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analysis

GFL trucks at the Solid Waste Transfer Station in Toronto, on Aug. 18, 2020.Melissa Tait/The Globe and Mail

Frothy equity markets have spurred a rush of initial public offerings, and the frenzy is helping investors gloss over one crucial piece of information: Many of the newly traded Canadian companies lose money. Sometimes, in fact, lots of it.

In the second half of 2020, Canadian companies including Nuvei Corp. (NVEI), MindBeacon Holdings Inc. (MBCN) and AbCellera Biologics Inc. (ABCL) have gone public, their deals often met with spectacular investor demand.

Montreal-based Nuvei, which handles payments, originally set out to raise US$600-million in September, but ultimately raised its total haul to US$805-million because the deal was 20 times oversubscribed. Vancouver antibody developer AbCellera Biologics initially hoped to raise US$200-million in December, but ultimately sold US$483-million worth of shares.

The new stocks have often soared after they started trading. Nuvei went public at US$26 per share and closed on Dec. 23 at US$57.66, giving it an US$8-billion market value. Dye & Durham Ltd. (DND), which provides software for legal and business professionals, listed its shares at $7.50 each on the Toronto Stock Exchange in July, and the stock closed at $50.91 on Dec. 23.

With North American equity markets trading around record highs and interest rates next to zero, it is understandable that investors are hungry to own stocks. Yet this fervour for IPOs raises questions as to whether investors even care about profits anymore.

Nuvei lost US$126-million in the first three quarters of 2020, while AbCellera posted a US$4.7-million loss from operations over the same period. Toronto’s MindBeacon, which provides mental-health therapy over the internet, lost $6.5-million over the same three quarters.

The appetite for money-losing companies hearkens back to prepandemic days. Right before COVID-19 erupted, GFL Environmental Inc. (GFL) raised $2.95-billion in one of the largest IPOs in Canadian history – but the company continuously loses money. As a serial acquirer, GFL is more focused on purchasing revenue than on profit, leading to a $508-million loss over the first three quarters of 2020.

Even some stars of the 2019 IPO class have made their names without ever focusing on profit. Lightspeed POS Inc. (LSPD), another payments provider and one of Canada’s software darlings, lost US$53-million last year and another US$40-million over the first six months of its current fiscal year.

The investor craze partly stems from a venture-capital mentality that has bled into public markets. Venture capital backers typically fund companies in their early days, and they are happy to accept early losses because there is an expectation of future profits. This way of thinking has helped the likes of Uber Technologies Inc. (UBER) thrive in public markets with a US$97-billion value, even though the company has lost US$14.6-billion over the last five fiscal years.

Another culprit: “There’s so much money in the system,” said John O’Connell, chief executive officer of money manager Davis Rea. There is cash everywhere these days, and money managers often want to park it in a new home.

At the same time, he said, “particularly in Canada, there’s such a dearth of [public] investment opportunities.” Three sectors used to dominate the TSX, but energy has been a disappointment for years, metals and mining is highly cyclical, and the composition of the financials sector has barely changed.

Many of the new IPOs, meanwhile, have a tech or biotech angle, and those are the hot sectors in Western markets right now. Throughout history, investors have shown a propensity for throwing money at bright and shiny new things. When Groupon Inc. (GRPN) went public in 2011, the company was expected to forever change the way businesses sold access to events and daily deals online. It’s now an afterthought.

For the new class of IPOs, it is too soon to know which will thrive and which will fail. With the cost of debt so affordable, companies can easily borrow money to fund new deals that give them longer lifelines – even if no profits materialize in the near-term.

“Some will survive,” said Bruce Murray, CEO of the Murray Wealth Group, “and, probably, most will lose.”

But convincing investors of that can feel impossible. The reason why, Mr. Murray said, is that “losers are quickly forgotten.”

“I don’t know when it ends,” said Mr. O’Connell of Davis Rea. “We are in the teeth of a frenzy.”

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