(Ep.120) The Acquirers Podcast: David Barr – Venture Value: Small And Micro Growth And Value With A Former VC

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In this episode of The Acquirers Podcast, Tobias chats with David Barr, President & CEO of Pender Capital Management. During the interview David provided some great insights into:

  • ‘Close The Discount’ Investing
  • Uncovering The Best Capital-Light Businesses Early
  • How To Generate Alpha In Markets
  • Use Private Market Valuations On Public Companies
  • Venture Value
  • Value Investing Opportunities
  • Finding Opportunities In Early Stage Companies
  • Dan Rasmussen Is One Of The Best At Identifying Public LBO’s
  • The Best Ideas Are Recycled Ideas
  • Early Signs That Amazon Was Going To Achieve World Domination
  • Differences In The U.S & Canadian Markets
  • (CVE: PFM) Is An Outstanding Business
  • (CVE: WE) Is Not Expensive
  • (CVE: STC) Trading At A 50% Discount To U.S Peers

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Full Transcript

Tobias: Hi, I’m Tobias Carlisle. This is The Acquirers podcast. My special guest today is Dave Barr from Pender Capital Management. We’re going to be talking about value, we’re going to be talking about growth, we’re going to be talking technology and small cap. It’s a fascinating conversation. It’s coming up right after this.

[The Acquirers Podcast theme]

Dave, we’ve known each other for a little while. You run three funds at Pender. Can you just give us an overview of what those three funds are?

David: Yeah, there’s three mandates. Pender Value Fund, which is our go-anywhere opportunistic fund. There’s no market cap restrictions, no geographical restrictions, so really allows me to draw in ideas and names from the entire Pender investment team. The fund I’ve been running since we went into the traditional asset management business in 2009 is the small cap opportunities fund. At my core, I get up jumping out of bed every day looking for great micro-cap and small cap opportunities.

That fund is very much focused on Canadian small micro-cap but we do venture into the US in a bit International, but 20% non-Canadian exposure in that mandate. Then, Pender Growth Fund is actually the fund started the whole thing at Pender. It was originally a venture fund, and we’ve transitioned it a couple of times. It’s now a publicly traded company, PTF, on the TSX Venture Exchange. It allows us to take deep liquidity opportunities. It’s a holding company. We don’t have to worry about shareholders redeeming at the worst possible time they can sell in the market, so it allows us to do some of the most interesting things we’re able to right across our investment team.

Tobias: Is a holding company that holds only other public companies or does it hold private stuff as well?

Buy Public Companies Using A Private Equity Foundation

David: It holds both. We target a 40/60, 60/40 mix. When we look at privates, it’s more later-stage, inflection-stage technology businesses, or things where we buy and control outright. There’s one medical software evaluation company in their 145, I think we bought that out of a larger pubco back in 2011. Back in the good old days, when you could buy a recurring revenue software business for 0.5 times revenue. It’s subsequently grown its revenue 4x over that period of time.

So, doing control investments like that. And then, on the public side being opportunistic, but also really employing our private equity approach. When we talk about Pender Growth Fund being the fund that started at all, I’ve started in private equity, and it really builds the foundation for our investment process. We’re business analysts, we’re trying to figure out what these businesses are worth, we’re trying to figure out what they’re worth to a third party, we want to know the quality of it, and how much that business can grow. When we’re looking at these companies on the public side, not only are we trying to buy them at a cheap price, but we’re trying to figure out what are the internal economics that business going to grow at. Then, the nice added bonus with Pender Growth Fund is we can help the company, we can take larger positions.

There’s one company we own over 50% of another company we own 35% of. We can really provide the stability that management needs to execute on their business plan, and bring other people to the table that can help the management team accelerate that too.

Finding Opportunities In Early Stage Companies

Tobias: Let’s just talk about quality a little bit, because I think that’s a very broad term. How do you define quality? What are you looking for?

