Business people are seen at the intersection of King and Bay Streets in Toronto on Oct. 15, 2014.Kevin Van Paassen/The Globe and Mail
The moribund initial public offering and lacklustre late-stage financing environment that had hung around the poor old North American technology sector, since the great financial crisis of 2008, is long gone. As one banker put it, "The drought is over."
David Wismer, managing director of technology investment and corporate banking with BMO Nesbitt Burns. Inc., called the end of the dry spell at an IPO-themed breakfast event hosted by Deloitte, BMO and Bennett Jones, which was held Thursday in Toronto. In attendance were investment bankers, lawyers, tax gurus and the usual smattering of scruffy financial journalists, such as yours truly.
The initial public offering market, which showed signs of life last year, says Mr. Wismer, has taken off in a big way this year, particularly in the U.S. Stateside, there have been 48 new public technology company listings so far in 2014, worth $38-billion (U.S.). During the entirety of 2013, only 43 tech companies listed on U.S. exchanges, raising a mere $9-billion (U.S).
Canada is no slouch either, boasting a number of marquee tech sector IPOs this year. In June, Kinaxis Inc. raised $116-million (Canadian), making it the biggest one on the TSX this year. And in April, Lumenpulse Lighting Inc. went public and took in $115-million.
Mr. Wismer says that one of the best pieces of advice he can give any company considering a public listing is, wait. Stay private and wait to do an IPO until the company is big enough, he argues. That might seem like odd advice from a banker, whose firm potentially stands to profit from lucrative advisory fees, but Mr. Wismer says that by waiting until a company reaches a decent size, the public appetite for an offering will be that much greater. Since the financial crisis, he says there has been a special focus on liquidity. And one of the best ways to guarantee liquidity is to get big. "Size does matter," he said (prompting sniggers from attendees).
What constitutes "big"? Mr. Wismer suggested a suitable market cap for a Canadian company would be between $100-million and $200-million. For startups considering a U.S. listing, think bigger – more like $400-million to $500-million (U.S.).
In the olden days, waiting often wasn't an option, because raising meaningful amounts of capital as a private company was difficult, if not impossible. That's no longer the case, Mr. Wismer said. Just in the past two years, he's seen a huge influx of funds from Canadian institutions, such as pension funds, who are increasingly investing in private companies.
The rationale for the pension funds is two-fold. Holding a private company diversifies their portfolios. It also allows the pension fund to get in early and, ideally, cash out with a much bigger capital gain, should that private company ever go public. For the private company, access to capital from the likes of an OMERS Ventures means they don't have to rush to do an IPO to raise money.
Mr. Wismer mentioned Hootsuite Media Inc. as an example of a private technology company that has been able to raise boatloads of cash without doing an IPO. In September, it raised $60-million through a private placement with BMO. For high growth (20-per-cent revenue growth a year) tech companies, the access to capital is now there, says Mr. Wismer. So a company such as Hootsuite has the luxury of biding its time and go public, when it feels the time is right and the potential returns are greatest.
Niall McGee