Canadian Q1 2019 IPO Market OutlookStability returns as North American markets get ready for influx of IPOs

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Canadian Q1 2019 IPO Market Outlook | Stability returns as North American markets get ready for influx of IPOs

Introduction 01

Q1 2019: Key trends and observations 02

IPO Market Dashboard 04

About us 06

Introduction

The market uncertainty and volatility that characterized the end of 2018 dissipated throughout Q1 2019. The market backdrop became more constructive as the global equity indices recovered from December lows – with higher oil prices and dovish commentary from central bankers acting as a tailwind for improving investor sentiment. Although companies and countries alike may be tempering their growth forecasts, the macroeconomic outlook for 2019 remains relatively benign, which should set up for a reasonable IPO market window in the year ahead.

North American IPO activity in the quarter was minimal, to say the least. Q1 is traditionally a quiet time for IPOs, and this was exacerbated this year by both the lingering hangover of late 2018’s market dislocation and the U.S. government shutdown, which caused the closure of the SEC in early 2019. However, the IPO pipeline for the remainder of 2019 remains robust, and North American IPO activity is expected to pick up as we enter Q2. Lyft priced its IPO on March 28th, making it the largest and highest profile technology IPO since snapchat in 2017, Pinterest filed for its IPO on the 22nd of March, and, investors and markets alike await Uber and other tech giants to join their ranks.1 In Canada, Lightspeed POS Inc. commanded attention globally amongst technology investors as it successfully completed an IPO in March 2019, raising proceeds of C$276 million – and has traded well in the aftermarket since pricing, with its share price finishing the quarter 28.8% above its offering price.1

We remain confident that investors continue to be searching for opportunities to invest in well-run companies with a credible story, a track record of success, and an ability to scale significantly.

Whether they are growth-focused disruptors or more modest total-return or yield plays, such companies should have little trouble gaining investor acceptance in the public markets.

U.S. Canada14Number of IPOs with deal size greater than US$10 million

2Number of IPOs with deal size greater than C$10 million

$4.5B US Total proceeds raised through IPOs YTD 2019

$347M CDNTotal proceeds raised through IPOs YTD 2019

13.1%YTD 2019 return of S&P 500 Composite Index

12.4%YTD 2019 return of S&P/TSX Composite Index

11.2%Aftermarket performance of YTD 2019 U.S. IPOs

8.4%Aftermarket performance of YTD 2019 Canadian IPOs

*Source: Dealogic (excluding SPACs), CapitalIQ, as of March 29th, 2019

Canadian Q1 2019 IPO Market Outlook | Stability returns as North American markets get ready for influx of IPOs Canadian Q1 2019 IPO Market Outlook | Stability returns as North American markets get ready for influx of IPOs

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Q1 2019: Key trends and observationsSEC closure leaves many IPOs on the runway, waiting for permission to take off The SEC was among the many U.S. federal agencies affected by the U.S. government’s 35-day shutdown, which began in late December and lasted for nearly all of January. Throughout the shutdown, the SEC’s EDGAR system remained open, and a significant number of companies were reported to have filed IPO applications during that period. Unfortunately, with SEC staff furloughed, no one could review or approve these applications. The result, of course, was a massive backlog – one that includes not only the “shutdown filers” but companies that postponed plans to go public in late 2018 because of market volatility at the time.

A positive side effect of the SEC’s shutdown was that it did provide filing companies with more time to focus on their IPO preparation and readiness, which should position them well when their IPO finally receives clearance for takeoff. There has been some evidence that the SEC was beginning to clear the IPO backlog as Q1 drew to a close, and we expect the pace of activity to increase significantly as we move into Q2.

Equity markets regain steadier footing as we move into 2019The volatility that characterized markets in the second half of 2018 appears to have given way to steadier and generally more positive performance in 2019. After markets endured their worst December since the Great Depression, there has been a

material recovery in Q1 of this year. The TSX Composite Index is up more than 12% since the beginning of the year. The Dow Jones, Nasdaq and S&P 500 each achieved several consecutive weeks of gains as well.1 It is important to note that these recent gains truly represent a recovery, in that markets are reaching previous levels as opposed to achieving new highs.

One of the major factors driving market performance is improvements in trade relations between the U.S. and China. The threats and sabre-rattling of 2018 seems to have given way to more constructive dialogue. In fact, U.S. President Trump’s decision to postpone a March 1 deadline

for imposing higher trade tariffs on China was viewed as an indication that progress was being made towards an agreement between the two trading powerhouses.

While the return of less-volatile markets is welcome, there are still concerns about what the year ahead will hold. Analysts have been lowering their forecasts since the start of 2019 as companies cut their own outlooks, citing rising costs, a stronger U.S. dollar, and weaker demand from China. Yet persistent lower interest rates may provide enough of a buffer to mitigate some of these macroeconomic pressures that corporations may be facing in 2019.

Technology sector continues to lead the way on IPOs Technology continues to be among the top 3 best performing sectors in North American markets, and this should continue to translate into higher-than-normal IPO activity in 2019. Indeed, 2018 saw a 40% increase in the number of technology IPOs compared to 2017 in the U.S., and we anticipate this trend could continue this year.2

In Canada, Lightspeed completed its IPO in March 2019 and is the first Canadian technology IPO since Real Matters in 2017, not to mention Canada’s first major IPO of the year. Lightspeed represents a strong “Made-in-Canada” tech story as a result of its Canadian founder and CEO, Montreal-based headquarters, and sponsorship from large Canadian institutional investors that were focused on backing and establishing a Canadian tech anchor. The IPO raised $276 million and was significantly oversubscribed, as evidenced by the strong aftermarket trading performance since the IPO. It also represents the first in a premier class of growing Canadian technology startups that are reaching the next phase of their lifecycle – and will hopefully join the Canadian unicorn club along with Lightspeed.

