Glimmers of hope are beginning to form among Bay Street market watchers that the long drought of Canadian initial public offerings may finally be nearing its end.
But that doesn’t mean investors should expect it to start raining IPOs anytime soon.
First, the market needs to thaw after being what Bank of Nova Scotia described in a report published last week as “completely frozen” since early 2022, when interest rates began their rapid ascent. Most of the companies that did go public over the past 18 months have “massively” underperformed the broader market, the report found – although that trend has started to change in recent months.
“Recently IPO’d companies have been trading at multiples more in line with their historically high averages,” the report said, rebounding from the “cheap levels” of late 2022.
The uptick became noticeable in April and has since gained enough momentum that “it caught our attention,” said Jean-Michel Gauthier, the Scotiabank market strategist who wrote the report, in an interview. “What we are trying to convey is this could be the start of a reversal of a trend.”
Rob Peterman, vice-president of global business development for Toronto Stock Exchange operator TMX Group Inc., said three factors are driving increased optimism for a stronger IPO market in the months ahead.
First, the IPO market in the United States has already rebounded considerably. For example, shares of Mediterranean restaurant chain Cava Group more than doubled during its first day of trading on the New York Stock Exchange in mid-June despite having already priced its IPO above its expected range. The offering was priced at US$22 a share and closed the June 15 trading session at US$43.78 a share.
Second, Mr. Peterman said there was a “backlog of quality companies looking to take advantage of an IPO window and that cuts across a number of different sectors.”
Third, he said TMX was “seeing more market stability right now and some equity financing momentum on the TSX,” citing a 79-per-cent increase in total capital raised by stock sales in the second quarter compared with the first three months of the year.
“There is definitely reason for optimism, whether the window will open up in September or whether it will be later in the year, we are expecting some companies to test the market,” Mr. Peterman said.
Stephen Kelly, a partner with Norton Rose Fulbright Canada LLP in Montreal and national chair of the firm’s Canadian business law group, said in an interview that September is probably “a little quick” to expect an IPO rebound, but added there is “absolutely” cause for increased optimism.
“You could have a debate over when that window is going to start to open, but I’ve been doing this for long enough that I have seen a number of cycles, and it feels like this cycle is starting to turn,” Mr. Kelly said.
Private companies are starting to think about going public as an option again, he said, “whereas if you talked to them six months ago, it wouldn’t have even been part of the conversation.”
Whether or not any Canadian IPO market rebound is sustainable, however, will be determined by how investors react to the next one or two companies willing to test the market.
“These things are unpredictable,” Mr. Peterman said. “One deal that comes out and either fails or does really well and gets 20 times oversubscribed, that is what is going to determine investor interest.”
One more factor that gives Scotiabank’s Mr. Gauthier hope for an especially strong IPO rebound is the sheer length of the current slump.
“What often happens after a long trough is there are a few companies testing the water and then there could be a flood of IPOs, especially if they start performing well,” he said. “If you have a long trough, you tend to have a bigger upswing.”
Jameson Berkow