David: Quality is a highly subjective term. Felix Narhi, Felix, our CIO. We have great debates over this all the time. For us, it’s what is the sustainability of the of the firm’s cash flows, and can they increase those cash flows over time? Where we’re looking in the cap spectrum, it has an impact. We’re looking more into the mid and large cap space. It’s really important to understand what the return on invested capital is, and how big that runway is. That’s really the core of a high-quality business. Can they reinvest their internal capital at a way higher rate than their than their cost of capital?

In the earlier stage, a lot of times we’re investing in companies that aren’t profitable yet, so how the heck do you actually figure out what the return on invested capitalists? When people can’t figure that out, that’s when I just see opportunities aplenty. When we focus down in the earlier stages of companies, it’s really looking for product-market fit, market validation– Nothing tells us that a product or service solves an unmet need or solves a big problem than customers buying a whole bunch of it. Customers buy things not necessarily because they want to because they need to. When you see this, when you see revenue traction– and then the fun part of our job is trying to figure out what the incremental margins could potentially be.

David: We’ve had this debate about Amazon going for 25 years, I think people finally– Everyone’s capitulated, and they think it’s a good company now. But there are periods of time where everyone just thought, this company is worth nothing, because it generates no free cash flow. When you can peel back the onion a little bit, and try and figure out where, where these companies are actually generating incremental free cash flow, because when they get the scale, then you’re going to see the power of the business model– Particularly, when you’re in the small and micro-cap space, you buy these things at a– They might be going out of business multiple, and then when they prove out that either, A, they’re growing at a nice clip, and, B, the internal economics or sticking to the ribs of shareholders, then we start to see a lot of multiple rewrites and reversion to the mean.

Early Signs That Amazon Was Going To Achieve World Domination

Tobias: Let’s just talk a little bit about Amazon as an example. How did you decide that Amazon was a good business, even though it seemed to have that problem that it wasn’t generating a great deal of free cash flow? Wasn’t even falling to the bottom line.

David: Yeah. We came close to buying Amazon, I think it was in 2013. But there were a couple of quarters where you could see they took the foot off the spend pedal a little bit, and every now and again, they would surprise with all of a sudden cash flow bumped up a little bit more than we thought and then they’re just trying to prove to the street that, “Hey, we could make this profitable if we really wanted to.” But you’ve got a CEO there, he clearly didn’t want to launch just the bookstore, he wanted pretty much world domination. As long as there were high reinvestment opportunities, they were going to be reinvesting every single last penny in achieving world dominance. Gosh, are they there yet?

Tobias: [laughs]

David: They’re getting pretty close.

Differences In The U.S & Canadian Markets

Tobias: I think they’ve done it. It’s an interesting segue. Given that you invest across Canada and the US, what’s your experience looking at– How do you find the two places differ?

David: Canada is a lot more conservative I find, which is interesting given we have this really healthy like junior capital markets. Much like yourself coming from Australia, Toby. We have moose pasture getting finance. You want $5 million, tell people there’s gold in your moose pasture. But when you look at the more mature markets in Canada and the end investors, it is a very conservative space. But then, we have this bifurcation where we have this very healthy public venture market, which encourages risk taking and capital formation in smaller companies. That’s wonderful for me being a small cap investor, because we have a whole bunch of small cap companies, a really fertile opportunity set for us to look at.

Structurally, there’s a lot less overhead corporate expense associated with being public in Canada compared to the US. A thrifty Canadian pubco can be public for $100 to $500,000 a year. Pretty sure, you can’t get out of bed in the US for under 2 million a year in pubco. If you’re a $100 million dollar company, $2 million a year is 2% of your revenue, I’d rather have that in my genes than have that going out to the lawyers and all the compliance people associated with being a public company.

There’s some structural advantages to being public early in Canada, but when the flip side is– When I talk about people being more risk averse, when we get into larger companies, we tend to see a valuation gap between Canadian public companies and US public companies. What that ends up doing is, it ends up providing a rich opportunity set for US companies to buy Canadian companies. We see this all the time. A US company can come in and buy a Canadian company at a similar multiple what they’re trading in the US markets, but it’s a 30% to 40% premium to where the Canadian company is trading at. So, any shareholder who has $1, and you offer him $1.30, they’re grabbing that $1.30 out of your hand as quickly as they can normally.

