BMO Leads Canadian IPOs Despite Poor Market Performance

Bank of Montreal's capital-markets unit was the top arranger of initial public offerings in Canada in 2022, edging out two significant deals in a year when plunging equity prices all but froze the market for companies seeking to sell shares for the first time.

Last year, Canadian companies undertook 112 IPOs with a total value of C$1.82 billion ($1.35 billion). That's down 85% from 2021's record C$12 billion in deals. BMO Capital Markets, which handled two offerings with a total value of C$197.6 million last year, previously held the top spot on the Canadian IPO league tables in 2018.

The economic uncertainty and geopolitical turmoil that caused volatility to increase and sent global equity markets into a tailspin last year made investors more risk-averse, which weighed on the valuations that private companies could get in public markets. Those tough conditions are still largely in place, which suggests that IPOs will continue to be weak in the first half of the year, said Peter Miller, head of equity capital markets for BMO Capital Markets.

"There is still a lot of uncertainty, so I think the first quarter is going to feel like the fourth quarter," Miller said. "It's going to be challenging until we see some surprise inflection in the inflation data."

The largest IPO last year was for eye health business Bausch + Lomb Corp., a deal that raised $711.9 million for Bausch Health Cos. as part of its plan to separate some of its businesses. The next biggest deal was the $125 million offering from apartment owner Dream Residential Real Estate Investment Trust.

Sante Corona, head of equity capital markets for Toronto-Dominion Bank's TD Securities, said that the large number of IPOs in 2021 has left fewer companies ready to go public, which could restrain the volume of deals this year.

"The strong performance of the stock market in 2020 and 2021 has led to a number of companies that had originally planned to go public in 2022 and 2023 to bring their IPOs forward," Corona said.

Chris Blackwell, head of Canadian investment banking at Canaccord Genuity Group Inc., believes that the companies that will revive the IPO market will be larger firms that can generate cash flow even during a recession. He believes that select diversified names, commodities producers and miners may be among those that help reopen the market.

According to Blackwell, the highest quality IPO candidates will clear the market and get people confident again, which will start the IPO cycle.

Canada's equity and equity-linked sales in 2022 were down 66% from 2021's record tally of C$56 billion. This dismal performance totaled just C$19.3 billion in sales.

Babbar predicts that the market will rebound this year as central banks wind down their rate-hiking cycles. This will provide investors with a more stable environment to work in.

Babbar stated in an interview that he does not think we are very far from a point where either a convertible with a premium conversion or equities will make sense. The deals we are going to see will usually be based on growth, where there are acquisitions and they need financing, and the markets will support them.

One of the largest deals of the year was a C$1.8 billion offering from pipeline operator TC Energy Corp., with the proceeds going towards the construction of the Southeast Gateway Pipeline, an offshore natural gas line in Mexico. According to Jake Lawrence, head of Bank of Nova Scotia's global banking and markets division, we may see more deals like this in the coming year.

According to Lawrence, businesses that are capital-intensive and have continued to grow and consolidate have performed well over the past year. He believes that real estate, mining, power, utilities, and industrials are sectors that fit this description.

There were far fewer technology deals in the equity capital markets last year than in 2021, and Canada is unlikely to see a wave of tech IPOs soon, according to Tyler Swan, head of equity capital markets at Canadian Imperial Bank of Commerce. However, the sector has developed a better pool of talent in recent years, and there is a longer roster of companies that may go public in the future, he said in an interview.

Swan believes that the tech sector will play a bigger role in financing activity over the long term, but expects it to be quite subdued in the near term.