If we told you at the beginning of 2015 that oil would tumble back below $50 (U.S.) for the second half of the year, and gold would continue its multiyear slump, would you also believe that Canada would end up with a healthy IPO market, with a handful of indisputable winners for investors?
The fact that this is the way it's turned out is testament to a Canadian initial public offering market that has become diverse and mature, satisfying what has become strong demand from investors for new issues.
"It shows Canada isn't just a one-trick pony," says Dean Braunsteiner, national IPO leader at PricewaterhouseCoopers in Canada. In the past, he says, "if it's not related to oil and gas or mining, there is no market." Now, "I think we've demonstrated over the last couple of years that there are a number of other industries such as high tech or the financial sector."
There were 18 IPOs on the Toronto Stock Exchange, according to the data prepared by Bloomberg for The Globe and Mail. We exclude stocks that began trading on smaller exchanges, such as the TSX Venture, as well as investment funds and partnerships that are selling units rather than shares. Other IPO analyses – like PwC's, which will be released next week – may use different criteria, so their numbers may differ.
To evaluate how IPOs did for investors, both in Canada and the United States, we look at not just their absolute gains, but also how they did against the major indexes to see whether investors would have been better off just buying a passive mutual fund instead. We also look at returns both from the offering price – which the ordinary retail investor often can't get in on – and from the closing price on the first day of trading.
The results for 2015 suggest Canadian investors were able to get in on a number of winners. There were 12 IPOs that outperformed the S&P/TSX composite, led by toy company Spin Master Corp., whose 20-per-cent return from the first-day close on its July 22 debut was nearly 30 percentage points better than the 9-per-cent loss of the composite over that period.
Other IPOs that beat the index by a full 10 percentage points or more from their first-day closing prices included credit card maker CPI Card Group Inc.; Sleep Country Canada Holdings; miner TMAC Resources Inc. and Fairfax India Holdings Corp., an offshoot of Prem Watsa's Fairfax Financial Holdings Ltd.
Canadian-owned CPI Card Group, which chose the TSX as its primary listing despite its U.S. headquarters, was the top IPO in absolute return, having gained 47.5 per cent from its October offering price of $10.
The year saw a good industry mix, from technology to restaurants and retail, one real estate investment trust in Automotive Properties REIT, and utility Hydro One Ltd., Canada's biggest IPO in more than a decade at $1.83-billion. The offerings also represented a mix of equity types, as investors bought into Hydro One for a stable and healthy dividend, but also bought into companies for their growth stories.
"Certainly there is a requirement for the companies who are looking to go public that they're high-quality, mature businesses, as there's certainly a lot less appetite for higher-risk IPOs, such as coming from the extractive industries of oil and gas and mining," said PwC's Mr. Braunsteiner.
The exception: The year also saw five debuts from "special-purpose acquisition companies," or SPACs, which raise money first and promise to buy an existing business later. While the format has existed in the United States for some time, it arrived with a splash in Canada in 2015.
While the five have returned between 3 per cent and minus 3 per cent since their offerings, S&P/TSX Composite underperformance during the year means three of the five – INFOR Acquisition Corp., Dundee Acquisition Ltd. and Alignvest Acquisition Corp. – have beaten the index by double digits.
"It's a bit of a testing ground at the moment.… We'll sort of cautiously wait and see what the results are like to see if this type of an industry has any legs and if there's a future for it in Canada," Mr. Braunsteiner said.
The United States, of course, has an IPO market many magnitudes larger than Canada's. There were 209 IPOs on the major exchanges, Bloomberg data show, down from 265 in 2014. And they did a bit worse than last year's class: 131, or almost 63 per cent, underperformed the S&P 500 index from their first-day closing price. In 2014, 60 per cent underperformed. (In 2013, the opposite occurred: More than half of the 200-plus U.S. IPOs beat the S&P 500 from their offering price.)
The declining IPO numbers, both in terms of the number of offerings and performance, are not surprising in the context of an aging U.S. bull market, which gained for six successive years before ending essentially flat in 2015.
The story of the 2015 U.S. IPO market shifted over the course of the year; biotechs started the year hot, continuing a multiyear pattern, but cooled as the year went on. (Allegations of drug price gouging and the troubles of Valeant Pharmaceuticals in the fall were unhelpful.) Health-care stocks occupy a number of the spots among top performers, but also a slice of the worst performers, illustrating again the volatility of the sector and how company-specific factors drive returns in the biotech/pharmaceutical space.
The U.S. IPO market also cooled off considerably after market declines in August prompted a number of companies to postpone or cancel offerings. "The market was very tumultuous," says Francis Gaskins, an IPO specialist and research director at Equities.com. "When that happens, people take their money off the table just about as quickly as they can."
David Milstead