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Which Canadian companies are best positioned for an IPO?

The TSX is in store for a great 2017, according to an RBC report. (Getty)

On Friday, Uber is expected to officially go public, making the unprofitable company (it lost $1 billion just in the first quarter of 2019 alone), the latest private firm to enter the public market and list on the NYSE.

Some say it’s risky, losing money and being unprofitable is never a winning chant for shareholders or potential investors alike, but that hasn’t stalled the ride-sharing company’s plans to price shares between $44 and $50.

Uber follows its rival Lyft (LYFT), which started trading publicly on March 29. Lyft’s shares have dropped over 20 per cent since its trading debut, and ended its first day with a market valuation of $22.2 billion.

Beyond Meat (BYND) is the meat alternative company whose shares skyrocketed 163 per cent on Thursday. By Thursday afternoon, Beyond Meat’s valuation was sitting at approximately $3.8 billion. But the company, like Uber, has yet to churn profit. And WeWork, also unprofitable and last valued at $47 billion, is also planning its IPO.

Slack Technologies Inc., the former Canadian company, has plans to debut on the NYSE via a direct listing, following the same steps as Shopify did in 2015. And Hootsuite, which recently laid off about 10 per cent of its workforce, is one of the most eyed Canadian tech companies when it comes to a possible IPO, but it has struggled to finalize a deal.

It’s an IPO race and relay, and Canada does have some legs in the lanes, but this might be burning out, says Shawn Rutledge, portfolio manager and investment advisor at Mackie Research Capital.

“Hootsuite and Vision Critical are two big ones that the investment community talks about as being the next hot IPO’s to hit the Canadian market. That being said, it has been this way for two to three years and some would argue they are getting impatient on their pace,” Rutledge tells Yahoo Finance Canada.

One of the main reasons Canadian companies often struggle is financing  it’s hard to attract investors even when the offering would seem of exceptional value, and Rutledge says that is the tough part about the IPO and secondary financing market. “It really correlates to the sentiment of the investment community,” he says. There are multiple variables, in addition to funding, that are assessed prior to filing an IPO and public sentiment is certainly one.

“Companies typically choose the route that lowers the Weighted Average Cost of Capital (WACC), be it debt or equity,” notes Calgary-based CPA Maxim Atanassov, a former senior manager at Deloitte with over 20 years of experience in the technology and energy sectors, and decades of experience working for both pre-IPO and publicly traded companies.

Public sentiment (“Does the company have a brand that will result in share over subscription or higher valuation?”), timing, and who the financial backers of a company are, are all key factors considered when talking about whether or not to go public, says Atanassov.

“The public route comes with public scrutiny, and there is also a high cost of initial and ongoing compliance that easily runs into the millions,” adds Atanassov. “In some cases, companies are forced to go the public route because they may have over-leveraged themselves and the lenders are asking them to improve on specific financial ratios.”

In the past, Canadian companies such as PointClickCare had been on the radar to possibly IPO, while today,  growing Canadian tech startups like North and Ritual have potential too, but all have yet to give any assurance an IPO is the route they are wishing to take. North is among the companies assisted by First Round Capital, which invested $1.5 million into Uber during its early seed funding stages. Toronto company Influitive is also among First Round Capital’s portfolio.

Depending on who is backing the company financially, investment horizons will differ. Companies can also get pushed to go public if “there is no follow-up capital available or the fund needs to be wound down, as this presents an exit strategy,” says Atanassov.

Canada’s tech industry is booming with startups popping up and boasting appeal, but that doesn’t mean companies are eager to jump into volatile markets and play a shaky hand. Sentiment in the Canadian IPO front has turned negative, says Rutledge.

“The appetite for risk in Canada does not mimic that of the U.S. market either. U.S. investors in the small to mid-cap IPO market tend to have a much stronger propensity for risk given the risk and reward relationship. Canadians tend to be more risk adverse,” he says. “Also, from the appetite for risk perspective in Canada, most investment has been geared towards the cannabis sector of the last two years. It has been the clear winner and has attracted the lion’s share of the Canadian IPO market, for sure.”

Another Canadian company that has made moves is Lightspeed POS Inc. The Montreal-based tech company raised $240 million in its initial public offering back in March, selling its shares on the Toronto Stock Exchange (TSX) for $16 each. Its shares jumped 18 per cent on first day trading.

“In Canada, it is important to distinguish between the TSX and TSX-V IPOs,” explains Craig Doidge, professor of finance at the Rotman School of Management at the University of Toronto. “For IPO volume, it is also important to distinguish between resource and non-resource firms as activity by the former are driven largely by commodity prices.” Doidge’s 2013 paper looks at IPO activity in the U.S. and around the globe.

“In the US, the JOBS Act (2012) lowers certain accounting and disclosure requirements and created a ‘testing the waters’ process for ‘small’ companies, those with revenues under $1 billion,” says Doidge. This is not relevant for the recent big IPOs like Lyft and upcoming ones like Uber, he says, but it is for companies like Beyond Meat.

Doidge says there is evidence that more small firms have gone public since the JOBS Act, but he doesn’t know if the same “testing of waters” would work in Canada.

“Requirements to go public on the TSX-V are already very low and many firms that performed poorly have gone public,” he notes.

Doidge says not to harp on the question of “What is wrong with Canada’s IPO market?” but rather that “…if the supply of these firms has not fallen, another relevant question is whether they are staying private longer because they can, i.e. now they have better access to private sources of capital, [maybe]?”

And many companies benefit from remaining private.

“It can generally take five to ten years to be at a stage in the business development to hit scale and be the leader in your market space. Issuers will generally look to IPO when the market sentiment is positive and it makes sense to raise the funds,” says Rutledge.

If the sentiment in the Canadian market remains bullish, Rutledge says we could see the likes of some of the above companies at the IPO table in the last half of this year.

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