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BMO, Georgian Partners in $100-million-plus deal to help Medgate consolidate market

One of Canada's oldest, quietest and steadiest software success stories, Toronto-based Medgate, has decided to shoot for the big time, bringing in a trio of brand-name investors to help fuel consolidation of its niche industry.

Medgate, a 30-year-old provider of cloud-based, subscription software used by companies to perform environmental, health and safety (EHS) audits, has received what it called "a large strategic investment" from Silicon Valley private capital firm Norwest Venture Partners, leading Toronto venture capital firm Georgian Partners and Bank of Montreal. The company didn't disclose terms, but industry sources say the size of the investment exceeded $100-million.

Some of that will be used for growth capital but most will go to existing shareholders, as part of a recapitalization. Sources in the venture finance world said the deal values Medgate at close to $200-million. Chief executive officer Mark Wallace declined to comment on the deal size or confirm the company's valuation.

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Medgate has been profitable for years and didn't need money, Mr. Wallace said. But after declining several suitors for the past couple of years, he changed his mind after realizing Medgate could create value by consolidating the market with some outside help. "It reaches a stage where you say, 'somebody is going to emerge as the leader in our space. So why not us?'"

Medgate is one of the larger players in a $1-billion niche industry that specializes in software-based risk management audits for companies whose operations include hazardous environments, including mining, oil and gas, chemical manufacturing and health care. Medgate's customers include Suncor Energy, BHP Billiton and Rio Tinto. The industry is growing by about 15 per cent a year as customers abandon customized legacy systems, update to global standards and tighten up their EHS practices in an attempt to be better corporate citizens.

The company's revenue is expected to approach $40-million in 2016, on the back of four years of about 30-per-cent top-line growth. That may sound modest, but many of Medgate's rivals, including Toronto-based Intelex, also have revenue in the mid-eight-figure range, and no other players are close to the $100-million mark.

"If you can dominate a niche market, the market will reward the leader disproportionately," Mr. Wallace said. "The first objective is to continue to grow and accelerate that growth and become the leader in this space." At that point, he indicated, an initial public offering could happen.

The deal will also put some cash in the pockets of Mr. Wallace, a lawyer by training (he was once general counsel for AT&T Canada) and entrepreneur who was one of Medgate's largest shareholders and retains a sizable stake.

Mr. Wallace joined Medgate in 2003 when it was a small division within health services company MedisysHealth Group Income Fund. He led a management buyout three years later in a $7-million deal. At the time, the company, founded in the mid-1980s by entrepreneur Murray Balcom, had just $3-million in annual revenue and was cash flow negative. It has been profitable ever since.

With the investment, Norwest's Rob Arditi and Jon Kossow and Georgian's Steve Leightell will join the board, as well as B.C. software entrepreneur Shanti Atkins.

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