VANCOUVER — The stark drop in initial public offerings by innovation-economy companies on the Toronto Stock Exchange continued in the third quarter, with not a single IPO in the tech, cleantech or life-sciences sectors. It’s the second time this year a quarter has passed without one.

So far, Canada’s main stock exchange has seen just one innovation-economy IPO in 2022—Quebec-based Bausch Health’s subsidiary Bausch + Lomb in the second quarter—compared to 19 in the first three quarters of 2021.

The near-freeze on innovation-economy IPOs reflects trends in the broader market. In total, there have been 68 IPOs across all sectors on the TSX so far this year, and 19 in the third quarter. That’s down nearly 46 per cent, or 125, from the same time last year, and about 37 per cent, or 30, from the same quarter in 2021.

“I think this is a reflection of the entire global IPO market,” said Dani Lipkin, director of global business development for the Toronto Stock Exchange and TSX Venture Exchange. “It’s quite quiet across sectors, across geographies.”

Worldwide, there were 992 IPOs year-to-date on Sept. 28, down 44 per cent year over year, according to the professional-services firm Ernst & Young.

Firms ‘ready to go when the conditions are right’

Lipkin attributed the drop in part to 2021 being a “banner year for IPOs,” meaning some companies may have rushed their go-public plans amid the craze. Additionally, the macroeconomic conditions that plagued the first half of 2022—rising interest rates, high inflation and economic uncertainty amid Russia’s invasion of Ukraine—continued. 

That’s created a waiting game for companies considering IPOs. The stock market is currently “very volatile,” said Paul Condra, head of emerging technology research at PitchBook. “You don’t necessarily want to sell into that market, because you might feel like going public now is selling my shares at the lowest possible amount that I could get for them. So, you probably just want to sit on the sidelines.” Companies delaying IPOs, he said, may be turning to private debt, raising venture capital or undertaking cost-cutting measures like layoffs to extend their financial runway.

Sitting on the sidelines is exactly what Lipkin is seeing. Part of his job is talking with private companies, and he said many “are ready to go when the conditions are right.”

Better conditions would include “some stabilization” in the market, said Richard Tse, a managing director and technology analyst with National Bank Financial Markets, as well as renewed investor interest that raises valuations. 

As for when IPOs may return in large numbers to the TSX, Lipkin noted that “markets can open in a very quick period of time”—though even the most ready firm would need to do some due diligence before listing, such as updating disclosure documents. For companies waiting at the ready, Lipkin said, that would be a mere matter of weeks.

Tse, for his part, thinks Canada may see the odd IPO between now and late next year, but said the country is unlikely to have “a cascade of a number of them” until late 2023 at the earliest.

Shares of recent IPOs tend to struggle

For a clear sense of why firms are holding back on initial public offerings, one need only look at how market conditions have affected Bausch + Lomb, or companies in the innovation space that went public last year.

The majority, 23 firms, closed below their respective IPO offering price to end the third quarter. Ten had shed two-thirds or more in value. The biggest declines came from HempFusion Wellness (97 per cent) and Farmers Edge (96 per cent). The latter, a Winnipeg-based precision-agriculture company, is now working on a turnaround plan under a former Amazon Canada executive as analysts question whether it will ever reach profitability.

The companies with the biggest reductions in value tended to be “names that have not, kind of, executed in line with the business model that was presented,” said Tse. Additionally, investor appetite has turned to companies that are profitable, or close to it, he said. Most tech firms that have recently gone public are not yet at that stage.

The few that are can see it in their valuations, including three that had IPOs on the TSX in 2021. Softchoice’s stock closed the third quarter three per cent higher than its IPO price, while those of Telus International and Magnet Forensics were up a respective 13 and 29 per cent. In their most recent quarter, Softchoice and Telus International reported a profit, while Magnet Forensics reported a small loss.

Telus International, one of the companies Tse covers, is in “a unique situation,” he said, in that it is both profitable and has a recurring revenue base. “It’s sort of a growth company that has, interestingly, some defensive attributes to it,” Tse said.