Lyft filed its IPO paperwork March 1, beating rival Uber to the punch in a keenly watched space of ride-hailing service providers. Lyft began trading on March 28th, raising $2.6bn and was met with strong demand from investors through aftermarket support. The deal was highly

oversubscribed which underscores the demand from investors for high tech and disruptive technology issuers. Lyft finished its first day of trading with aftermarket performance of 8.7% in its share price.1 Nearly 300 technology companies could go public in 2019, including Uber, Airbnb, Slack, Cloudflare and Peloton, all of whom will use Lyft as a barometer of market tone when pursuing their respective offerings.3 Pinterest, the visual search engine with over 265 million users, filed for an IPO on March 22nd, after battling SEC delays, and further highlights the volume of technology activity expected for the remainder of the year.1

The sheer number of technology companies considering IPOs is likely driven by many companies being among the largest in their respective verticals, with few M&A opportunities available. At the same time, private equity and venture capital investors are seeking a liquidity event due to the longer tenure of their investments. Finally, there continues to be robust investor appetite for high quality technology companies. In the case of the Canadian marketplace where the sector makes up only approximately 4% of the TSX Composite, there is a need for more high quality investment opportunities in this industry.

Looking ahead: 2019 is open for business – will 2020 be the same?2019 appears poised to be a positive year for IPOs in the North American markets, but prospective issuers should pay close attention to investor and market sentiment throughout 2019. Investors will be closely

watching the post-IPO performance of 2019’s new issuers, which will play an influential role in determining their appetite for taking part in future IPOs this year.

The base case forecast for global economic growth is for growth to moderate in 2019 and 2020 but the economic cycle’s risks to increase in 2020, as fiscal drag is expected to weigh significantly on U.S. economic growth, according to Craig Alexander, Chief Economist of Deloitte Canada.4 However, we are already seeing downward guidance on earnings and moderation of future growth outlooks. Late 2019 and 2020 also bring with them the uncertainty associated with a federal election in Canada as well a presidential election year in the U.S. in 2020, which has historically been a catalyst for higher market volatility. In addition, we are now very late into the current economic cycle, as we approach the 10th year of the current bull market. It is widely expected that an economic turn is coming, though whether that turn comes in 2019 or 2020 remains to be seen.

Companies considering an IPO should closely monitor market performance and volatility and investor sentiment in the months ahead. There is also merit for companies thinking about going public to consider pulling forward their IPO plans to 2019 – rather than delaying into 2020 – in order to capitalize most effectively on the current market conditions and constructive investor sentiment. For the moment, investors remain optimistic and the IPO market appears to be open for business.

Canadian Q1 2019 IPO Market Outlook | Stability returns as North American markets get ready for influx of IPOs Canadian Q1 2019 IPO Market Outlook | Stability returns as North American markets get ready for influx of IPOs

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IPO Market DashboardMarket volatility back to normal levels

Figure 1. VIX vs TSX / S&P 500 (since January 2017)

Source: CapitalIQ, January 1st 2017 to March 29th 2019

Market performance recovery in 2019

Figure 2. S&P/TSX sector performance (January 1 – March 29, 2019)

Source: CapitalIQ, January 1st 2019 to March 29th 2019

Figure 3. S&P 500 sector performance (January 1 – March 29, 2019)

Source: CapitalIQ, January 1st 2019 to March 29th 2019

IPO aftermarket performance is mixed; but with bright spots

Figure 4. Canadian IPO aftermarket performance (2017 to present)

Source: CapitalIQ & Dealogic, January 1st 2017 to March 29th 2019

Canadian Q1 2019 IPO Market Outlook | Stability returns as North American markets get ready for influx of IPOs

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About usDeloitte IPO Advisory services is an end-to-end service provider that utilized a comprehensive framework for advising and preparing companies for the initial public offering and beyond. This can include analyzing a company’s strategic alternatives, getting “IPO ready,” helping to coordinate the overall process and providing independent capital markets advice throughout the process. The group comprises a dedicated team of professionals from investment banking, equity capital markets, private equity, financial reporting, risk, tax, and consulting backgrounds.

Deloitte’s leading IPO Advisory practice is differentiated in the marketplace through its dedicated Capital Markets team, providing issuers with independent advice relating to key IPO success factors, including equity story, value, market timing, pricing strategy, underwriter selection, fee negotiations, roadshow and investor targeting strategy.

To learn more about our services, contact your local Deloitte contact or one of our Deloitte IPO Advisory professionals.

Endnotes

1 Bloomberg as of March 29th, 2019

2 Dealogic, as of December 31, 2018

3 CBInsights

4 Dark clouds bring rougher seas, Economic outlook: January 2019

ContactsJennifer MaebaPartnerIPO Advisory Services416-301-8491jmaeba@deloitte.ca

David DalzielPartnerIPO Advisory Services416-601-6298ddalziel@deloitte.ca

Robert NardiPartnerIPO Advisory Services514-393-5203rnardi@deloitte.ca

Jason NovakovskiPartnerIPO Advisory Services403-261-8104jnovakovski@deloitte.ca

www.deloitte.caDeloitte provides audit & assurance, consulting, financial advisory, risk advisory, tax and related services to public and private clients spanning multiple industries. Deloitte serves four out of five Fortune Global 500® companies through a globally connected network of member firms in more than 150 countries and territories bringing world-class capabilities, insights and service to address clients’ most complex business challenges. To learn more about how Deloitte’s approximately 264,000 professionals – 9,400 of whom are based in Canada – make an impact that matters, please connect with us on LinkedIn, Twitter or Facebook.

Deloitte LLP, an Ontario limited liability partnership, is the Canadian member firm of Deloitte Touche Tohmatsu Limited. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

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