Wednesday, October 03, 2007

The IPO Slowdown

Interesting report yesterday from PricewaterhouseCoopers indicating that Canada's market for initial public offerings appears to be heading for its slowest its year in a decade. Nobody’s going public anymore!

The third quarter of 2007 saw 22 new issues worth a total of $337-million, vs 33 new issues in the year-earlier period worth $650 million (nearly a 50% drop!).

So far this year we’ve seen 63 IPOs worth $1.2-billion – compared with 95 IPOs in the first nine months of 2006 valued at $4.7-billion (nearly a 75% drop).

PwC spokesman Ross Sinclair said, "It's surprising with the general economic activity and the markets overall that we're experiencing such a low level of IPOs.”

Rick says: not such a surprise. The feds’ decision to choke off income trust IPOs removed an artificial stimulant to the public markets. Growing governance issues (and corresponding legal/accounting costs) make “going public” more onerous and expensive than ever. And the rise of private equity is giving private companies a cheaper and easier alternative.

I was talking to one entrepreneur at a fast-growth company this summer and asked if he intended to take his company public. “Are you crazy?” he said. With the additional costs of governance and compliance, he said going public would add $1 million in annual overhead to his company – an anti-competitive burden it couldn't afford.

This has serious implications. As more and more large Canadian companies get bought up and privatized, it reduces the “basket” of Canadian equities that the Canadian investment community needs – for investing all that RRSP and pension cash, for diversification, and for safety (against currency fluctuation).

The negativity compounds: when institutional money can't find enough stocks to buy, more of it becomes private equity, which then competes with public markets.

Public companies are actually a vital national resource. We have to find some way to revitalize this market. If they want to keep this cash cow healthy, the brokers and lawyers may even have to cut their fees a bit.

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