Canada's public markets have become unpleasant to operate in: Finance professor
Investor tolerance for indebted companies going public is wearing thin.
The latest indication: GFL Environmental Inc. cancelled its initial public offering after its suggested range of $20 to $24 per share failed to woo investors concerned with the company’s debt levels. The Vaughan, Ont.-based waste hauler has yet to turn a profit and incurred $6.5 billion in debt to make acquisitions, according to data compiled by Bloomberg.
That’s turning off investors whose patience has already been tested by a string of flops in the IPO market and the underwhelming performance of listed companies still in their infancy. Between Uber Technologies Inc. and Peloton Interactive LLC still hunting for earnings after making their public debuts, WeWork and Endeavor Group Holdings Inc. shelving their IPO plans on profitability concerns, and the falling valuations of Canadian cannabis stocks, there’s plenty of reasons for investors to be wary.
“You have to lay a proper path to profitability. Clearly the market has no interest right now in companies that are highly levered,” Barry Schwartz, chief investment officer at Baskin Wealth Management, told BNN Bloomberg in a phone interview.
“Unfortunately GFL and the investment bankers did not read the room. Come on, you can’t go public with that kind of debt after WeWork and Endeavor was pulled.” Schwartz added that while the business models of these companies differ, debt remains the issue holding all of them back and turning prospective buyers away.
Schwartz added that even if GFL was debt-free, he probably still wouldn’t buy shares of the company when and if it finally makes its public debut. “We like to see a couple of years of a company being public before we’re interested in buying. That’s the caveat with my comments: I wouldn’t have bought this even if it was perfect,” he said.
Lack of investor appetite may be contributing to the lull in public offerings this year. Since Lightspeed POS Inc. debuted in the first quarter, the only other issue on the TSX has been from Toronto-based software company Docebo Inc., which went public last month. In the third quarter, on all Canadian exchanges, there were only nine IPOs that made it to market at a value of $194 million, according to research by PwC Canada. In contrast, there were 12 public listings with a value of $792 million in the same period of 2018.
It’s not just low demand fuelling the recent dearth of public listings in the Canadian market. Corporate leaders, for their part, may choose to keep their business out of the public spotlight.
“You increasingly see managers having to deal with investor relations, other gatekeepers such as proxy advisors, stock exchanges, securities regulators. And if you don’t deliver smooth quarterly earnings you risk facing the wrath of the markets and the analysts. We have a 24-hour business news cycle that can really beat you up in the press if you don’t meet those expectations,” Ari Pandes, associate professor of finance at the University of Calgary’s Haskayne School of Business, told BNN Bloomberg in an interview last week.
“So I think what you’re hearing and seeing is IPOs down [and] companies that are public turning to the private markets because they want to get out of that short-termism and get out of the public eye.”
Pandes added that during this period of low interest rates, “money is awash” in the private market, which gives private companies alternatives to raising capital through a public listing and the “luxury of deferring an IPO.”
The consequence of that, he said, is that the spoils — if any are to be had — from private investments are rewarded exclusively to the wealthy who meet the threshold of securities regulators by way of their net worth. Meanwhile, he added, the average retail investor looking to save for retirement is left with fewer options in terms of companies in which to invest for their future.
But retail investors may not necessarily be missing out, according to Baskin’s Schwartz.
“Private equity in your portfolio isn’t going to save you if there’s too much leverage,” Schwartz said.
“Private equity valuations are baloney until you become public. You can put on any multiple you want, but when it actually starts trading and is open to the public, that’s when the truth comes out … we all know that an IPO is not necessarily a path to riches for investors.”
But he said he doesn’t think the IPO market is hopeless. The ebb and flow of public listings is normal, he said, noting the current slowdown in activity shouldn’t dissuade companies from going public — if conditions are right.
“I think if we get past worries about a recession and [see] improvement in the economy, the IPO window will improve again,” Schwartz said. “Markets are at all-time highs. Obviously people are attracted to stocks at the moment. But it just has to be a proper, organized situation in terms of debt levels and confidence in profitability.”
Lou Eccleston, chief executive of TMX Group Inc., which operates the TSX, said while GFL’s IPO cancellation is a “disappointment” to the management team and to the marketplace, he’s still seeing interest in Canadian listings from foreign companies.
“It’s not that the entire IPO market is broken: We are still seeing strong demand from Tel Aviv, from Silicon Valley, from Europe. It’s still happening,” Eccleston told BNN Bloomberg in an interview Friday after TMX reported its third-quarter results.