The Canadian initial public offering business has always been on the thin side, but 2008 brought famine conditions.

With global financial markets threatening to collapse, risk aversion spiking, firms hoarding capital and economic recession looming, at times the appetite for new issues utterly disappeared. Granted, it’s hardly surprising that 2008’s unprecedented market conditions led to a deal drought. The weak results are just the latest in a string of relatively lean years for Canadian common equity IPOs.

Each year, Investment Executivelooks at the Canadian IPO market in terms of deals completed in the calendar year. IE counts all the transactions classified as IPOs — which includes capital pool companies on the junior market, but excludes deals, such as investment funds or split-share transactions, on the senior market that don’t represent fresh equity for new companies. Deal values are based on the final prospectus filed on SEDAR.

IE also estimates the underwriters’ total annual commissions based on each transaction’s prospectus using the bonus credit method, whereby each member of the underwriting syndicate is credited with an equal share of the commission proceeds, and the lead underwriter is given a double share.

This past year saw declines in deal volume, value and, consequently, commissions. In terms of total deal volume, there was a notable drop in 2008, with 224 new IPOs coming to market, down from 288 in 2007. But on a value basis, the drop was far more precipitous, with the total value of IPO capital raised slumping to $1.2 billion in 2008 from more than $3 billion in common equity in 2007. As a result, the overall IPO commission pie is estimated at slightly less than $70 million in 2008, not even a quarter of what it was in the previous year.

Those shrinking numbers reflect an ongoing trend. In previous years, however, declining IPOs were offset by more deals and bigger offerings, but much of this came in the form of non-traditional issues such as income trusts — a lifeline that has now disappeared, thanks to a federal government decision that effectively killed the trust phenomenon.

NON-TRADITIONAL ISSUES

In 2005, there was more than $14 billion in new deal activity. But the vast majority of this was non-traditional deals: income trusts, income funds and offerings such as split shares. Back then, traditional equity was likewise a rare creature, accounting for only $1.8 billion of the IPO activity. The latter’s portion jumped to almost $4 billion in 2006, before slipping by 20% the following year. Indeed, the falloff would have been far greater in 2007 if it wasn’t for a single, large — more than $1 billion — deal late in the season.

In 2008, the IPO drought intensified. There were just a handful, 19 in all, of genuine IPOs on the Toronto Stock Exchange, raising slightly less than $1 billion in new common equity. Moreover, the vast majority of these transactions were in the resources sector.

The one salvation for the Canadian market in 2008 was high commodity prices in the first half of the year, which enabled resources-focused companies to raise money. You can count the number of non-resources IPOs that came to market in 2008 on one hand. (See page 22.) But as soon as the global economic outlook dimmed and recession went from a possibility to a certainty, activity in the resources segment was also curtailed. Indeed, just one new IPO was completed after June 30, as the resources sector IPO window slammed shut behind falling commodity prices.

The junior market held up better than the senior side in 2008, although the deal activity was skewed to the front end of the calendar there, too, as more than 60% of the deals completed on the TSX Venture Exchange occurred in the first half of the year.

Still, the decline in deal volume and value wasn’t nearly as precipitous in the junior space as it was for the TSX. Last year, about $268 million of new equity was raised in slightly more than 200 deals, including 150 CPC transactions, on the venture market. This is down from $550 million raised across 245 deals, including 181 CPC offerings, in 2007.

Not surprisingly, these exceptionally lean conditions led to upheaval in the underwriting league tables — with the big bank-owned investment dealers as the primary victims of the dearth of deal activity. Firms that have traditionally had a bigger presence in the venture market held up much better, and in some cases leapfrogged the traditional underwriting leaders.

@page_break@For 2008, the leading underwriter in IE’s survey was Vancouver-based Canaccord Capital Inc. It topped the rankings on the strength of its dominance of TSXV offerings. Canaccord was closely followed by two other independent shops, Cormark Securities Inc. and Paradigm Capital Inc.

FEW NOTABLE DEALS

Cormark took one of the top spots thanks largely to the fact that it led one of the year’s few notable deals — the début of Toronto-based money manager Sprott Inc. Similarly, Paradigm ranked highly by virtue of its lead assignment on another big deal, the IPO of Texas-based Forbes Energy Services Ltd.

Indeed, the scarcity of substantial deals means that a lead underwriting assignment in one or two of the few decent-sized deals of the year was enough to secure a spot at the top of the rankings in this otherwise wretched year.

While the IPO market was largely a write-off for the bank-owned firms in 2008, the good news, from their point of view, is that the secondary offering market held up somewhat better — and they continued to dominate that space.

According to data from Thomson Reuters, total secondary offerings reached $27 billion in calendar 2008 — down significantly from $35.1 billion the previous year, but far healthier than the IPO market. And the five bank-owned dealers, led by RBC Capital Markets, held the top five rankings in its secondary issue league tables.

Moreover, according to data from the Investment Industry Association of Canada, total equity issuance — including common equity, preferred shares, trusts and limited partnerships — was $42.4 billion for the year, down 23% from the prior year.

While the IPO market was dead for the second half of 2008, the fourth quarter was the year’s most active for other equity issuance, according to the IIAC. Some $12.7 billion was raised in the period.

However, the dark lining to that silver cloud is that the spike was the result of financial services firms rushing to raise funds as the markets remained troubled, the economy deteriorated and their perceived capital needs swelled. Still, the bank-owned firms benefited from that development.

According to the Thomson Reuters league tables, in terms of total equity issuance, top-ranked RBC, was followed by TD Securities Inc. , which jumped from fifth place the prior year; CIBC World Markets Inc. climbed to third place from fourth; BMO Capital Markets slipped from second place to fourth place; and Scotia Capital Inc. ranked fifth, albeit up from seventh spot the prior year.

Nevertheless, while other types of underwriting business held up last year, the Canadian IPO trade could not escape the knock-on effects of brutal market conditions — hampering deal volume, value and commissions. IE