Venture Value

Tobias: Let’s get back to the start. How did you get your start as an investor?

David: I had the fortune of starting as a venture capitalist in early 2000. Basically, I moved back to Vancouver after going to business school, caught on with a small venture firm. You ring the bell on the NASDAQ and then I just get punched in the face for three years. That was the start of my career. When you’re going through it, it feels like the worst experience ever.

Now, looking back on it, it really helped to fine tune a lot of my investment process where we had this portfolio of technology businesses, and as soon as we recognized there was no capital available, we had to go in and triage and say, “Okay, what companies are going to survive, and which are going to die?” What was interesting is that, companies with revenue and positive free cash flow tended to survive, and those with no revenue and spending a lot of money tended to go away.

For me, looking around the investment university, that was highly influential, and in the way I look at investing today and how I got my start in. I just spent a whole bunch of time analyzing businesses for about a decade working in the venture private equity space, which is just– I love tearing apart businesses and looking at them all day– probably resonate with a bunch of 20- to 30-year-old analysts right now who want to be like PMs and CEOs of firms, and the best days are when you get spent 14 hours a day doing nothing but looking at stocks when you’re in your 20s and 30s. So, enjoy it, everybody.

Tobias: When did you join Pender?

David: I joined in 2003. The fund I’ve started with in 2000, it kind of rode the market downturn along with the rest of the tech sector, and my two current partners bought the management contract. As they like to say, “We need a short, little, red-haired guy to do all the work,” and well, that was me. I caught on in 2003, and we built that business– We were really active in the venture space for until about 2007, and I was getting ready to leave and start a small cap hedge fund, because what I saw between 2003 to 2007, 2008 was there’s a big valuation disconnect between technology companies in the private markets and technology companies in the public markets. I could finance some–

On the private side, you could finance some guy’s big dream, who thought he is worth a billion dollars, because he thought he was smarter than Mark Zuckerberg, a billion-dollar valuation for an idea, or you could go into the public markets, and there’s a couple of companies out there did great on where you were looking at businesses, one company was doing $5 million of revenue, was doubling its revenue year over year, moving from $5 to $10 million of revenue, hit the inflection point of being cashflow positive, and I think it had $10 million of cash in the bank, and it was trading at a $10 million market cap. You’re buying it for the cash on the balance sheet. It just turned profitable and was growing at 100% year over year. You see things like that. We joke like we do hard things at Pender, we much prefer doing easy things. When you can buy something for the cash on the balance sheet and you get the business for free, that’s on the easier pile. We just saw way more opportunities in the public markets than we saw in the private markets.

Uncovering The Best Capital-Light Businesses Early

Tobias: I think that your investment style then is you’re looking for free cash or at least a pathway to it, and you like technology-type businesses that are not quite at scale, but a pretty clear path to getting to scale. Is that a fair characterization of your philosophy?

David: Yeah. I would expand it. We’re ideally looking for capital-light business models. Technology is just aplenty with them as are healthcare, consumer products, specialty finance firms. We talk about it with respect like Thomas Phelps in his book, 101 Stock Market. You need two things to generate great long-term returns. Actually, you can do it with just riding the business fundamentals. But if you can also get the multiple rerate, and the multiple expansion in a company you’re teeing yourself up for to double dip on, you take advantage of the market and the economics of the business. For us, what we find is there’s a period of time where before it’s really apparent what the true underlining earning power of the business is, where you can buy a company at a multiple that’s at a discount to what it would be trading at once it does actually demonstrate that earning power. So, getting in there early.

