How tech sector drove the year of the IPO to new heights

John Wilkin has seen a number of strong initial public offering cycles during his 23-year career as an M&A lawyer. But he’s never seen one quite like 2021.

A partner at Blake, Cassels & Graydon LLP, Wilkin said the year stood out because nearly every sector took part in the action.

“When I started out in early 2000s, the IPO market was driven by the dot-com trend, and then in the mid2000s, with the boom in commodities,” Wilkin told the Financial Post. “This recent increase in activity has been across the board…. I think the strength of the Canadian capital markets across sectors is proving itself out.”

Indeed, to say the Canadian IPO market enjoyed a banner year in 2021 is a bit of an understatement. The year saw a total of 73 IPOS from Canadian operating companies according to calculations from Financial Post Data, a roughly 70 per cent boost from 2020 and the highest total in more than 20 years.

The largest IPO hitting the market was that of Waterloo-based insurance company Definity Financial Corp., which raised $1.61 billion. TELUS International Inc. was the second largest at $1.36 billion, and dentalcorp Holdings Ltd. came third at $718.59 million.

Altogether, more than $9 billion was raised.

Peter Miller, managing director at BMO Capital Markets, said the timing was right for many firms big and small to go public, given the low-interest-rate environment, high-flying valuations and — especially in the tech space — a large contingent of momentum investors ready to pile in.

But the biggest IPOS were hardly overnight success stories. Take Definity, for one. Before it could come to market, it had to switch from being a mutual company owned by customers to a corporation, even though there was no legal framework to make such a transition.

“For 12 years, we’ve been working on this transaction,” Miller said. “It literally took all that time to go through the lawmakers and government and parliament…. They were waiting for Chrystia Freeland to sign documents — all at the last minute.”

Michelle Khalili, managing director and head of equity capital markets at Scotiabank, saw similar factors aligning to create a booming year for dealmaking, with IPOS being “the stars of the show.”

“It was a function of a confluence of events,” she said. “We certainly had positive investor sentiment…. You’ve had strong market performance, you also had a great deal of liquidity in the system.”

While the action was spread out across a number of sectors, the strength of tech in particular was hard to ignore.

According to FP Data’s numbers, the tech sector led the IPO pack in 2021 as it accounted for nearly 23 per cent of the deal load. This was followed by the materials sector at roughly 14 per cent and health care at 13 per cent.

Khalili said her team at Scotiabank had been watching both institutional and retail investors pumping more capital into the tech space and were ready for the explosion in deals there.

“On top of that, we also saw, within our tech ecosystem, very strong, high-quality companies that were Ipo-ready.”

The pandemic was also an important factor in how the year played out.

“COVID certainly helped a lot of stories in the technology sector,” BMO’S Miller said. “So, it just really ballooned the universe of potential companies that wanted to go public.”

Whether the bonanza can continue is not as clear cut. Miller argues that 2022 will see less exuberance in tech sector IPOS, largely because the companies that were aiming to go public have largely already done so.

“Sitting here today, I wouldn’t certainly be bringing a technology IPO to market. This momentum, chasing of growth and technology at least for now, is turning over,” Miller said.

“Many of these technology stocks can be growing 30, 50 per cent a year — that in and of itself should be a fantastic return for any investor…. But what we’ve seen is on top of that, the multiples, doubling, quadrupling from what they were (before the pandemic) which was like rocket fuel behind these share prices. That’s just not sustainable.”

Khalili, for her part, sees the IPO pipeline for 2022 remaining strong. She noted that there was still a significant amount of stimulus in the system, and opportunities in the tech space.

So far in 2022, five deals have closed, largely represented by companies in the materials and precious metals sector.

The stock markets, however, may ultimately decide how the year goes. While the TSX Composite Index and Dow Jones Industrial Average are off to sluggish starts, the Nasdaq is down more than 14 per cent so far this year, with some of the high-flying tech names down much more than that.