Private is the new public: The problem with tech stars chasing private money as they don’t file IPOs

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Mike Silagadze has big plans to upend the global textbook market.

His 11-year-old Toronto software firm, Tophatmonocle Corp. (Top Hat), has been growing by 50 per cent a year, signing up professors to offer interactive electronic textbooks, tests and assignments on its platform, while traditional giants of the US$35-billion industry such as Pearson PLC have struggled.

With 400 employees and annual revenue approaching US$50-million, Top Hat, which has raised tens of millions of dollars in venture capital to date, is “getting to the size where we can go public on the TSX,” said Mr. Silagadze, the chief executive and co-founder. His plan is to be prepared for that option by spring 2021.

That doesn’t mean an initial public offering will happen. It’s not even his first choice. The company has had little problem attracting private capital investors from Canada and the United States, and “If we can get a liquidity event without going public, we’ll do that,” Mr. Silagadze said. “If you can find an anchor private equity fund that can give you all the liquidity you need and allow you to raise capital with the same frictionless process that you would in an IPO, it’s better in every way.”

Mr. Silagadze is far from alone. His reluctance to take his company public is part of a much bigger trend unfolding in the senior ranks of Canada’s flourishing technology sector.

Many other promising companies are big enough and growing fast enough to become reasonable candidates for an IPO on a senior stock exchange within two years. In conversations with investors, CEOs and financiers, The Globe and Mail has identified 15 to 25 companies that fit that description. Some are fast closing in on $100-million in annual revenue – considered the threshold for an IPO on a major exchange – or, such as health-care software giant PointClickCare Technologies Inc. and online auto financier Canada Drives Ltd., have surpassed it.

But a lot of those CEOs just aren’t interested. As with Mr. Silagadze, it is well down their list of potential financing choices.

Call it Canada’s Lost Tech IPO Boom. Those companies are increasingly avoiding going public because they have so much access to private capital. Hundreds of billions of dollars have flowed into U.S. and Canadian private equity in recent years, much of it owing to chronically low interest rates that have driven savvy investors to seek returns from non-conventional asset classes.

But for tech-starved Canadian stock markets, the lack of new entrants is an opportunity lost. Canada has seen just three tech IPOs in the past four years. As software continues to conquer the world, Canadian retail investors, and the investment dealers that cater to them, are missing out on a vital source of wealth creation

“The trend line in Canada is: Don’t take them public unless you absolutely have to” said Matt Roberts, a partner with Toronto’s ScaleUP Ventures. “Nobody wants to deal with the public markets anymore. Companies have so much capital lined up they don’t really need to go public.”

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The flood of venture capital, venture debt and private equity into tech continues to swell, pouring in from wealthy individuals, sovereign wealth and pension funds, university endowments and other institutions.

Last year, private equity funds globally raised $810-billion and invested $600-billion, up more than 200 per cent and 85 per cent, respectively, from 2014, according to preliminary data from analytics provider Refinitiv. In Canada, its data say venture capital firms invested $6.9-billion in 2019, more than ever before and up about 50 per cent from 2018. Taking inflation into account, 2019 was second only to the peak dot-com bubble year of 2000.

That flood is enabling fast-growing companies to stay private much longer, raising as much as they could by going public, but without the hassle, cost, disclosure requirements and scrutiny. “If you told me there was a $500-million deal to do in Canada of a software company that lots of people can understand, I bet you could talk to 30 interested parties,” said David Greenberg, general partner of Baltimore-based JMI Equity, one of the most active U.S. growth equity capital investors in Canadian technology. “There is a depth of [private] capital ready to do deals of all sizes.”

The rise of private capital means less investment is flowing into public markets. In the mid- to late 2000s, Canadian technology companies would typically raise $40-million apiece in public offerings on the Toronto Stock Exchange. Last year, a dozen Canadian companies each raised more than twice that much – but from private investors.

The total number of public companies in has declined by 35 per cent in Canada since 2008. In the U.S., the total is down by 50 per cent over the past two decades.

The squeeze in Canada’s tech sector has been particularly dramatic. Since 2009, there have been just 11 tech IPOs that raised $50-million-plus on the TSX – 12 if you count Minneapolis-based Ceridian HCM Holding Inc., which is managed out of Toronto.

The sector was already thin. Information technology accounts for less than 6 per cent of the TSX composite index, compared with 22 per cent on the S&P 500 in the U.S.

