March is traditionally the start of the IPO season.Christopher Katsarov/The Globe and Mail
A red-hot IPO run went stone cold in recent weeks, with an anemic stock-market performance and war in Ukraine halting what had been a record-setting pace of public debuts.
With a long list of Canadian and U.S. companies now postponing plans for initial public offerings, investment bankers say business owners will look at alternative sources of funding, such as venture capital, private equity and credit markets, to raise money or cash out.
Going into this year, U.S. social-media platform Reddit and driver-assistance pioneer Mobileye were preparing multibillion-dollar IPOs. Before President Vladimir Putin’s decision to invade neighbouring Ukraine, 10 Russian companies were planning IPOs, Reuters reported. All these planned public listings are now on hold.
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Canadian debuts were in the works at Vancouver-based online furniture retailer Article, legally known as TradeMango Solutions Inc., along with software company Hootsuite Inc.
Calgary-based Circle Cardiovascular Imaging Inc. also planned to go public this year. In a January e-mail to The Globe and Mail, chief executive Greg Ogrodnick said an IPO was “off the table for now, but we are ready when the market is ready.”
He said that as an alternative to tapping public-market investors, the medical-software company is also considering raising private capital, after tapping its existing investors last fall for $10.6-million in fresh funding.
Traditionally, March is the start of the IPO season, as companies planning to go public beef up their regulatory filings and presentations for investor road shows with fresh annual financial results.
“IPO activity has been weighed down by poor returns and volatility, grinding to a halt in late February,” investment bank Renaissance Capital LLC said in a report published on Friday. The IPO shutdown comes after Canadian companies raised a record $9.1-billion in 50 IPOs last year, according to data service Refinitiv. There were 397 offerings worth US$142.4-billion on U.S. exchanges, setting new highs for the number and value of market debuts.
Investors have lost interest in IPOs in part because the majority of companies that went public performed poorly, according to Renaissance’s data. Share prices for more than two-thirds of IPOs launched in the past two years are down 50 per cent or more from their highs.
Many recent and planned IPOs come from growth sectors such as technology and health care, where valuations have been falling in recent months. The tech-heavy NASDAQ index moved into bear market territory last week, down more than 20 per cent from record highs set last fall.
Right now, the mindset among investors is to hunt for bargains among existing public companies, rather than risk money on IPOs, according to Renaissance. However, the investment bank said there are “ample IPO candidates ready to take the leap once conditions improve.”
For business owners who were considering IPOs as a way to cash out – including entrepreneurs from the baby-boom generation – selling to a private-equity fund is now likely to be an attractive way to exit, said Kim Furlong, chief executive of the Canadian Venture Capital and Private Equity Association (CVCA).
“Almost 60 per cent of Canadian small and medium-sized enterprise owners are at or heading toward retirement,” Ms. Furlong said in a recent report. The CVCA study found that a significant portion of these entrepreneurs expect to sell to outsiders, including public-market investors, rather than family members. Ms. Furlong said: “Private equity plays a role in succession planning.”
Private-equity funds typically generate a significant number of IPOs as they exit holdings. With public markets shut, Ms. Furlong said private-equity investors will shift to selling businesses to strategic buyers, such as industry rivals, or tap Canada’s growing secondary buyouts market, where private-equity fund managers cash out institutional investors that want to exit a holding, then continue to own the business with new partners.
Last year, Canadian private-equity funds raised $1.9-billion from selling six companies through IPOs, according to the CVCA. Private-equity owners pulled in more money – $2.1-billion – from 12 secondary buyouts, and even more cash – $2.5-billion – came from 64 exits of holdings through mergers and acquisitions.
In the past, small tech companies and other knowledge-based businesses often looked to IPOs for capital because Canadian banks were unwilling to lend money to owners who lacked hard assets, such as real estate, to pledge as security.
In contrast, as IPO markets freeze up this winter, the big banks are far more willing to lend to asset-light growth companies, after broadening their credit offerings in recent years. CIBC led this evolution, acquiring tech-focused lender Wellington Financial in 2018 and rebranding the platform as CIBC Innovation Banking. Since the beginning of the pandemic, the CIBC division extended new loans to more than 50 growth companies.
With a report from Sean Silcoff
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Andrew Willis