A meandering benchmark index and a slew of companies going private have left Canada’s capital markets in a precarious position.

The number of companies leaving the country’s public markets has exceeded new ones joining. In 2023, 19 publicly listed Canadian firms have gone private and taken about $12.5 billion off the Toronto Stock Exchange and junior TSX-Venture, including one that went bankrupt. Summit Industrial Income REIT, valued at US$4.2 billion, and Home Capital Group Inc., which fetched a US$4.1 billion valuation, were the two largest Canadian take-private deals this year.

New listings haven’t kept pace. There has been just one initial public offering on the TSX this year and another 12 companies debuting on the junior exchange, raising a total of just US$114 million.

“Given how unreceptive the markets have been to IPOs generally, I don’t see a scenario where you wouldn’t have more take privates than IPOs,” said J.R. Laffin, co-head of capital markets and public mergers & acquisitions at Bay Street law firm Stikeman Elliott.

Large private equity firms still have a lot of dry powder to deploy in public markets where small- and mid-cap firms are trading at discounted valuations, Laffin added.

TSX SET TO SHRINK

Partly as a result of the privatizations, the total market capitalization on the TSX is teetering on the edge of a decline. It dropped to $3.77 trillion at the end of October, a decline of 1.5 per cent over the last 12 months, according to Bloomberg calculations. A annual contraction would be the first in five years, though so far the market value remains once per cent higher on a year to date basis.

More concerning is the 3.7 per cent gain this year by the country’s main equities benchmark, the S&P/TSX Composite Index, a plodding figure when set against the 19 per cent increase for the S&P 500.

“Investors aren’t optimistic enough — just generally, right now — to give companies the benefit of the doubt, so most companies are holding off on plans to go public,” Bloomberg Intelligence analyst Andrew Silverman said, adding that “going private, on the other hand, is a much easier call to make.”

A similar dynamic has played out elsewhere, with IPOs slumping amid volatility in the stock market and higher interest rates and going-private deals outpacing IPOs in the U.S. this year. So far, there have been 58 companies taken private in the U.S. this year for US$120.1 billion, according to data compiled by Bloomberg.

However, the S&P 500’s performance and the Nasdaq 100’s 47 per cent jump to a nearly two-year high have kept the U.S. market on a growth trajectory for the year.

Into that buoyant stock market, there was some hope for an IPO rebound in the U.S. in September this year, but middling performance from those firms have weighed on go-public sentiment across the board, Stikeman Elliott’s Laffin said. For the time being, he expects privatizations to continue to outpace stock market debuts. 

“I don’t see a near-term catalyst for things to change,” he said.