IT also exceeds 10 per cent on the benchmark stock indices in Germany, France and Hong Kong.

Last year, just two Canadian IT companies – Lightspeed POS Inc. and Docebo Inc. – went public on the TSX. Legal software firm Dye & Durham Corp., which delayed its planned 2018 IPO, will probably go public in 2020, along with maybe online deals website consolidator Emerge Commerce Inc.

Beyond that, Bay Street tech underwriters don’t expect much. This year “will be more of the same,” BMO Capital Markets managing director David Wismer said. “If things were the same as 10 years ago [when private equity was scarcer], there would have been 20 other [Canadian tech] IPOs.”

The drought is not due to lack of investor interest. The Lightspeed and Docebo offerings were both heavily oversubscribed. Shares of Ottawa-based Shopify Inc. have surged since its 2015 IPO.

In the U.S., by contrast, the parade of tech IPOs continues. Despite the poor performance of many of the 42 new tech issues last year, other prominent names such as Airbnb Inc and DoorDash Inc. are set to go this year, following the lead of Casper Sleep Inc, which filed a registration statement Friday to list on the New York Stock Exchange. “It’s more of a supply than a demand issue” in Canada, said Mr. Wismer.

Private investors are pumping so money into tech that some analysts worry they’ve created pre-IPO bubbles. Uber Technologies, Inc., Lyft, Inc., and Slack Technologies raised billions privately only to see shares of their money-losing companies tumble after their IPOs last year.

Still, a significant share of the gains for public investors in the U.S. over the past 25 years has come from the technology sector. A slew of internet giants including Amazon.com, Alphabet Inc., Apple Inc., Facebook Inc. and Alibaba Group Holding Ltd. have created trillions of dollars of wealth.

“Canadian retail investors have been dramatically underexposed to technology,” said Peter Misek, a former analyst who now co-leads Framework Venture Partners in Toronto. “Do you think there will be more or less technology in every industry? If you think there will be more, we’ve basically been missing out on the largest secular trend the world has ever seen.”

The reallocation of capital to private markets from public “really sucks for the average retail investor because now the only people that are getting access to these hyper-growth businesses are basically rich dudes,” Mr. Silagadze said.

With technology so underrepresented on Canada’s benchmark stock index, “one could argue that makes [the TSX] less relevant,” BMO’s Mr. Wismer said. “Our future standard of living depends on the innovation economy. If we as a country don’t have a critical mass of public technology companies, it impairs that.”

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The trouble is that, for tech companies themselves, the advantages of staying private have grown dramatically.

Mike Wessinger, the CEO and co-founder of PointClickCare, a Mississauga-based provider of cloud-based health-care records software to nursing homes and retirement facilities, is happy he didn’t take his company public in 2015. The company filed a prospectus with U.S. and Canadian regulators for an IPO. But it delayed and then pulled the offering. Instead, PointClickCare raised private equity led by San Francisco’s Dragoneer Investment Group.

PointClickCare has continued to flourish under the control of Dragoneer, JMI and management. The company’s revenue has increased by 140 per cent since 2015 to more than US$300-million. If it were public, PointClickCare would likely be worth more than U$2-billion and one of the TSX’s 10 largest tech companies.

That won’t happen any time soon. “Private is the new public,” Mr. Wessinger said. “I would expect to see this company for the foreseeable future continue to grow and be a large stand-alone company.”

He offers many reasons for preferring the private life. PointClickCare has avoided costs and the burdens of public reporting and the steady barrage of questions from investors and analysts on topics like U.S. health care politics. A random tweet by U.S. President Donald Trump about the Affordable Care Act could send stocks in the sector reeling.

As a public-company CEO, Mr. Wessinger would also likely be more focused on short-term investor concerns and fluctuations in the stock. “You try to pretend that you wouldn’t pay attention to the markets and just build for the long term. But if you wake up one morning and 30 per cent of the company’s value has hemorrhaged because of the way investors think about your company, you’ll behave [in a way to get] the markets think differently.”

Then there are the shareholder activists who often dog public companies. “I don’t have that distraction,” Mr. Wessinger said.

Away from public scrutiny, PointClickCare has spent four years and US$100-million developing new products expected to drive future growth. “The pressure as a public company would be, ‘Just stop doing that, your core business is so incredibly profitable’ and we would have optimized for the short term,” Mr. Wessinger said.