That’s the core of a lot of our small cap investment work, because it’s hard to figure that out, and sometimes we’re right, sometimes we’re wrong, it’s not without risk. But the rewards are wonderful when you get it right. But it is challenging, and it really drives in on the fact– I’ve been looking at growing technology businesses for over 20 years. On our investment team, we’ve got a private markets team focused strictly on private tech companies. We got over 12 people on the public market side. When you understand these businesses at a deep level and you’re having conversations about the company, you can start to fine tune and figure out if the business really is scalable at the end of the day or if it’s not.

One of the things you really have to look out for in the technology space, and we see this in Canada right now, obviously, we’ve had a hot IPO market right across the board, and the worst thing about a technology company is when it’s growing really quickly, and everyone says, “Oh, yeah. They’re reinvesting for growth.” But the reality is a lot of times, they’re reinvesting just to make their existing customers happy. It’s not actually growth, it’s just maintenance spend.

Businesses like that tend to be job shops, and they could be nice little businesses. But you’re not going to see the software revenues everybody salivates when they look at Facebook, and Google, and all these big guys at the end of the day. You might see some normalized real business multiples, kind of in that 2 to… to see a high single digit type operating margins, because those are more competitive businesses, heavy investment in people, and the profitability probably just isn’t going to be there at the end of the day. So, in the early stages, it can be really hard to figure out if that technology truly is scalable or if it’s a job shop. So, we try to tune in on that.

How To Generate Alpha In Markets

Tobias: How do you take the approach that you have which seems very suitable for small cap growth tech and apply that in a larger cap value universe?

David: Yeah. When you look at how you can actually have an advantage in generate alpha in the markets, we talk about there’s three ways you can do it. You can have an analytical edge and we lean on that heavily in the small cap markets, because small cap markets are incredibly inefficient. The second is your behavioral approach. That’s really having a contrarian mindset, and so when we get into large cap companies– our opinion of Stitch Fix is as there’s at least 100 other people out there who have similar opinions probably have done deeper work than we have, but that’s okay.

Our approach is, understand the business at a deep level and the potential earnings power, and then just be opportunistic, when the market gives you the opportunity. Stitch Fix, my partner, Felix, he talked about it, he posted his thesis on it at a conference last summer. The stock was probably in the $20, $30 range at that point in time and ran up to $100. Obviously, we sold a whole bunch of stock with $100. Then, all of a sudden everyone said, “Well, it’s not worth $100. It’s worth way less.” So, it came back down, it was in the 30s, and we reloaded on our position. Do we have any unique insight on the business?

Stitch Fix is a bit of a battleground stock, so there’s a lot of people who will disagree with us. The great part in these battleground stocks though is you’ve got strong opinions on both sides, which leads to massive over pricing and massive underpricing. We just have our opinion on what we think the business is worth, what the quality is, and we take advantage of what the market does on any given day.

The Best Ideas Are Recycled Ideas

Tobias: I guess that leads me to the next question, which is when you’re looking for these opportunities, how do you go about finding them? Are you screening or what’s your process?

David: Our favorite ideas are recycled ideas. Because when you’re trying to understand a business, you don’t figure it out overnight. It really is a bunch of accumulated knowledge and understanding the deep workings of the business. For us, a lot of the ideas, people will ask me, “Where’d you come up with that idea?” I’m like, “I don’t know. I’ve just been following it so long, I don’t even know where it came from.” We are seeing a moment in time right now, where the go public market is pretty frothy.

There’s a lot of stuff coming to market right now. For us, this is a great opportunity to get to know these companies. There was a period of time last year where private market value was at a discount to what we would see in the public markets, so there was an opportunity to take advantage of that arbitrage. Private markets, they’re smart people too, and they figured it out. So, they’re now demanding higher prices on the IPO, which then– you don’t have that bump out of the gate. Some are even, able to price it a premium to what the business is probably worth.

But for us right now, it’s about doing the work and getting to understand these businesses, and consistently meeting with the management team, because our ideal investment is a high-quality business that we can buy and hold for a really long period of time. I sound like a million other people out there. Who doesn’t want that? I recognize that how that sounds.

