Canadian IPO market poised for rebound after worst year since 1994

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The song Zombie by the Cranberries had just been released the last time Canada’s market for initial public offerings of stock had a year as bad as 2023.

With Lithium Royalty Corp. LIRC-T being the only IPO of note this past year, a recent Bank of Nova Scotia report declared this has been Canada’s “worst year since at least 1994.” Almost three decades later, Zombie could reasonably express the current state of the Canadian IPO market.

However, the national outlook for IPOs in 2024 can perhaps best be expressed by the title of another popular song from 1994: Green Day’s When I Come Around.

Companies that had wanted to go public in 2023, or even earlier, have started rebuilding their IPO plans. Buoyed by calmer markets and rising investor confidence, private companies have started reaching out to lawyers and bankers in hopes of putting their go-public plans in motion.

“In November and December, particularly in December, we have started to see a pickup in that activity for companies that are looking to be prepared in 2024,” Ramandeep Grewal, co-head of the financial services practice at Stikeman Elliott LLP, said in an interview. “The first reach out we had about six weeks ago, I was a little bit surprised, but it is becoming a bit of a pattern now. There is that anticipation that the market is going to be there.”

Rosalind Hunter, co-chair of the capital markets practice at Osler, Hoskin & Harcourt LLP, said that in the conversations she and her team have had with bankers who typically handle IPOs, “we have felt that change in tone where they have a more positive outlook on deal activity for 2024.”

Of course, preliminary conversations with lawyers and a more positive tone from bankers is nowhere near enough to guarantee Canada’s long-moribund IPO market will finally rebound in 2024. After all, experts have been predicting an end to the IPO drought since last August, only to have those predictions proven premature.

This time, as consensus builds around the belief that interest rates have peaked and market volatility continues to settle, the ideal conditions for private companies to consider going public are beginning to form.

“We actually have a great IPO pipeline, but the timing is a little uncertain because IPOs are once in a lifetime for a company, and they want to make sure that their business is performing well and that the economic outlook is very strong,” Tyler Swan, head of equity capital markets at CIBC Capital Markets, said in an interview. “We are headed in that direction, but I think for many companies, it might take a couple quarters before they want to move forward.

“But by the back half of next year, we will start to see the IPO market recover meaningfully and certainly be very strong thereafter,” Mr. Swan said.

While many of the technology business that went public during the market frenzy of 2021 have since struggled to survive, the tech sector is nonetheless expected to lead the eventual IPO rebound. Ms. Grewal said some companies have shifted their business strategies to the point where they “are in a more positive cash flow situation than your typical growth startup tech company.”

“They may be the ideal candidates to kick-start the market when it does come back,” she said.

The S&P/TSX Capped Information Technology Index has risen by 55 per cent year-to-date, which Rob Peterman, chief commercial officer for Toronto Stock Exchange at TMX Group Inc., said is a sign that investor interest in the space is returning.

“What we have seen are the tech companies working hard to adjust their cash burn as investors switched from asking for growth to asking for better results in terms of EBITDA,” Mr. Peterman said, referring to a commonly used acronym for operating profit that stands for earnings before interest, taxes, depreciation and amortization.

“A lot of the IPOs we believe will come from the tech sector,” he said.

The increasing number of equity financing transactions over the past few weeks is another encouraging sign for the IPO market, Mr. Swan said, as “that kind of activity comes back more quickly.”

In late December, for example, Ivanhoe Mines Ltd. completed a $575-million private placement, Pembina Pipeline Corp. closed a bought deal worth nearly $1.3-billion and Boardwalk Real Estate Investment Trust (REIT) raised nearly $251-million in its own bought deal. The Boardwalk transaction included a full exercise of an overallotment option, meaning investor demand turned out to be stronger than initially anticipated.

One element of the market that could diminish the odds of an IPO rebound is the extent to which mergers and acquisitions also recover. Private companies often pursue a so-called “dual-track” strategy, in which they plan to go public while also planning to sell the company outright before committing to one of those two paths.

“If history is any indicator, typically the M&A transactions tend to win out,” Ms. Grewal said. “The types of multiples they provide and the valuations they use are just higher.”