Some Canadian stocks are swinging wildly this fall and shares of certain companies that went public earlier this year are already trading underwater, but that isn't stopping more issuers from lining up their own initial public offerings.
Following the first half of 2015, which was the hottest IPO market since the income trust era, investor appetite has rapidly deteriorated. Important deals, such as Hydro One's massive $1.8-billion IPO, can still get done with solid demand, but there is widespread acceptance on Bay Street that the market for new deals looks vastly different than it did four months ago. Signs of this cooling emerged as early as August.
Some companies, such as Sleep Country Canada and Crown Capital Partners, have seen their IPO shares drop by 10 per cent or more. More recent deals, such as CPI Card Group's IPO, have had to be scaled back in size.
Adding more complexity, investors remain spooked by the fallout from a Chinese economic slowdown.
Yet Canadian issuers, particularly those that classify as "diversified" companies, are still hot to go public. "When people realize the world isn't going to end over the next year, I think you're going to see more diversified IPOs," CIBC World Markets managing director Ryan Voegeli said at a conference Tuesday.
Investment bankers are known for being overly optimistic, but Mr. Voegeli wasn't talking up his own book (he covers the diversified sector). Based on meetings he's had, there is still decent demand from companies for more IPOs. Last week, for instance, Bloomberg News reported that the restaurant chain Freshii has met with bankers to explore the option.
What isn't clear is whether the backers of these companies, especially private equity firms, will be as keen on IPOs as they were over the first six months of 2015. In many cases, private equity backers prefer to exit their investments by selling to strategic buyers because they can unload their holdings in one shot, instead of trickling out subsequent stakes to public investors following the IPO.
For this reason they sometimes choose to run dual-track processes, where they explore an IPO and a private sale at the same time. Shred-It International, backed by Birch Hill Equity Partners, did just that, ultimately opting to sell to a strategic buyer even though it was being marketed at a higher public valuation.
Speaking on the same panel, TorQuest partner Alan Lever said the first half of this year was an anomaly in this regard. "The valuations were high enough [and] the execution risk was low enough" that the decision matrix was heavily skewed to favour IPOs. Backers looking for future exits from their portfolio holdings may not make the same decision, even if the market stabilizes.
However, diversified companies have one big thing going for them. For the longest time Canadian investors craved yield. Bankers say that mentality has shifted, and buyers have shown willingness to take risks again. If it persists, IPOs may be more likely than they normally would – provided the broad market, as well as recent deals, hold up.