IGM slashes valuation of Wealthsimple by 20 per cent as tech stock rout spreads to private firms

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One of Canada’s most highly valued private technology startups, Wealthsimple Technologies Inc., has been devalued by 20 per cent by its largest shareholder, as the broad-based sell-off of publicly traded technology stocks spreads to private markets.

IGM Financial, a subsidiary of Power Corp. of Canada, holds a 23-per-cent stake in Wealthsimple, an online financial services company that has seen a surge in new retail clients throughout the pandemic with its zero-fee trading platform.

IGM, also the parent company of Investors Group, revealed in its latest financial statements released Thursday that it had marked down its valuation for Wealthsimple to $925-million as of March 31, from $1.153-billion at the end of 2021.

“This is not a reflection of the business model, its prospects or the management at Wealthsimple,” IGM chief executive officer James O’Sullivan said in an interview. “We are extremely proud of Wealthsimple as their largest shareholder, but from a distance, you only have to look at the publicly traded fintech companies to see that valuations have reset and so this reflects our judgment as to what an appropriate value is.”

“Just given what is going on in the world around us and with interest rates rising, all risk assets are being repriced so some revaluation of Wealthsimple struck us as appropriate in the circumstances.”

Last year saw a record run by Canada’s tech sector as 16 companies went public on the Toronto Stock Exchange and private companies blew past the previous record for venture capital fundraising, set in the peak dot-com bubble year of 2000, even adjusting for inflation.

Wealthsimple was one of the most conspicuous beneficiaries of soaring valuations and investor interest during the pandemic and became one of Canada’s most valuable private technology companies – on paper – when it raised $750-million last May at an $5-billion valuation.

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That star-studded round drew investment not only from A-list U.S. venture capital firms such as Dragoneer Investment Group, TCV, Meritech Capital Partners and Greylock Partners, but also A-list celebrities Drake, Ryan Reynolds and Michael J. Fox.

The deal – among the largest private financings in Canadian technology history – was actually the second time in just seven months that Wealthsimple had raised a nine-figure sum from private investors, as interest in its U.S. analog, Robinhood, soared owing to millennials flocking to trading platforms to buy into meme stocks. But unlike Robinhood, which has seen its stock plummet by almost 90 per cent since its 2021 peak, Wealthsimple can conduct its own back-office trading, an attractive benefit the company acquired with the 2015 purchase of Shareowner.

Asked if IGM had written down Wealthsimple enough given Robinhood’s steep drop – the American company is now valued at twice Wealthsimple’s cost on IGM’s books – or if further writedowns could come, Mr. O’Sullivan said he is confident he has hit the right mark with the valuation.

“This reflects the change in value from Dec. 31 to the end of March and we absolutely looked at a long and appropriate list of public companies, but that’s only one of the three methodologies we look at,” he said. “The other thing we look at is private market transactions, which continue to trade better than public companies, as well as how the business is doing overall.

“We think that we have the mark right. I’m very comfortable with it, but we’re going to review it again in June. That’s what we’re obliged to do and what we will do.”

The $5-billion valuation provided the strongest validation to date of Power Corp’s evolution from a staid owner of classic financial services companies such as insurers and wealth managers, into one of the biggest supporters of upstart financial technology companies that are bank challengers, targeting underserved millennials and small businesses.

However, soaring valuations for Power-backed companies, including Wealthsimple and Koho Financial Inc., made Power’s stakes in the companies so large on paper that they became a material part of its holdings and assets. Increasingly, Power’s fortunes were tied to the more volatile and risky startup space rather than anchors like Canada Life and IGM, its core holdings.

Now, the arrival of rapidly rising interest rates prompted by soaring inflation, as well as the hangover from a pandemic-era spike in values among Internet companies, has led to a broad-based sell-off and crash in valuations for tech stocks. Observers for months have speculated that would spread to the private markets as well.

“Valuations are going to ebb and flow – absolutely as it should be,” Mr. O’Sullivan said. “Every publicly traded stock rises and falls with micro and macro events and I think the same should be true with private market assets.”

Several Power-controlled entities along with IGM have collectively invested in Wealthsimple over eight financing rounds, including Power Financial Corp, insurer Great-West Lifeco and venture capital firm Portag3 Ventures.

In 2021, IGM and other Power affiliates began to reduce their respective stakes in Wealthsimple.

Of the $750-million raised in 2021, two-thirds was used to buy part of the stake of Power and its affiliates, although the family of companies remains the largest shareholder. The Power group of companies received $500-million, with the remaining $250-million being used for a direct equity investment in Wealthsimple.

Now, Power’s consolidated holdings stand at 43 per cent of Wealthsimple’s equity, down from 61.7 per cent. Its voting control stands at 60-per-cent voting control. IGM has 23 per cent of the total.

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