The banner years for equity financings and pandemic-driven mergers and acquisitions are likely to fade away, with deal activity slowing significantly in the first quarter, particularly for Canadian equity sales.

The value of Canadian equity financings fell 81% in the first quarter of 2022 to $3.9 billion, according to Refinitiv, from $20.9 billion in the same period last year. While year-over-year comparison is difficult, as the start of 2021 was when markets soared, the total value of stock sales hasn’t been this low in more than a decade. ‘a decade.

Central banks cut interest rates to their lowest possible levels at the start of the pandemic to support the economy, sending stock prices soaring and spurring equity selling.

Much of the cooling stems from a recent shortage of tech funding. Last year, the sector accounted for around a quarter of all stock sales – and tech initial public offerings have been particularly popular. So far this year, technology deals have been virtually non-existent due to a market rout in the sector. The tech-heavy Nasdaq Composite is down 12% year-to-date.


BEST INSURERS FOR EQUITY FINANCING

Proceeds from transactions ($ billions)

Bid value* (in billions of US dollars)

BEST M&A FINANCIAL ADVISORS

Bid value* (in billions of US dollars)

BEST INSURERS FOR DEBT FINANCING

Proceeds from transactions ($ billions)

THE GLOBE AND MAIL, SOURCE: REFINITIV 1st quarter 2022 *including net debt

BEST INSURERS FOR EQUITY FINANCING

Proceeds from transactions ($ million)

Bid value* (in billions of US dollars)

BEST M&A FINANCIAL ADVISORS

Bid value* (in billions of US dollars)

BEST INSURERS FOR DEBT FINANCING

Proceeds from transactions ($ billions)

THE GLOBE AND MAIL, SOURCE: REFINITIV 1st quarter 2022 *including net debt

BEST INSURERS FOR EQUITY FINANCING

Proceeds from transactions ($ million)

Bid value* (in billions of US dollars)

Simpson Thacher and Bartlett

BEST M&A FINANCIAL ADVISORS

Bid value* (in billions of US dollars)

BEST INSURERS FOR DEBT FINANCING

Proceeds from transactions ($ billions)

THE GLOBE AND MAIL, SOURCE: REFINITIV 1st quarter 2022 *including net debt

Mergers and acquisitions (M&A) activity also slowed in Canada, with deals worth US$66.6 billion announced in the first quarter, including debt, according to Refinitiv, down 45 % compared to the same quarter last year.

The trend continues worldwide, with the overall value of M&A deals down 23%, according to Refinitiv. However, the pace of mergers and acquisitions is still relatively healthy compared to pre-pandemic years.

Macroeconomic pressures are the main factors driving recent changes. “We live in heightened volatility and uncertainty,” said Nitin Babbar, global co-head of equity capital markets at RBC Dominion Securities.

Inflation sparked uncertainty last fall, leading to a sell-off in growth stocks that hit the tech sector. Those fears have not gone away, and now geopolitical concerns loom over everything. Minutes from the last US Federal Reserve meeting were released on Wednesday, and they showed that Fed officials wanted to start raising interest rates aggressively, but decided to slow down due to the effects economic drivers of Russia’s attack on Ukraine.

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Economic change is forcing investors to reconsider the types of stocks they wish to hold. “At the heart of this is a rotation from growth sectors to value sectors,” said Sante Corona, head of equity capital markets at TD Securities. “It plays out in the broader market, and it plays out in the new issue market as well.”

One of the reasons the M&A market hasn’t been hit so hard – at least so far – is the difference in deals. Stock sales are subject to public market enthusiasm, while many mergers and acquisitions are now being driven by private investment vehicles – and those buyers are full of money. “The private equity community continues to have a lot of capital to put to work,” said David Rawlings, CEO of the Canadian arm of JPMorgan Chase & Co.

Despite growing uncertainty, many of the equity sales launched in the first quarter of this year have been successful. Bank of Montreal BMO-T recently sold $2.7 billion worth of stock to help pay for its acquisition of Bank of the West, among others, and the deal was well received by investors. “We haven’t seen any issuers who really want [raise money] and we have to say ‘you can’t’,” said RBC’s Babbar. “It’s just a question of the transmitter’s need.”

For mergers and acquisitions, soaring financing costs will be a major issue. Interest rates have been very low over the past two years, helping to fuel transactions that are partly paid for by debt, but bond yields have jumped now that a growing number of economists believe the Federal Reserve could make consecutive increases in its key interest rate by 50 basis points each.

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