Bay Street’s astronomical deal flow cause for concern

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These are words no one on Bay Street wants to hear: Watch out, these markets are nuts. When deals sell this easily, it usually means there's far too much market froth.

It used to be that a billion-dollar equity offering was a big event. Yet when Element Financial announced plans to raise $2.2-billion on Wednesday, there was almost no reason to blink. Since January, Canada's capital markets have seen at least six billion-dollar equity offerings, and such gigantic deals now seem almost run of the mill.

Investment bankers often wax poetic about the income trust era, as if it's some long lost sweet spot they'll never get back. In those good old days, underwriting fees were like water, flowing all over Bay Street.

But what we've got going right now is arguably just as good and might even better considering we aren't relying on resources to back stop deal flow.

Element Financial's latest deal proves just how liberal we've become. This was a deal in which the issuer raised funds to help finance a future acquisition, yet no one knew what Element would eventually buy, because they kept their plans a secret. Yet investors were so hungry for the stock that the deal size was increased to $2.5-billion Thursday.

I'm sure buyers assume Element will bid for some GE Financial Corp. assets – something analysts have been speculating about for months – and I'm sure investors feel as though they can trust the company's management team. But even then, we don't yet know what purchase price will be paid for the potential acquisition.

The market for initial public offerings is just as frantic. Fairfax's decision to take Cara Operations Ltd. public created a fervour for more IPOs, and since then investment bankers have stressed that private equity firms are practically begging them to pitch for deals of their portfolio companies. The list of potential IPOs is said to be so long that some bankers haven't seen this level of activity in their careers.

Blame it on the knock-on effect: Now that Shopify's has successfully gone public, for instance, everyone in tech wants a piece of the action – so Hoot Suite said on Thursday that it's considering launching its own public offering much sooner.

This isn't solely an equity market phenomenon. Every January, there is speculation that the last year would be the end of good times for debt issuers because "this will be the year" when interest rates rise. Yet they still haven't – actually, yields mostly keep falling, prompting more companies to issue bonds. Roughly $43-billion of bonds have been sold by Canadian issuers so far in 2015, up from $36-billion at the same point last year.

Let's be realistic: It's hard for any banker or retail adviser to say "no" to a commission dangled in front of their faces. The deals are going to keep coming. But there are practical things underwriters can do, such as price deals appropriately so that new shares and bonds trade well long after they've been sold.

What few people realize is that we create our own market cycles – at some point, everyone from investors to bankers to retail advisers get so greedy they start bringing bad deals, and these kill the market. All we need to do is smooth the cycle out. Because if we don't, a downturn will come, and then bankers will grumble about their bonuses again.

Maybe my words don't mean much. An investment banker I know well likes to tease me and say I'm just a "gossip columnist." But you should at least listen to Federal Reserve chair Janet Yellen. Earlier this month, she warned of "potential dangers" in equity markets because valuations are "generally quite high." The more Bay Street takes advantage of these frothy markets, the uglier the downturn will be.