Canada’s initial public offering (IPO) market has continued to struggle recently, observes CIBC World Markets Inc., and it’s important to the economy that it be revived.
In a new paper, CIBC reports that IPOs were down about 30% last year, after a decent start to the year. And, it says, activity was down nearly 75% from the peak of more than $10 billion, which was set back in 2002. Moreover, it notes that the drop-off in IPO activity in Canada has also been more severe than in some other key countries, such as the United States and Japan.
In particular, it notes there has been a substantial decline in offerings by smaller issuers (companies with a valuation of $50 million or less). “The percentage of funds raised by that segment, while above the lows seen during the recession, has trailed levels seen during the previous recovery,” it says. “Since smaller and medium-sized businesses often have the greatest expansion potential—and can punch above their weight, where technological development and innovation are concerned—that is a matter for concern.”
On a sector basis, resources have come to account for a larger share of the IPO market, while there have been declines in utilities, communications and consumer sectors, CIBC reports. Importantly, new technology companies have accounted for only a little over 4% of the capital raised through IPOs in Canada in recent years, versus around 10% in the US, it adds.
One reason for the weakness of the Canadian IPO market, it says, is investor uncertainty. But also, it notes that Canada ranks poorly for its IPO markets’ perceived effectiveness in providing public funding to companies at the venture capital stage.
And this, in turn, bodes ill for the job market, it notes. “Absent an active, optimally functioning IPO market, acquisitions by a declining number of larger firms would become the principal liquidity vehicle for venture capital-backed firms, at a cost in job creation, since M&As don’t produce the same employment gains as startups,” it says.
Recently, the federal government laid out its plan for deploying $400 million in promised investment in venture capital, which aims to spark private sector co-investors in order to create a more sustainable venture industry in Canada — realizing that ultimate goal will require a vibrant IPO market too.
“Public capital markets have traditionally played an important role in financing the activities of companies in all sectors of Canada’s economy. A smoothly functioning on-ramp for new entities is critical not only from the perspective of job growth, encouraging innovation and greater investor opportunity, but the support it provides for other key elements of the business financing ecosystem, like the venture capital industry,” it concludes.