Canadian investors flock to Real Matters IPO

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Real Matters Inc. continues to be a made-in-Canada success story with a made-in-Canada fan base. After a successful road show, will it get peace, order and a good investor reception when it goes public?

The online mortgage-services firm, which is set to begin trading on the Toronto Stock Exchange next Friday at a $1.17-billion valuation after pricing its shares this week at $13 each, has closed its order book after being seven times oversubscribed. Interestingly, demand for the roughly $157-million offering – $125-million from the treasury and the balance from existing investors – was overwhelmingly Canadian, with institutional investors across the country accounting for about 85 per cent of demand, and the rest split between U.S. and European investors, sources familiar with the deal said. The deal, co-led by BMO Nesbitt Burns, INFOR Financial Group and Merrill Lynch, was already well oversubscribed at home before the road show hit Boston and New York this week.

Compare that with the two most recent Canadian tech IPOs: Shopify Inc., in May, 2015, and Kinaxis Inc., in June of 2014. Shopify, which operates an online commerce platform for merchants, went public on both the New York Stock Exchange and the TSX, but it was primarily an American deal; U.S. investors accounted for roughly 90 per cent of the offering. Shopify was one of the last offerings of a buoyant North American market for subscription-software firms before the IPO circuit went cold that fall for the better part of a year. American investors paid little heed to the fact Shopify had no visibility at that time as to when it would become profitable because its top line was doubling annually. The stock popped on the first day of trading, closing up 51 per cent from its $17 (U.S.) offer price, and has more than tripled since on a string of better-than-expected quarterly reports.

Kinaxis, on the other hand, only went public on the TSX, but still managed to attract about half its investor base from the United States after a road show that included far more U.S. stops than the Real Matters team made. The supply-chain-management software firm was profitable but growing at a much slower pace than Shopify, and investors were indifferent initially: The stock priced at $13, below its initial target range, and was a slow starter. However, the story has picked up after a string of successful quarters, and the stock now trades in the $85 range.

So what about Real Matters? Unlike many tech firms that go public, Real Matters's $164-million (U.S.) in private capital funding came overwhelmingly from conservative Bay Street financial institutions, rather than Silicon Valley venture-capital firms. (Its two largest shareholders are Canadian real estate advisory firm Altus Group Ltd. and Toronto fund manager Edgepoint Investment Group Inc.) Sources say the IPO orders have largely gone to what has been described as "high-quality investors," with little apportioned to hedge funds that often crowd into hot IPOs to make a quick buck. The company is so well-regarded among Bay Street institutions, there was little need to market in the United States at all, even though the vast majority of its business is south of the border. (Real Matters has staked much of its growth on bringing technology and improved service to the U.S. mortgage-appraisal business and estimates it provides one in 20 residential mortgage appraisals in the United States.)

With such high demand from so many apparently conservative investors, it will be interesting to see what happens after founder and CEO Jason Smith rings the opening TSX bell next Friday. If the IPO buyers hold, there could be hot demand for what trades. But on the very next trading day, Monday May 15, Real Matters will report second-quarter revenues it has already flagged in its prospectus will be "significantly lower" than the $78.9-million posted in the first quarter, after rising interest rates dampened the U.S. residential mortgage market. Presumably investors who bought into the offering got the full story during the road show. How will the open market react? That's when things get real.

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