Over the last five years, many IPOs have been postponed.
Along with investors becoming more conservative after the recession, “the market’s essentially been closed to any companies that have a cyclical look,” explains Gary Baker, leader of the fundamental Canadian equity team at Connor, Clark & Lunn Investment Management. He’s one of three sub-advisors for the Renaissance Canadian Growth Fund.
As a result, many high-quality companies, such as outperforming resource businesses, decided to hold off on going public until market conditions became more favourable.
But now, the tide is turning. Already, says Baker, there’ve been some REIT public offerings due to “investor demand for yield-oriented products.”
Further, “as equity markets have become more receptive, we’ve had some of the highest-quality new public offerings.” And, “given the success of these new companies…it’s going to encourage other companies” to enter the market.
So investors should see a surge of IPOs throughout the coming year, as we’re still in the midst of the economic recovery cycle. Still, warns Baker, investors need to be cautious.
Read: Slate of IPOs ahead
“When you get toward the end of [this] cycle, you start to see lower-quality companies going public,” he adds, “and those are the ones that you probably want to avoid. [But] I don’t think we’re at that stage yet since we’re [still] in the early innings of the IPO cycle.”
When Baker and his team want to add to their portfolio, here’s how they identify good prospective investments.
They ask specialists who “cover all the stocks in their areas of expertise,” which means they look at all small-, mid-, and large-cap securities, says Baker. Their goal is to delve into undiscovered market segments to find opportunities that others might miss.
There are two main advantages of working with specialists. First, he’s able to get perspective on whole sectors and markets by tapping into comprehensive research.
This is key, says Baker, since “you can’t truly understand a sector if you only cover a segment of [it]. Some of the best information we get about small-cap companies [is acquired] by talking about large-cap companies in the same sector,” and by comparing the performance of each group of stocks.
Second, many of the experts are familiar with the management teams of top companies. This is useful because good managers “often start new companies after they successfully grow a [business].” When those managers sell and start another, Baker and his team might already have a connection to that new, potentially profitable company.