Canada’s IPO market dries up as young companies look to private capital

When Toronto-based software company Docebo Inc. started trading on the Toronto Stock Exchange last week, it marked the end of a drought that saw zero IPOs on the senior exchange for seven straight months.

That’s the longest dry spell since 2016, when there were just three new issues over the entire year.

“This is a huge problem,” said Tom Caldwell, chairman of Caldwell Financial and a past governor of the TSX. “Newer enterprises are where the vibrancy of an economy comes from.”

The Canadian IPO market has been generally declining for more than a decade, a trend that poses a threat to the long-term health of the country’s public markets, according to some researchers and Bay Street veterans.

For many entrepreneurs, going public does not have the same allure it once did.

The expense and time required to fulfill the regulatory requirements of a public listing have risen considerably over the years, said Ari Pandes, an associate professor at the University of Calgary’s Haskayne School of Business who has studied Canada’s IPO market.

And companies that fail to produce smooth quarterly earnings risk incurring the wrath of shareholders, putting an emphasis on short-term financial results.

“Being a public company has become much more difficult, and management teams face a lot more pressure and scrutiny,” Prof. Pandes said. “They have to spend a lot more time on investor relations, rather than running their businesses.”

At the same time, the proliferation of private financing options has afforded startups the luxury of deferring an IPO, or taking a pass on public markets entirely.

North American private-equity and venture capital companies controlled US$1.7-trillion in assets as of the end of last year, according to McKinsey & Co.

Ready access to private capital has contributed to a thinning out of the public company ranks.

There were 795 corporate listings on the TSX at the end of August, which is down by 35 per cent since 2008. At the same time, exchange-traded funds and other structured products have flourished and are on the verge of outnumbering operating companies trading on the country’s largest exchange.

What researchers have described as a “systematic decline” of public equity markets is not limited to the Canadian market. In the United States as well, fewer IPOs combined with mass delistings, largely through mergers and acquisitions, have shrunk the roster of publicly traded stocks in recent years.

While many younger companies can find all they need to grow and thrive in the private realm, most investors lack the means or sophistication to access private investments.

“One of the most important aspects of public markets and IPOs is that regular retail investors can partake in the business growth of young startups,” Prof. Pandes said.

With private equity increasingly displacing stock exchanges, more and more Canadian success stories will be beyond the reach of the masses.

“That’s a real cost for the Canadian economy. You could see inequality widen,” Prof. Pandes said.

The financial ecosystem supporting smaller Canadian stocks has declined alongside the population of Canadian listings.

Dozens of boutique brokerages have either folded or been swallowed up by larger competitors in recent years in Canada. And there are far fewer equity analysts or fund managers focused on the smaller end of the market.

As a result, many companies too small for inclusion in the biggest indexes are ignored and undervalued, Mr. Caldwell said. “Public markets are not ascribing proper valuations to a lot of mid-sized and smaller companies.”

Even as the total number of stocks declines, however, the total market value of those companies continues to climb.

Since 2008, the size of the average company on the TSX has risen from about $1-billion to $3.6-billion. And total market capitalization as a proportion of Canada’s GDP is at a record high, said Loui Anastasopoulos, TMX Group Ltd.'s president of capital formation for equity markets.

“There are fewer companies, but there is still a lot of strength in public markets.”

Those public markets could again become the preferred venue for smaller companies that have been nourished on private capital, Mr. Anastasopoulos said. “I think we're coming out the other side of that trend. These companies will require an exit.”

In recent years, however, a large majority of Canadian venture capital investors have chosen to exit investments via mergers and acquisitions, which accounted for 163 deals since the of 2015, compared with just 12 exits to the public market via IPO or reverse takeover, according to data from the Canadian Venture Capital and Private Equity Association.

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