Investment bankers divided on when Canada’s already-sleepy tech IPO market will pick up after COVID-19

A Toronto Stock Exchange ticker in Toronto in March 2020, on a day when world markets suffered huge losses on concerns over COVID-19.
A Toronto Stock Exchange ticker in Toronto in March 2020, on a day when world markets suffered huge losses on concerns over COVID-19. Steve Russell/Toronto Star via Getty Images

While the COVID-19 pandemic could prolong Canada’s tech IPO drought, investment bankers and asset managers say there’s still demand for more software stocks on Canadian public markets. 

Firms with ambitions to go public say the pandemic won’t stop them from listing. But market volatility, the unfolding economic downturn and a good-news story from last year could lead to a larger number of small offerings, and keep some bigger names away a while longer.

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Talking Point

Investment bankers and asset managers say there’s demand for more software stocks on Canadian public markets, but the COVID-19 pandemic could hold up promising startups’ plans to list for at least a few months. Volatile performance, the outbreak’s economic effects and the success of one of last year’s listings could encourage smaller offerings, and keep larger firms private for longer.

Led by Shopify, the Canadian tech sector has significantly outperformed equity markets as a whole this year. But compared to U.S. indices, “Canada just doesn’t have a lot of options for technology investments,” said Jennifer Radman, senior portfolio manager at Caldwell Investment Management. Domestically focused stock pickers are particularly keen on software companies with recurring revenues and growth runway as price slumps or economic worries threaten sectors with larger weightings, like energy and financials.

Despite the demand, relatively few Canadian tech firms have listed in recent years. Though there are high-profile exceptions like Lightspeed, which raised $240 million on the Toronto Stock Exchange (TSX) in March 2019; Ceridian, which conducted a US$462-million dual listing in April 2018; and Markham, Ont.-based Real Matters’ $156.7-million offering in May 2017, promising Canadian startups and scale-ups have stayed private for longer in large part because they have more access to late-stage capital.  

“It’s less about lack of IPOs and more about the predominance of private financings,” said Mike Lauzon, head of technology at Canaccord Genuity. Across the country, companies like PointClickCare, Verafin and Clio have taken more than $100 million each from major U.S. funds. “Companies can be more opportunistic and go public more on their own terms, given the prevalence of private capital available,” said Rob Magwood, managing director of equity capital markets at CIBC Capital Markets.

Pre-pandemic, several firms announced IPO plans. Emerge Commerce, which operates four discount online shopping websites, was hoping to list later this year. “That’s still very much the plan, and proceeds largely will go towards upcoming acquisition opportunities,” said CEO Ghassan Halazon, although he acknowledged that market conditions will dictate timing. Halazon claimed the 34-person company is profitable and has been able to maintain growth on its main platform, WagJag, by expanding its inventory of grocery deals. 

Larger firms also say their plans to go public are on track, if possibly delayed. Restaurant point-of-sale technology firm TouchBistro was considering an IPO in early 2021, but last month, CEO Alex Barrotti said COVID-19 would “definitely push our timeline back” if the pandemic lasted more than three months. 

Last year, Laurie Schultz, CEO of Galvanize, which makes governance and compliance software, said she aimed to be “public company-ready by 2022.” The pandemic is “changing some of what companies focus on from a risk perspective, but we see all the same growth opportunity that we did before,” said Dan Zitting, chief product and strategy officer at the 500-person Vancouver firm. Galvanize’s clients—government, financial services and health care are its largest sectors—may focus more on business continuity, for example. 

“The point of becoming a public company is to continue our 10-year journey towards being … the dominant SaaS player in [governance, compliance and risk management],” Zitting said, adding that the firm wants to continue expanding profitably instead of “trying to be a Silicon Valley high flyer.” 

But firms that can’t maintain their growth trajectories will have a tougher time listing. “The biggest challenge right now is lack of visibility on near- and medium-term revenues” because of the uncertainty surrounding the post-outbreak recovery, said Sanjiv Samant, managing partner of the Round13 Growth Fund. “When this revenue visibility returns—perhaps six to nine months from now—companies and potential investors will have more confidence in financial forecasts,” he said. Until then, firms may feel they’re being undervalued, and stay put or seek private financing. But instead of looking north, Samant predicts U.S. private equity funds will be focusing on local and existing portfolio companies for the foreseeable future because of travel restrictions. It’s hard for investors to get to know management via videoconference. That may limit firms’ access to late-stage financing, but may also provide opportunities for the emerging cadre of Canadian growth and opportunity funds, like Round13, Version One Ventures and Inovia.

Asset managers are also likely to focus on highly liquid holdings like larger-cap stocks over relatively illiquid ones like IPOs over the next 12 to 24 months, according to Samant, previously an investment banker with National Bank and Canaccord. Lightspeed’s listing last year revived tech firms’ interest in IPOs, but Samant’s view of the market hasn’t changed significantly because of COVID-19. “While many companies were rumoured to be going public, very few—if any—were actually going to attempt it in 2020,” he said, noting that retail interest could fuel smaller offerings, but larger ones will face challenges until institutional investors regain confidence.

The success of Docebo, which raised $75 million in an October 2019 TSX listing, may also inspire companies that aren’t yet at the size of Lightspeed or Real Matters. While the investor base for smaller-cap firms has shrunk over the last half-decade, the Toronto-headquartered enterprise-learning SaaS firm received a positive reaction, said Brent Layton, co-head of technology and innovation banking at CIBC Capital Markets. “Docebo reopened the market to smaller issuers that could come out a little bit earlier in the stage of development.”

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Canadian tech IPOs have been slow to return after past downturns—Workbrain’s December 2003 IPO was the first after the dot-com bubble burst, for example. But Magwood said capital markets are already beginning to stabilize and will open to new offerings “relatively quickly” when it’s clear what impact COVID-19 has had on companies’ financial results and future prospects. “Once we’ve got that level of stability, there is a good amount of capital standing on the sidelines,” he said.

Lauzon said that while issuers could do deals at “decent valuations” over the next three to six months, it’ll take “a little bit of creativity,” citing reverse takeovers, special-purpose acquisition companies and IPOs with pre-secured cornerstone investors. Still, “the buy side is very much open for business,” he said.