Looking at the most successful IPOs in 2010, three industries clearly stood out as attracting the most interest from investors – mining, oil & gas and real estate – and we expect this trend to continue in 2011 with continued strength in the commodity sector and significant investor interest in higher-yielding securities.
For Corporate Finance, 2010 was a year of ups and downs. While there were more successful IPOs than in the previous two years, there were also a large number of withdrawn transactions, not to mention challenges in pricing some IPOs that did get completed. Caution will continue to be the theme in 2011.
While 2010 was an improvement in many ways over previous years in Corporate Finance, the IPO market in Canada still fell short of expectations. On the positive side, market conditions finally improved to the point where a number of IPOs were successfully launched and completed, including by technology companies and other issuers outside of the natural resource sector. However, looking at the most successful IPOs in 2010, three industries clearly stood out as attracting the most interest from investors: mining (particularly gold and precious metals), oil and gas and real estate. The market was much more challenging for IPO candidates outside of these industries. Follow-on offering activity was a similar story in terms of the types of issuers accessing the markets, although pricing of new equity offerings returned to more normal ranges in 2010 (with “normal” being single-digit discounts to market price for public offerings).
On the debt side, 2010 was another strong year for new issues. While debt offerings tend to attract less media attention, the continued development of a Canadian high yield debt market was one of the most covered corporate finance stories in 2010.
With this background, we offer some thoughts for 2011:
- We expect that the mining, oil & gas and real estate sectors will continue to attract significant investor interest in light of continued strength in commodity prices and a desire by investors for yield. Issuers outside of these sectors will need to be realistic about valuations.
- Issuers will need to be flexible with their financing plans. For companies seeking an exchange listing or equity financing for the first time, managing expectations – of shareholders, board and management – will be key. Prior to 2010, it was relatively unusual for an IPO to proceed to the marketing stage and not be priced. This was not the case in 2010, which will be remembered for the large number of withdrawn IPOs, not to mention challenges in pricing some transactions that did get completed.
- Earlier stage businesses should be prepared to consider a range of transactions, including fallback listing methods such as a reverse take-over, or alternatives to listing such as an outright sale of the business through an M&A transaction. All issuers should be cautious about relying exclusively on a conventional marketed IPO for a financing or liquidity transaction, since a conventional IPO is the most susceptible to changes in market conditions.
- Issuers should expect greater scrutiny and less predictability from regulators and will need to be realistic about timelines. There are potentially many reasons for this, including a heightened focus on regulation following the financial crisis and, in Canada, what perhaps can be described as some distraction caused by efforts to create a national securities regulator. Issuers should build in more time to allow regulators to consider requests for exemptive relief, particularly for applications involving non-routine matters. For public offerings, we have seen regulators in the past year focus on use of proceeds and promoter issues. While the financial crisis gave rise to a flurry of issuers raising funds for general corporate purposes, in general, issuers today can expect more scrutiny of disclosure regarding how offering proceeds will be spent as well as the adequacy of proceeds for achieving their intended purpose. For issuers seeking a TSX or TSX-V listing for the first time, greater focus on meeting the exchange’s minimum listing requirements (particularly financial tests) will be required and issuers seeking an initial listing should plan on speaking with the exchange early in the process. Lastly, build in longer review times for a new listing application – at least two months from the time of submitting application materials to be safe.