A DECADE-LONG GLOBAL BOOM

IN PRIVATE CAPITAL

($CAD MILLLIONS)

GLOBAL PRIVATE

EQUITY INVESTED

GLOBAL VENTURE

CAPITAL INVESTED

$600,000

500,000

400,000

300,000

200,000

100,000

0

2019*

2011

2013

2014

2010

2015

2016

2017

2018

2012

GLOBAL VENTUR

CAPITAL RAISEDE

GLOBAL PRIVATE

EQUITY RAISED

$800,000

600,000

400,000

200,000

0

2019*

2011

2013

2017

2012

2016

2018

2015

2010

2014

*2019 data is preliminary and incomplete

THE GLOBE AND MAIL, SOURCE:REFINITIV

A DECADE-LONG GLOBAL BOOM IN PRIVATE CAPITAL

($CAD MILLLIONS)

$600,000

GLOBAL PRIVAT

EQUITY INVESTEDE

500,000

GLOBAL VENTUR

CAPITAL INVESTEDE

400,000

300,000

200,000

100,000

0

2019*

2011

2013

2014

2010

2015

2016

2017

2018

2012

$800,000

GLOBAL PRIVATE

EQUITY RAISED

600,000

GLOBAL VENTURE

CAPITAL RAISED

400,000

*2019 data is

preliminary

and incomplete

200,000

0

2019*

2011

2013

2017

2012

2016

2018

2015

2010

2014

THE GLOBE AND MAIL, SOURCE:REFINITIV

A DECADE-LONG GLOBAL BOOM IN PRIVATE CAPITAL

($CAD MILLLIONS)

$600,000

GLOBAL PRIVATE

EQUITY INVESTED

500,000

GLOBAL VENTURE

CAPITAL INVESTED

400,000

300,000

200,000

100,000

0

2019*

2011

2012

2014

2010

2013

2015

2016

2017

2018

$800,000

GLOBAL PRIVATE

EQUITY RAISED

600,000

GLOBAL VENTURE

CAPITAL RAISED

*2019 data is preliminary

400,000

and incomplete

200,000

0

2019*

2011

2013

2017

2018

2010

2012

2015

2016

2014

THE GLOBE AND MAIL, SOURCE:REFINITIV

By contrast, Mr. Wessinger’s two key private investors are patient and “recognize that this is a 10 or 20-year play,” he said. “They value it, they understand what we’re trying to do, and I don’t have to spend forever helping them understand the dynamics of our end market or what we’re trying to accomplish.”

Besides, he adds, “any time we need to raise capital they have been more than willing to help,” paying only a slight discount to public market values. “Private equity has gotten very attractive and there’s so much of it. I could take a call every day from another private equity investor who would love to [invest].”

Bain & Co. estimates private equity firms raised, invested and returned more money to investors during the 2014-18 period than in any other five-year period. The amount of committed but uncalled private equity capital around the world – known as “dry powder” – topped US$2-trillion that year.

With more private money chasing deals, it’s also improving the terms on offer for Canadian tech stars. Toronto’s Cority Software Inc., an environmental health, safety and quality auditing software firm, has revenue that is growing by 30 per cent a year and fast approaching $100-million. Its operating margins exceed 20 per cent and its customers are loyal. “We would have absolutely a glide path to the public markets,” CEO Mark Wallace said.

Instead, U.S. private equity giant Thoma Bravo LLC bought a control stake last year from earlier private capital investors, valuing the profitable company at more than US$500-million. The next ownership change, Mr. Wallace said, will likely see another private equity firm or corporation buying Cority. He has no interest in the burden of running a public company. “We’re happier going the private route,” Mr. Wallace said.

Even companies that are open to an IPO are in no rush, given the private equity alternatives. Louis Têtu, CEO of Quebec City-based Coveo Solutions Inc., sold his last, publicly traded software company, Taleo Corp., in 2012 to Oracle for US$1.9-billion. Last fall, he opted to raise $227-million in a private funding led by Ontario Municipal Employees Retirement System.

That was almost as much as Lightspeed raised in its IPO, but Mr. Têtu sees only downside risk if he were to go public now, in advance of an expected recession. If a market sell-off dragged down his share price, he’d have to reprice stock options for executives and be stuck with weakened equity for acquisitions. “I’ve lived through that,” he said. “It creates a whole host of issues.”

Doing deals as a private company allows him to issue shares based on Coveo’s last private valuation. “For a guy like me, it gives us another year or two and then we’ll decide if we go public or not," Mr. Têtu said.

