Amid erratic markets and mixed investment performance for recent deals, there are growing worries the high expectations for initial public offerings this fall are unrealistic.
Because IPOs sold with ease before the summer started, Canadian investment banks lined up a slew of new issues to hit the market post-Labour Day. Yet in the past month, some cautionary signs have materialized, and as August draws to a close, advisers are quietly indicating they are now less certain of replicating their success from earlier this year.
From January to July, the total value of new IPOs listed on the Toronto Stock Exchange hit $4.2-billion, up 15 per cent over the previous year – which had already climbed 9 per cent from the same period in 2013. This surge complemented investor demand for new issues of all types – including follow-on offerings for companies that are already public.
Total TSX financings reached $40-billion by the end of July, which is a 19-per-cent jump over 2014.
But deal advisers now worry demand won't be as heavy come fall. Macro concerns hang over global markets, particularly China's economic slowdown, and in Canada there are signs investors got ahead of themselves by piling into recent deals.
Because some have been burned, they may now be wary.
For IPOs in particular, many deals were multiple times oversubscribed, including those for Cara Operations Ltd. and Shopify. The heavy demand, as much as 20 times more than the intended offering size, allowed many issuers to sell their new shares at higher prices and earn better valuations.
While a number of these IPOs still trade above their issue price, some don't, and that's caused people to wonder if investors bit off more than they could chew. Lately there has been a lot of chatter about Sleep Country Canada's IPO, which was so heavily oversubscribed, the deal size was boosted by 50 per cent to $300-million. Since it started trading, however, its shares are down 11.5 per cent.
Other Canadian IPOs currently "underwater" – industry slang for trading below their new issue price – include Mogo Finance Technology and Crown Capital Partners.
The heavy demand for new deals largely stemmed from a dearth of non-resource companies in Canada. Now that the mining supercycle has crashed and energy markets continue to tumble, portfolio managers are desperate to buy everything from emerging financial institutions to consumer staples stocks. Because resource prices are unlikely to rebound any time soon, especially not with China's economy cooling, this demand will likely continue – and that means more IPOs.
But on Bay Street there is now much more caution around what types of deals can sell. Many of the IPOs that hit the market this year came with multiple voting shares, which gives the issuers full control over the company. If the market continues to cool, investors may only prove willing to buy into deals where everyone owns ordinary common shares.
Valuations will also be key. Investors were once so desperate to get their hands on non-resource stocks, they put in ridiculous orders. Lately, though, there are indications they have learned their lessons. Follow-on offerings for both CHC Student Housing Corp. and DHX Media were recently cancelled or postponed because investors balked at the valuations.
Asset managers themselves are arguing for cooler heads. When a new issue is announced, investors should ask, "Why is there such urgency to buy this thing on the IPO?" said John O'Connell, chief executive officer of Davis Rea. Not only will there be a chance to buy shares in the market once the stock starts trading, he worries too many deals are sold on hype. "I think it's wise for investors to be highly skeptical of stories when the broker's being paid a commission," he said.
Commodity investors are also reconsidering their demand for future deals. Despite the resource downturn, a number of Canadian mining and energy companies sold new shares in 2015 to either help pay back debt or finance new acquisitions – and some of these deals were rather large, worth $1-billion or more.
Initially, investors were often happy to support the mega offerings. Now, they're paying the price for it. EnCana sold $1.4-billion of new stock in February at $14.60; its shares now trade for $8.97. Silver Wheaton sold $800-million (U.S.) worth of new shares at $20.55; they now trade for $13.59.
"I'm absolutely aghast," said portfolio manager John Stephenson, when describing his attitude toward Canadians who have been so willing to support new issues, particularly for resource names. Historically, Mr. Stephenson invested heavily in commodities, but last year, he switched his focus because it was clear to him the bull run was over.
Asked why he thinks other money managers aren't so willing to move on, he only had one theory: "Hope springs eternal."