Friday interview with GMP's Lorne Sugarman
If you are a tech company in Canada, you’ve probably met Lorne Sugarman, GMP’s tech investment banker, over the past several years. Although this past week has been brutal, 2007 is shaping up to be the best market for tech equity offerings this decade. Who better to give us the inside story than our i-banker at GMP Securities?
Question #1. Over the last 10 years, GMP Securities has grown from what was considered to be a small boutique dealer to now rival the distribution power of any of the chartered banks. Are there are lessons that come to mind might be relevant entrepreneurs across Canada?
I think the first aspect of the GMP’s success that would be most relevant to entrepreneurs in all industries is the importance of building a cohesive culture and a sense of shared destiny that permeates the entire organization. Since the founding of GMP in 1995, the initial partners, who now constitute the senior management of the firm, have instilled a common passion for success in servicing our clients that extends throughout the firm.
The second element that would be relevant is focusing on areas where you have a strong competitive advantage and then expanding from there as the right opportunities present themselves. GMP was started as an institutional investment banking boutique that focused on the sectors of the market where we believed we could add the most value. Additionally we focused on being the leading provider of liquidity to mid-market, entrepreneurial Canadian growth stories. As we grew we then expanded into the wealth management space with our GMP Private Client initiative, into private equity with our acquisition of EdgeStone and now into the European capital markets with GMP Europe.
Q2. You head up the tech practice. Why did the Canadian tech IPO window finally open up after a brutal 7 years? How long can it last?
Subsequent to the technology meltdown in 2000 there was a few years where our sector was in a deep freeze. Slowly signs of life began to emerge and there have been a few small IPO windows that have opened from time to time in each year starting in early 2004. The few Canadian technology IPOs that have come to market in each year since then have met with mixed results. I think that the determinants of market success for each of these IPOs has been issuer-specific and has not been driven by a general industry resurgence. Since 2004, those companies that have come to market and then exhibited strong fundamental performance have seen their shares respond favourably, while the others have hit rougher waters. It’s my view that the markets will always be receptive to growth stories with good fundamentals and strong management teams regardless of market conditions except in extreme circumstances. I think that it still remains to be seen if this is finally the big window that many of us in the sector have been waiting for.
I believe that at present portfolio managers in Canada are looking to diversify their investments beyond the mining and energy stocks that have dominated the Canadian capital markets in the past few years. PMs are looking for high growth stories in tech as the growth has begun to slow in the resources space. I think that this has led to a build up of significant demand for Canadian technology growth stories while at the same time there is a dearth of technology investment opportunities in Canada created by acquisitions in the sector and a lack of new issues coming to market. While this situation affords an ideal financial markets for Canadian technology companies, ultimately, in aggregate, the companies in the sector will have to continue to post strong fundamental performance for this window to really have staying power.
Q3. The last tech IPOs have all been TSX-only in nature. Last Fal4l, the AIM market was the hot topic, but its appeal seems to have subsided as the TSX window opened up. Is the AIM now merely a backup market should the TSX turn cool on tech offerings?
I don’t know that the AIM is really seen as a back up right now. Demand on the AIM for foreign small-cap technology issuers is now non existent. If the TSX were to turn cool on tech offerings I don’t think that the AIM would be able to pick up the slack right away. While the demand for Canadian small cap technology issues may return to the AIM, it’s not there now — regardless of the situation on the TSX.
However, like all things in the capital markets, the demand on the AIM for foreign small-cap issues will go in cycles. In the long run the AIM will continue to be a great exchange for smaller, entrepreneurial growth stories including those from foreign jurisdictions. That’s why we established GMP Europe, so that we could offer our corporate clients a means of accessing European capital whether in conjunction with an offering on the TSX or on a standalone basis.
Q4. I’m amazed that some of the sacred cow rules have been thrown out the window. Not that long ago, an IPO raise had to be at least $40 million before the buyside would take a meeting; liquidity being the primary concern. Now, it seems that anything goes. Is it now all “story-specific”?
Absolutely it’s story-specific. Investors are increasingly willing to get involved with early-stage companies provided that they have strong growth opportunities and management teams that can execute. This goes back to what I was saying before about the increasing demand for high growth tech stories that isn’t being adequately supplied by new issues. This phenomenon has led institutional investors to consider smaller issues in the space, if the story is enticing, to help them diversify beyond energy and metals stocks. It’s simply a question of what’s available in the market.
Q5. The aftermarket support of some of these IPOs has been fabulous. Although the raises haven’t been that large, there has been plenty of post-IPO trading, even during the summer. And the stocks have been rising. Where were those buyers on the IPO?
The amount of liquidity we’re seeing in the markets is just tremendous. All sectors seem to be benefiting as funds continue to flow in to the market. There are also many portfolio managers that don’t want to take the pricing risk on the IPO issue, but are willing to step in in the aftermarket trading. Additionally, the smaller IPOs have often left significant unfilled demand on the IPO, which has led to strong demand in the aftermarket as investors look to increase their shareholdings to their desired position size.
Q6. Sectorally, are there any areas that are particularly attractive? Mobile, enterprise software, network infrastructure, EMS?
Companies with strong fundamentals and growth opportunities in all areas of tech are being seriously looked at by investors. However, some of the hotter areas that are attracting a lot of interest from investors include Wireless apps, IPTV and digital on-demand content in the home, WiMAX, online advertising and video gaming applications.
Q7. Last question, what’s on your iPod?
Lots of 2Pac, Snoop, Jay-Z, Biggie, NWA and some other old school.
Thanks so much Lorne for joining our space this week. Your answers were fabulous, and I appreciate the fact that folks pay GMP for your advice — and you’ve shared it with us without the customary 6% fee! And good luck to you and your wife with the baby delivery later today (thanks for squeezing us in).