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IPOs return somewhat in the first quarter but investors remain skeptical

It’s not the flood some were expecting when the new year rolled around, but there is still some positive news: there have been more initial public offerings in the first quarter of 2017 than there were in all of 2016.

According to information from FP Data Group, five new-to-the-market companies have raised at least $30 million of equity capital so far this year. The five include Freshii Inc. ($144.2 million) and Superior Gold ($32.7 million.) Both companies share another distinction: they filed a preliminary prospectus late last year and priced their IPOs in the current quarter.

Persta Resources, a Calgary-based oil and natural gas exploration, production and development company, is also on the list. It went public on the Hong Kong Stock Exchange.

The quarter’s other two IPOs were Canada Goose Holdings — which manufactures and sells expensive retail winter outerwear and which raised the equivalent of $391 million — and Fairfax Africa Holdings, an investment holding company, aiming to “achieve long-term capital appreciation, while preserving capital,” by investing in securities of companies either based in Africa or business that deal with Africa. It raised $79.3 million.

While five companies were successful in going public, two potentially brand new issuers — Source Energy Services and STEP Energy Services — could not attract enough investor interest. In large part the uncertain outlook for the oil sector can explain that lack of interest. STEP and Source are both broadly defined in the oil field service business. Private equity firms owned both.

The stage has been set for another IPO in the second quarter: In mid-March BOS Solutions Holdings filed a preliminary prospectus. The company defines itself as a “leading North American provider of customizable and scalable liquids-solids separation services.” It also provides services to the energy industry.

Plans call for new capital to be raised from the public and for some current investors to sell part of their stake via a secondary offering. BOS’s major shareholder is from Luxembourg. No indication of how much BOS is after.

What’s not included in the numbers is the small number of companies which go public as a result of a transaction with a special purpose acquisition company. For the quarter there were two such deals (Acasta Enterprises and Alignvest) via a structure that has been used extensively in the U.S. but which arrived in Canada two years back.

Known as SPACs, they follow a familiar format: Capital is raised, management seeks out a target and subject to shareholder approval and the transaction then closes. In theory, it sounds very simple, but in reality it is more complicated. The reason: SPACs are very shareholder friendly and shareholders have a choice: they can remain as a shareholder or they can ask for their money back. If too many opt for the latter then the SPAC doesn’t have enough resources to complete the transaction — unless it can secure replacement capital very quickly.

IPOs are often seen as life blood of the equity markets, providing as they do the opportunity for a company to go public, to attract new capital from a wider group of investors and expand — and allowing the founders a way to cash out, over time.

For investors, IPOs represent the chance to buy a new name perhaps in a new and more growth oriented sector.

Against those two big picture themes, over time there has been a general decline in IPOs. Possible explanations include the increased burdens (regulatory and otherwise) of being public and the difficulty of building a business, in public, and meeting the short-term whims of the market.

Financial Post
bcritchley@postmedia.com