Canadian tech IPO market remains AWOL, despite impressive 5 yr. outperformance of TSX Information Technology Index

Pitchbook has just reported that the U.S. I.P.O. window is wide open, but Canadian investors shouldn’t expect any spillover for the foreseeable future.  Not that there aren’t companies to take public; it’s that the demand just doesn’t seem to be there.  Which is ludicrous, given the positive performance of Canadian tech shares over the past five years as well as the decent stable of late stage private companies across the land.

This from a research report published by National Bank’s Richard Tse earlier today:

When it comes to the TSX Composite Index, the hard reality is that tech is a small contributor ‐ around 2.5%. Yet, as small as that contribution may be, the technology names within the Index have had some impressive returns.

If we look at the combined returns over the past 10 years for a staple grouping of tech names like Constellation Software, CGI and OpenText, collectively, that group has seen their stock prices increase 1,488% on average (CAGR 31%)!

But what’s even more interesting is that the collective TSX Information Technology Index has had equally impressive outperformance relative to the broad Index, more than doubling the return of the TSX Composite in the past five years.

Those kinds of performance figures usually get the attention of Portfolio Managers.  And yet, I fear the telephones on Canada’s institutional sales desks are silent.  At least as far as tech IPO interest goes.  Even now, after five years of fabulous outperformance.

In part, I blame the local investment bankers.  They are, I’m told, counselling Canadian tech entrepreneurs to get profitable before tapping the public markets.  Even if that reduces topline growth.  The question is: do you bring the PM what he/she thinks he/she wants, or what they should want?  In my mind, its the I-bankers who are best positioned to advocate to the Institutional Sales desks on behalf of the sector as a whole.

It may well be that the Canadian buyside is only interested in profitable stories.  And yet, south of the border, nothing could be further from the truth, with the NASDAQ on track to have its best quarter since 2013.  Appito is just another example of the courage of the American investor (from Pitchbook) and its investment banking sector:

Apptio (NASDAQ: APTI), a provider of IT business management software, debuted on the public market Friday. The company set a share price of $16—above the previously announced range of $13 to $15—and raised a total of $96 million. The stock saw an early bump, opening for trading at $23.40, and closing the day at $22.55, representing a 40.94% uptick from the increased pricing.

When Apptio first filed for its IPO about a month ago, opinions differed over how the public market would receive the company. While the warm receptions that enterprise tech startups Twilio (NYSE: TWLO) and Talend (NASDAQ: TLND) received earlier this year suggested that Apptio would also succeed, the company has seen its net losses increase for the past three years, and it has yet to turn a profit. However, its revenues have also been trending upwards, much to the apparent liking of the market.

Why is it, exactly, that American i-banks will take a money-losing, small cap tech name public, while the Canadian cohort must be profitable?  I think of the experience of Xactly Corp (XTLY:NYSE), one of our Wellington Financial Fund IV portfolio companies, and worry that the Canadian buyside has forgotten how to make money in the wake of the collapse in O&G and mining shares.  Hopefully it isn’t something so simple as Canadian dealers all waiting for the next guy to “go first.”

San Jose-based Xactly filed its confidential S-1 with the SEC a couple of years ago, and launched its IPO in June 2014.  Although it was VC-backed (Alloy, Bay, Bridgescale, Key, Outlook and Rembrandt), growing at 30% year-over-year, and counted JP Morgan as the lead underwriter, it was still very much a small cap story.  With ~US$50 million in recurring revenue and a valuation of less than US$250M, the IPO raise was a smallish $56M.

Something that JP Morgan Vice-Chair Cristina Morgan and her sales desk could have easily ignored.  But they didn’t, and everyone is the better for it: the VCs, the staff, Xactly’s customers as well as the buyside.

Xactly shares have soared: up 79%, post IPO.  That’s not the eye-popping performance of Constellation Software, which outperformed the TSX by 100x over the past ten years.  Even so, Xactly and Apptio are more evidence of the inability of the Canadian public markets to take regular risks on anything other than resource plays.

And it is becoming a real risk to the future of the Canadian economy.

MRM

(disclosure: our Fund IV owns warrants/shares in XTLY)