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Are we in the midst of a lost technology IPO boom or just a boom delayed? Private investors argue there are broader benefits to Canadian companies staying private longer: They’re scaling up and delivering on longer-term plans that public investors may not appreciate.

“To be able to do this with a private investment partner and not have to show immediate impact is a benefit for the companies,” said Justin Sadrian, managing director with global private equity firm Warburg Pincus, which has invested close to US$500-million in Canadian tech companies since 2015. “It’s not that they are choosing to never go public.” Instead, he said, they are getting to the point where they are “much more mature businesses that are more seasoned, in many cases derisked, and better prepared” for quarterly reporting.

Michael Sabia, the outgoing CEO of the Caisse de dépôt et placement du Québec, agrees. “The last message I would read into fewer [tech] IPOs is a lament,” he said. “I actually think you could interpret this as the opposite. Fifteen years ago, an IPO was the indicator of success and most companies sought to do it as early as possible. [But] there is a growing recognition that public markets may be an inhospitable environment in which to grow a business.”

Even raising, say, $40-million in an IPO in the early 2000s often left a company underfunded, under-covered by analysts and too small for many fund managers. Beset by weak trading volumes and anemic share prices, public Canadian tech companies such as internet-of-things pioneer RuggedCom Inc. were also vulnerable to hostile bids that offered huge premiums to stockholders. RuggedCom sold out to white knight Siemens AG in 2012 for $440-million – a move CEO Marzio Pozzuoli called "bittersweet” at the time because it left him short of his goal of building a billion-dollar company.

By contrast, Ottawa software firms Kinaxis and Shopify raised considerably more in the mid-2010s IPOs. Both drew on heavy institutional interest and subsequently ranked among the most expensive cloud software stocks in their classes.

“The choice is: Do entrepreneurs want to have large, institutional, partnership-focused money that will be available to help them grow?” Mr. Sabia said. “Public market capital is not by its nature partnership capital. That’s the proposition we make. We represent a pool of patient, constructive capital [and] offer an attractive, alternative path [to an IPO]. These businesses will become an important part of the Canadian economy … and eventually many go public – but they’ll probably go public later.”

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But will they? Statistics show that private capital-backed companies overwhelmingly sell to corporations looking for strategic acquisitions or, increasingly, to other private equity firms. IPOs typically account for 10 per cent or less of “exit” transactions.

“We foster the idea [with founders] of being ‘public ready,'” JMI’s Mr. Greenberg said. But doing that, "makes the companies more attractive to [any type of buyer] and, in most cases, the company comes to its own decision that you can have a better, more lucrative outcome than trying to public.”

Selling out to another buyer is also a more attractive option for private equity firms because it lets them cash in immediately. IPOs often become drawn-own exits with mandated periods for holding publicly traded shares, and the associated market risks.

“I’m not sure it’s an IPO boom delayed,” said Neil Selfe, CEO of investment banking advisory firm INFOR Financial Group. “Ultimately, many private equity-sponsored companies will be bought [by strategic acquirers] ... because they will always pay more than the public markets.”

There may be good news for public investors, however. Despite expectations of a slow 2020, Canadian underwriters expect a pickup in tech IPOs in 2021 and beyond. “I think [it] will happen in 12 to 24 months,” said Aly Gillani, RBC Capital Markets’ managing director overseeing tech financings.

"At a certain point, [the] cycle catches up [and] we’ll be back to a place where there should be more tech IPOs on a regular basis … [perhaps] half a dozen or more a year,” BMO’s Mr. Wismer said.

The list of near to medium-term IPO candidates includes Vancouver-based anti-fraud and risk management software seller ACL Services Ltd. and restaurant software supplier TouchBistro Inc. of Toronto. After that would likely come Ottawa’s Mindbridge Analytics, a provider of artificial-intelligence tools for auditors; Toronto’s Ritual Technologies Inc., whose mobile app is used by consumers to order and pay for takeout food; and Coveo.

“We’d love to go [public] if market conditions are right” by early 2021, TouchBistro CEO Alex Barrotti said last September. ACL, which operates as Galvanize, is gearing up to be IPO-ready by 2022. CEO Laurie Schultz last May said an IPO “will be a lot harder” than selling but would “leave a legacy for the community.”

“We have a very good base of companies here,” said former Bay Street technology investment banker Sanjiv Samant. “When you have that many more companies coming, a handful will go public.”

