VANCOUVER — After a record-breaking year for initial public offerings on the Toronto Stock Exchange, the first quarter of 2022 saw a significant slowdown in activity. Not a single innovation-economy company—one that would list in the technology, life-sciences or cleantech sectors—went public through an IPO, according to data from TMX Group, the owner of Canada’s biggest stock exchanges. Seven did so in the first quarter of 2021.

The slowdown in new listings came as the majority of innovation-economy firms that went public in 2021 traded below their initial offering prices, as investors moved into resource stocks, taking defensive positions amid economic uncertainty. That shift boosted the exchange’s main index, which outpaced its global counterparts by gaining three per cent in the quarter.

“We’ve obviously entered a period of macroeconomic uncertainty,” said Thanos Moschopoulos, managing director of equity research and technology at BMO.

Overall, 44 new issuers—a group that includes IPOs and other types of new listings—listed on the Toronto Stock Exchange as of March 31, 2022, according to data from TMX. That’s down 38 per cent from 71 new issuers over the same period last year. IPOs saw a similar drop, with 34 so far this year compared to 55; cumulatively, they raised 90 per cent less money.

Explaining the slowdown

Moschopoulos said several macroeconomic factors have fuelled investor uncertainty, including Russia’s invasion of Ukraine that began Feb. 24. It’s created a ripple effect around the world, and fears of a global recession abound.

At the same time, inflation has soared. In February, Canadian consumer prices jumped 5.7 per cent year over year, according to Statistics Canada’s most recent figures. It was the biggest jump in more than two decades, since August 1991.

The Bank of Canada started raising its benchmark interest rate against that backdrop. In March, it bumped it to 0.5 per cent. Last week, it moved it up another half-point to one per cent—and further hikes are expected.

“Investors are apprehensive about putting new money into tech in general … because they are more focused on the present than the future,” said Moschopoulos.

The slowdown of new IPOs in Canada mimics what’s happening elsewhere, said Dani Lipkin, director of global business development at TMX Group. Global IPO volumes fell 37 per cent year over year in the first quarter, according to the professional-services firm Ernst & Young. Worldwide markets saw 321 deals raising US$54.4 billion in the same period. 

Checking in on the Class of 2021

The majority of last year’s new innovation economy listings ended the first quarter of 2022 trading lower than their IPO offering price.

The Winnipeg-based agtech Farmers Edge had the biggest drop, down 81.4 per cent to $3.17 from its $17 offering price in March 2021. The company’s quarterly earnings reports have failed to impress, and its CEO and founder Wade Barnes resigned at the end of March. The company also took on a $75-million credit facility at the time for “general corporate purposes.”

Loop Energy also struggled, with its shares dropping nearly 81 per cent below their $16 offering price in February 2021 to $3.05.

Three other companies saw their shares lose more than 70 per cent of their value: Eupraxia (76.3 per cent), MCI Onehealth Technologies (73.8 per cent) and Thinkific (72.9 per cent). The last company recently laid off one-fifth of its staff after “a rigorous review of [its] organizational structure” that determined it could continue to grow with a leaner workforce. Thinkific’s shares jumped 18 per cent that day. CEO Greg Smith told BetaKit that the layoffs came as conditions make it harder to raise capital.

“I’m not surprised, necessarily, given that the macro backdrop has just changed so dramatically versus a few months ago,” said Moschopoulos. The interest-rate changes, global uncertainty and risk of recession all influence what investors are willing to pay for a stock.

“When things are more uncertain, investors tend to get more defensive,” he said. They rebalance their portfolios and rotate out of higher-growth, innovative tech stocks and into more defensive parts of the economy. As oil prices rise, they also move into the oil sector, he noted.

Some of the Class of 2021, however, have fared better. Of the five gainers, Waterloo-based digital-investigation software firm Magnet Forensics leads, up roughly 65 per cent from its April 2021 offering price of $17.00 to $28.10 at the end of the first quarter. Moschopoulos said its earnings have outpaced analysts’ expectations. It’s also profitable, reporting a net income of roughly US$7.3 million for all of 2021. “I think psychologically that is something that has made their stock hold up better than some others,” he said. Over longer periods of time, years rather than months, the performance of an individual company starts to matter more to its share price over the long term than macroeconomic conditions, he said.

The other gainers include Softchoice (39.2 per cent), Payfare (20.8 per cent), Copperleaf (9.5 per cent) and Telus International (0.8 per cent).

Beyond the IPO

Despite a lack of IPOs in the sector, other kinds of listings not so tied to the current macroeconomic climate continue to take place, said Lipkin. “A good number of innovation companies” went public this year through other methods, such as qualifying transactions, where a capital-pool company acquires the firm going public.

In the first quarter of 2022, four innovation-economy companies listed on the Toronto Stock Exchange through a non-IPO transaction. On the TSX Venture Exchange, a dozen did so, with the majority through qualifying transactions. Together, those show “a good pace relative to the historical number of companies that would go public in a full year,” Lipkin said.

Qualifying transactions “have more of an ability to time their financing,” he said. They provide a longer period of time to raise money, hold it in escrow and complete a transaction compared to an IPO. “There’s just more wiggle room to do the financing overall when there can be tougher marketing conditions overall across the board.”

What to expect in the rest of the year

Several Canadian companies were expected to IPO in late 2021, but delayed their plans as conditions changed. Montreal’s Sharethrough said in November it would wait because of “adverse and challenging current market conditions, especially for technology companies.” It’s possible these and others that hinted at 2022 go-public plans, such as Vancouver’s Article, may still choose to do so this year.

“Certainly, there are a number of private companies in Canada that would have the financial characteristics, the growth prospects, the market opportunities that investors would be interested in,” said Moschopoulos. Whether the timing will be right sometime in 2022, he said, is partly company-specific and partly dependent on the macroeconomic situation. “No clear answer for that.”

It’s possible the TSX will see some IPOs this year from firms in the innovation sectors, he said, but he doesn’t expect that as soon as next month.

The innovation pipeline in Canada continues to be strong, said Lipkin, with more companies growing into unicorns—a positive for the long-term outlook of firms going public. “We continue to be in good discussion and dialogue with companies across the country who are preparing for an IPO eventually.”