Exchange Insights from TSX and TSXV

The technology opportunity

Some of the world’s leading technology companies are listed and traded on Canada’s premier equity exchanges, Toronto Stock Exchange and TSX Venture Exchange. These companies not only benefit from a stable and dynamic equity marketplace, they also gain access to large pension funds, money managers and other institutional investors.

The benefits of these companies extend to investors, as well. Because the two exchanges accommodate companies from their early stages to their maturity, astute investors in Canada and elsewhere can identify promising young firms and then participate in their subsequent growth. The rewards, for companies and investors alike, can be substantial.

Having 179 technology issuers and a combined market cap of $37.2 billion (as at January 31, 2012), TSX and TSX Venture together rank second in North America for number of listed technology companies. Another 130 issuers operate in the clean technology sector, with a market cap of $17.5 billion. Many companies in these sectors are world leaders in their field. (See sidebar).

Last year, technology issuers on the two exchanges completed 82 financings and raised more than $550 million. The market for technology stocks was robust as well, with more than 7.3 billion technology shares traded on TSX and TSX Venture in 2011.

“Our technology issuers are among the most innovative, growth-oriented companies in the world,” says Ungad Chadda, Senior Vice President, TSX. “Increasing awareness of this sector in Canada and around the world is a top priority and of vital importance in its success.”

For investors, the two exchanges provide access to technology companies at all stages of growth, from small but promising new ventures to more established senior companies.

Large issuers include multinationals such as CGI Group Inc. (TSX: GIB.A). A 35-year-old company with 31,000 employees in 15 countries, CGI generated revenue in 2011 of $4.32 billion and now ranks among the world’s leading providers of IT and business processes. Absolute Software (TSX: ABT), founded in 1993, was initially listed on TSX Venture. For the second consecutive year, the company recorded a 20% increase in revenues in 2011, to more than $79 million, from sales of IT asset management, data security and computer theft recovery services.

Smaller firms listed on TSX Venture are also of interest. Investors can participate in the potential of companies such as TIO Networks Corp. (TSXV: TNC), an expedited bill-payment processor, which recorded $36.5 million in revenues in 2011, an increase of almost 50% over the previous year, and Verisante Technology Inc. (TSXV: VRS), a medical device company that commercializes cancer detection systems using a platform developed by the BC Cancer Agency. The top-ranked technology company in this year’s TSX Venture 50 ranking, Verisante’s market cap grew over the last year by 782%, to $35 million.

More than half the technology issuers listed on TSX and TSX Venture are involved in software and services. In these areas, successful companies are characterized by stability and longevity. Demand in their sector remains strong, driven by GDP growth and corporate profitability. According to research analysts at investment bank Versant Partners Inc., U.S. software expenditures in the third quarter of 2011 grew by 6.6% over the same quarter in the previous year, the highest growth rate in the last four-and-a-half-years. Growth in software spending will continue, the firm says, unless S&P 500 profits decline.

Opportunity beckons

Observing the promise in Canada’s technology sector, two U.S. financial organizations have formed a joint venture to invest in early-stage Canadian companies in the clean technology sector. SAIL Venture Partners, the early-stage venture arm of SAIL Capital Partners, and Stifel Nicolaus Canada Inc., have set up a $100-million fund to invest in companies that have developed innovative products ready for market.

With the joint venture, SAIL Venture Partners becomes one of the first American clean technology venture firms to establish a presence in Toronto to capitalize on opportunities in Canada. SAIL became aware of Canada’s technology sector after participating last fall in the TSX Clean Technology Finance Series in California. Organized by TSX and TSX Venture, the series aims for deal origination between C-level executives and elite advisors from the Canadian capital markets. At each event, companies engage in one-on-one meetings with leading Canadian deal-makers in the sector.

“We’ve had the pleasure of consulting with both the SAIL Capital Partners team and the investment banking team at Stifel Nicolaus in the U.S. on various deals,” says Rob Peterman, Head of Business Development for the technology sector for TSX and TSX Venture. “Over the past few years we’ve connected both firms to many of the key players in the Canadian capital markets. It’s great to know that some of these connections have resulted in a U.S. investment bank and venture capital firm investing in their Canadian presence and taking a close look at funding Canadian companies.”

David Fowler, President and CEO of Stifel Nicolaus Canada Inc., has more than 25 years of experience in Canadian capital markets and knows the territory well. “The opportunity for cleantech venture investment in Canada is immense,” he says.

Linking ideas to investors

To help connect technology issuers and Canada’s investment community, TSX has arranged a series of events at which more than 50 Canadian companies in the technology and clean technology sectors have met with investment bankers across the country.

Over the last few months, for example, TSX and the Canadian Advanced Technology Alliance (CATA) organized the Capital Connections Series to introduce investment banks to Canadian technology companies in the security industry.

“Any time a company is moving to a different stage, whether a startup going to early stage, or early stage going to mid-stream, it SXC Health Solutions faces a significant capital requirement,” says CATA President and CEO John Reid.

Each event in the series includes a 10-minute meeting between capital market professionals and the CEOs of five technology firms. After Constellation the initial meeting, participants can continue their conversations and acquaint themselves with other leaders in the advanced-security sector.

Following the initial event last September, enterprise contenttwo of the five technology firms scheduled further meetings with investment banks to discuss investment opportunities in more detail, and eventually secured growth capital.

So far, the Capital Connections Series has attracted five capital market participants: BMO Capital Markets, Cormark Securities Inc., Mackie Research Capital Corporation, Versant Partners Inc., and The Equicom Group Inc. “It’s sometimes hard [for technology companies] to be heard, appreciated and actually funded through the more obvious venture channels,” says Reid. “So if you can reduce the time it takes for the key people to talk to one another, then you’re addressing a primary business requirement.”