-care software provider PointClickCare Corp., retailer Shoes.com, marketing software firm Vision Critical and real-estate information provider Real Matters Corp. have all either filed for an offering or made noise about doing so in 2016.
Alas, if the global macro environment is the driver, rather than company-specific factors, ordinary investors may not see these names on the Toronto Stock Exchange until 2017, if ever. Mortgage lender MCAP, about as pure a play on Canada as can be imagined, axed its IPO at the end of last month on the Brexit news.
"I think we're going to have a weak IPO market this year," said Dean Braunsteiner, national IPO leader at PwC. "I don't see anything on the horizon that would lead me to believe there's going to be the resurgence we've seen the last couple of years, where you've had one or two weak quarters, but there's one or two big IPOs in the pipeline waiting for timing."
He added: "There was a lot of optimism around the tech sector, but it looks like a lot of the tech companies are finding the money they need from private equity at the moment, so they're not rushing out to IPO."
One might think the hot performance of the mining sector in the first half of the year might at least lead to some IPO action in the second. But, perhaps to be obvious, for a company to go public, it has to exist in the first place, and there may not have been a terribly large number of start-ups in the past few years when the precious metal was on a pronounced downswing.
"There just isn't an appetite for investors to invest in those junior upstart companies," Mr. Braunsteiner said. "It's too risky, and there's an overhang from the companies that haven't been able to make it in the last couple of years."
Sad news for investment firms and their well-paid bankers. But also disappointing for the retail investor, who has fewer names from which to profit.
David Milstead