Private equity a big part of IPOs COMMENT

Flood that began in 2017 looks set to continue

If the initial public offering market in 2018 resembles the 2017 experience, then investors can expect a flood of new public companies that are owned either by private equity or venture capital funds.

According to a recent report, about half of the IPO activity in Canada in 2017 arose because the backers opted to cash in part of their investment.

Canada Goose (backed by Bain Capital and which garnered $390 million), Jamieson Wellness (backed by CCMP Capital Advisors and which raised $345 million); Freshii (backed by Jaxii Holdings, and DDM Alternative Investments and which raised $144 million); Real Matters (whose backers include Altus Group Limited and EdgePoint Investments Group and which raised $156 million) and Step Energy (which raised $100 million and which was backed by Arc Energy) are the better known examples.

As for 2018 private equitysponsored IPOs, the flood may start early as there have been very recent reports that GFL Environmental — which is backed by HPS Investment Partners and Macquarie Group — is planning a US$1-billion IPO.

And if the IPO experience resembles the pattern of 2017, then investors are set for some disappointments given the lacklustre performance of some of the issuers which opted to raise capital in the public markets for the first time.

Neo Performance Materials Inc. is the most recent company to be taken public by a private equity firm and is the latest example to disappoint.

One week back the company, that was owned by funds managed by Oaktree Capital Management, raised $200 million via the sale of shares priced at $18, a price that was presumably supported by the decision to pay an annual dividend of $0.38 a share.

None of the proceeds went to the issuer: instead they all went to the selling shareholder who could pocket another $30 million if the underwriters decide to exercise the 15-per-cent overallotment option. Since being listed the shares have not traded above issue price and closed Thursday at $17.60.

Neo Performance isn’t alone. In the fall, Roots, which in the marketing materials was lauded for having a “rich Canadian heritage,” raised $200 million via the sale of shares priced at $12. That was outside the initial $14-$16 marketing range.

As with Neo, all the proceeds went to the selling shareholders — mainly Searchlight Capital Partners, and the former senior executives — and as with Neo, the stock has struggled in the public markets. According to Bloomberg, the stock closed down $2 on day 1, hit a low of $8.92 and closed Thursday at $10.55.

Given such a performance it’s not immediately obvious why investors will be lining up when the selling shareholders, who will want to monetize the rest of their investment at some stage, come looking for buyers.

On the other hand, Stelco Holdings — owned by private equity fund Bedrock Industries LLC — has been a solid performer: the IPO’s shares were priced at $17 and closed Thursday at $22.

Other big winners include Canada Goose (up by more than 100 per cent) MedReleaf (up by 66 per cent) and Jamieson Wellness (41 per cent).

According to information from FP Data Group, there have been 20 IPOs so far this year where the individual proceeds were greater than $30 million. (Kinder Morgan, which raised $1.75 billion, with all the proceeds going to the U.S. parent, is the largest.) The IPOs raised $4.8 billion. Of the 20, 18 are listed on the TSX, one (Superior Gold) on the TSXVenture Exchange and one (Clementia Pharmaceuticals) on Nasdaq.