Halogen's valuation shadow could undercut Canada's tech IPO momentum
The deals are there for Canadian technology companies and its broader ecosystem, that’s for sure.
Kinaxis (KXS:TSX), Critical Control (CCZ:TSX), DIRTT (DRT:TSX) and Espial (ESP:TSX) have all raised equity via public offerings over the past few weeks. And that’s just a representative list of Canadian-based tech firms which have been able to get something done in what I’ll call a less-than-perfect capital markets environment. The NASDAQ hasn’t been playing ball — slowing the U.S. tech IPO market to a trickle. U.S. SaaS multiples have contracted (although they don’t look horrible from an issuer’s standpoint), and several previous local IPO offerings haven’t yet produced sustainable gains for their IPO investors.
Names that come to mind include Difference Capital (DCF:TSX), Halogen Software (HGN:TSX), NexJ (NXJ:TSX), ViXS (VXS:TSX) and so forth. And while there’s nothing unusual about shares not going straight up post-IPO, one name in particular is drawing undue attention. And it may have a negative impact on the TSX for some time to come.
It seems that Halogen’s current valuation has raised concerns within certain corners of the American VC and Growth Equity community. The issue is simply Halogen’s crappy valuation as compared to the direct comps that trade on American stock exchanges. Halogen remains a growth story, and is largely playing out as promised on last year’s roadshow. Which makes it even harder for U.S. VCs with private Canadian tech investments to ignore that the stock is now trading around eight bucks, well below its $11.50 IPO price; this for a stock that hit $15.75 at one point last summer. Why list in Canada, they ask, if they undervalue our best investments?
Why does any of this matter? Simply because this Halogen situation is bouncing around Bay Street like a pinball, as investment banks firms pitch Desire2Learn, Hootsuite, Shopify and Vision Critical on the comforts and appeal of the TSX. There hasn’t been any punative pushback just yet, but some U.S. VCs have definitely soured for the moment on the concept. 10 years ago, Silicon Valley VCs were thought to see the entire Canadian public market as being just one big “Vancouver Stock Exchange”, and the TSX was rarely listed as a “qualified stock exchange” in U.S. VC-driven shareholder agreements; even when the investee company was Canadian-based.
Many private company CFOs will tell you that they’d like to list their companies on the TSX for patriotic reasons. They know, better than anyone, how important it is to have a robust local capital ecosystem. They don’t decide in a vacuum, however, since most VCs (particularly those with a Board seat) retain the right to approve an ultimate liquidity event. For the companies that aren’t big enough to attract Wall Street attention, the issue is moot. But its the large tech names that have the luxury of choice, and valuation is a (the?) key factor before deciding “to go out the door.”
The idea that the TSX is Siberia of stock exchanges for good tech companies is no more. But Halogen’s lacklustre trading over the past 90 days, through no fault of its own, might just set the local market back ten years if the quote doesn’t self-correct soon.
(disclosure: CCZ is a Wellington Financial Fund II portfolio company; Vision Critical is a Fund III portfolio company; I own ESP and HGN)