But if there is a bonanza of Canadian tech IPOs coming, it’s not likely to happen for some time. For now, the sector is strong and well financed, with more companies adding jobs, growing into billion-dollar entities and expanding into global markets – just not the stock markets.

CANADIAN TECH IPOs ON THE TSX

(DEAL VALUE $CAD MILLIONS)

JULY

$682

SMART

TECHNOLOGIES

2011

2012

2013

MAY

$63

HALOGEN SOFTWARE

JUNE

$169

INFORMATION

SERVICES CORP.

2014

APRIL

$115

LUMENPULSE INC.

JUNE

$116

KINAXIS INC.

2015

MAY

$184

SHOPIFY INC.

JUNE

$50

MOGO FINANCE

TECHNOLOGY INC.

OCTOBER

$225

CPI CARD GROUP INC.

2016

2017

MAY

$157

REAL MATTERS INC.

2018

Total

$2.1-billion

2019

MARCH

$276

LIGHTSPEED INC.

OCTOBER

$75

DOCEBO INC.

THE GLOBE AND MAIL, SOURCE:BMO CAPITAL MARKETS

CANADIAN TECH IPOs ON THE TSX

(DEAL VALUE $CAD MILLIONS)

JULY

$682

SMART TECHNOLOGIES INC.

2011

2012

2013

MAY

$63

HALOGEN SOFTWARE INC.

JUNE

$169

INFORMATION SERVICES CORP.

2014

APRIL

$115

LUMENPULSE INC.

JUNE

$116

KINAXIS INC.

2015

MAY

$184

SHOPIFY INC.

JUNE

$50

MOGO FINANCE TECHNOLOGY INC.

OCTOBER

$225

CPI CARD GROUP INC.

2016

2017

MAY

$157

REAL MATTERS INC.

2018

Total

$2.1-billion

2019

MARCH

$276

LIGHTSPEED INC.

OCTOBER

$75

DOCEBO INC.

THE GLOBE AND MAIL, SOURCE:BMO CAPITAL MARKETS

CANADIAN TECH IPOs ON THE TSX

(DEAL VALUE $CAD MILLIONS)

JULY

$682

SMART TECHNOLOGIES INC.

2011

2012

2013

MAY

$63

HALOGEN SOFTWARE INC.

JUNE

$169

INFORMATION SERVICES CORP.

2014

APRIL

$115

LUMENPULSE INC.

JUNE

$116

KINAXIS INC.

2015

MAY

$184

SHOPIFY INC.

JUNE

$50

MOGO FINANCE TECHNOLOGY INC.

OCTOBER

$225

CPI CARD GROUP INC.

2016

2017

MAY

$157

REAL MATTERS INC.

2018

Total

$2.1-billion

2019

MARCH

$276

LIGHTSPEED INC.

OCTOBER

$75

DOCEBO INC.

THE GLOBE AND MAIL, SOURCE:BMO CAPITAL MARKETS

Canadian tech CEOs reveal why they don’t intend to go public soon - or ever

Adrian Schauer, chief executive of AlayaCare Inc., a Montreal cloud software provider to home health-care agencies, is backed by the Caisse de dépôt et placement du Québec and other private investors. Mr. Schauer says public markets used to pay a premium for shares. “But today there’s so much private equity capital chasing a scarcity of good opportunities that valuations in private markets are equivalent,” he says. "The only advantage I still see to public markets is perpetual capital. I enjoy getting to pick my investors and the interactions I have with them. It’s a handful of smart, sophisticated people.”

For Carol Leaman, chief executive of Waterloo-based employee training software provider Axonify Inc., “It’s a choice of, ‘Do I want the hassle of being under public scrutiny and chasing stock price all the time versus just keeping two or three investors and growing and focusing on the business?’” Her company is partly owned by Baltimore-based JMI Equity. When that firm exits, she says an initial public offering is the third choice behind selling out or taking on another private equity backer. “I talk to the odd CEO who thinks an IPO is cool and prestigious. I don’t have that.”

“The private equity world has become more attractive for companies like ours,” said Jamie King, chief executive of St. John’s-based Verafin Inc., a fraud detection and anti-money-laundering software provider. Last year, his two private sponsors sold stakes held by established funds they manage to newer ones, valuing Verafin at close to $1-billion. An initial public offering “was ruled out fairly quickly,” Mr King said. He’s very happy with his investors. They’re supportive and "generally take a long-term approach.” Verafin could go public, he said – but not until 2024 or 2025. “It’s a potential realistic alternative in the next funding cycle.”