The IPO market in Canada has taken a significant turn this year to date, in particular when compared to depressed IPO activity in 2016.
Last year’s paucity of IPOs can be attributed to a variety of factors, including: global market volatility; low oil prices; and uncertainty surrounding the U.S. election and the Brexit vote. For perspective, there were fewer IPOs in 2016 than in 2008 at the height of the financial crises, and 2016 marked a 19-year low in IPO volume, as reported in a recent market survey published by PwC Canada.
However, Canada’s IPO market has made a decisive rebound in the first half of 2017. Contributing factors include: double-digit gains by the S&P/TSX Composite Index in 2016; recovering oil prices; improving U.S. stock market performance following the presidential election; and a pipeline of Canadian companies in a variety of industries that are potential IPO candidates.
Canadian IPOs at a Glance
In the first half of the year, 16 IPOs valued at over $2.9 billion were completed or launched.1 A variety of industries are represented, including:
- oil and gas supply and services (Kinder Morgan, Source Energy Services, STEP Energy Services);
- clothing retail and manufacturing (Canada Goose);
- real estate technology (Real Matters);
- food and beverage franchising (Freshii, Bento); and
- investment management (Alignvest, Fairfax Africa Corps, which was modelled after a similar India-focussed investment company IPO completed in 2015).
Emerging Themes for 2017
Industry Sector Activity
Market conditions appear favorable for unique, strongly branded consumer product offerings. Aritzia’s 2016 IPO signalled a receptiveness to such businesses among investors. This appears to be continuing into 2017 with the Canada Goose and Freshii IPOs.
Confidence in Canada’s all-important natural resources sector—a bellwether for the overall health of the capital markets given the large proportion of resource companies—appears to be improving. Increased activity among oil and gas companies is evidenced in part by the IPOs of two energy services companies so far in 2017 as well as the follow-on offering activity described further below.
Dual Class Share Structures
Canadian companies continue to go public with dual class share structures. A majority of the IPOs in 2016 and 2017 to date involved companies going public by offering subordinate voting shares that carry one vote per share, with voting control retained by the founders or other controlling shareholders through multiple voting shares carrying between 10 and 50 votes per share. Because of the misalignment between the voting and economic rights of shareholders, these structures have come under scrutiny from time to time by securities regulators and governance commentators. TSX rules impose takeover bid coattail protections to ensure that holders of subordinate securities are treated fairly in a change of control, and securities laws impose heightened disclosure requirements.
Accordingly, each of the relevant IPO prospectuses in 2016 and 2017 disclosed the potential adverse effects of a dual class share structure, including: the risk of lower trading prices for the subordinate voting shares; the dominant influence of the controlling shareholders over the management and affairs of the company; the potential of the structure to discourage change of control transactions in which subordinate voting shareholders might otherwise be offered a premium for their shares; and the potential to discourage competing proposals in future going private transactions.
Despite these drawbacks, competing factors, such as the relatively high proportion of large, family-owned businesses that are listed on Canadian stock exchanges and the relatively modest size of the capital markets overall, continue to make dual class share structures popular in Canada.
Technology-Related Risk Factors
Technology-related risk factors were disclosed in a majority of recent IPO prospectuses. This disclosure is driven by companies’ ever-escalating reliance on technology-dependent systems in their business operations, regardless of industry sector.
Companies should pay increasing attention to the quality of disclosure in their technology-related risk factors in light of the current regulatory focus on this issue.
Accordingly, companies have heightened exposure to the potential adverse effects of technological failures, including cyber security breaches. Going forward, companies should pay increasing attention to the quality of disclosure in their technology-related risk factors in light of the current regulatory focus on this issue.
Technology-related challenges and potential costs and risks disclosed in recent IPO prospectuses include the following:
- Securing electronic data against the risk of cyber-attacks by third parties or internal personnel
- Complying with evolving technology-related laws and regulations, often in multiple jurisdictions, including privacy regulations and electronic payments regulations
- Adopting new technologies that are necessary to compete effectively in the marketplace and integrating advanced systems efficiently with legacy systems
- Preventing technology failures that could disrupt critical business activities and lead to loss of customers and revenue
- Purchasing insurance, adopting disaster recovery procedures, and otherwise preparing for remediation in order to mitigate the potential financial and reputational damages caused by a technology breach or failure
1 PriceWaterhouseCoopers. “Rebounding IPO market posts best first-half result in five years: PwC survey,” July 4, 2017. Available here.
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