But in order to actually find those companies, you need to be following them for a long time. When you really get to understand, how the business is operating, what management’s doing? In a small cap space, there’s less information available. For us, it’s a lot of times it’s meeting with these management teams and building a track record on how they’re doing strategically.

Because they’ll come in and they talk about where they want to take the company in three to five years, and we take a whole bunch of notes, and then three to five years later, we look at our notes, and it’s like, “Wow. Here’s a CEO who’s just done everything he said he’s going to do and more.” Then, on the flip side, I talked about the moose pasture financings up here in Canada, we hear a whole bunch of people who are going to build billion-dollar companies in a year, and yeah, every now and again, they do.

Tobias: [laughs]

David: Every now and again.

Dan Rasmussen Is One Of The Best At Identifying Public LBO’s

Tobias: When you’re constructing a portfolio, how do you think about diversification, concentration across industries? To what extent does that enter into the consideration?

David: Yeah. When I’m building out a portfolio, the most important aspect of it is capital preservation. That ties into what’s the maximum exposure we want with respect to business risk. If I look at a company, we’ll go into some pretty interesting situations where, yeah, there might be an overlevered balance sheet, and we see a pathway for that company to de-lever.

I know you’ve had Dan Rasmussen on the pod, and he does a great job identifying these public LBOs effectively where you’ve got, $800 million of debt and $100 billion of equity value. And as you pay down that debt value transfer, it goes from the debt holders to the equity holders. You can make a 4x or 5x in a relatively short period of time in these things. The flip side is it can go to zero. You do your work to make sure they don’t, but it can. If we see a risk exposure like that our max waiting will be 2%, because we try and keep the catastrophic risk at the business level out of the portfolio.

The second way we look at risk is on the end customer side. For us, when we see downturns, they generally tend to be industry wide. We’ve seen this big downturn in the oil and gas industry. If we had 100% of our portfolio invested in companies that were selling software to the oil and gas industry, we’d be looking like fools right now. It’s really managing our industry exposure at where the spend actually is occurring, because that’s where the industry cycles actually come more into play.

‘Close The Discount’ Investing

Tobias: What about rebalancing, trimming, and adding? Do you that or do you just let the positions run?

David: I tend to be pretty active. Historically, we’ve been about 25% turnover in the portfolio. I imagine there might be some people listening who think 25% is highly active? That’s crazy. But for me, last year was clearly a really high turnover year given the market conditions and what happened. When you understand what a business is worth to a third party, it really gives you a lot of conviction to when the business–

When Mr. Market says, “The business is worth less today than it was yesterday,” that gives you an opportunity to add a bit more to your position. Similarly, when Mr. Market says, “The business is worth way more than it was yesterday, you can take a little bit off the table.” So, we do trade around it. My core position size is between 2% and 6%. What we would look at is, the two aspects that would come into it are, is it a high-quality business, is it a compounder to throw another overused term out there right now, or is it a lower quality business and what we call close the discount situation, which is kind of that more traditional Ben Graham type value investing.

We’re way more active on our close the discount names, because gosh, we’ve all bought something because we saw great asset coverage on the balance sheet, and it’s $1 of assets, stock’s trading at 20 cents. And then, you think you’re a hero, because the stock goes to 80 cents and you forget to sell, and then you’re back at 20 cents, and you’re kicking yourself. There’s no easier way to round trip than in a low-quality, close-to-discount situation. As those types of companies get closer to fair value, we actively manage our position sizing.

On compounders, that’s where we’re happier to let them run, as long as they’re in the range of fair value. What’s really challenging is actually a lot of these great companies, we continually underestimate the business momentum. We continually underestimate the great things management did two, three, four, or five years ago, which are starting to pay dividends today, which is that next lever of growth, which isn’t readily apparent, if you’re backwards looking. You actually have to give management a little bit of the benefit of the doubt when they’ve got that history of doing really smart things.

Amazon, I think, is an example of that where you look at AWS and nobody really knew what was going on inside of AWS. Look at it today. That was never part of the value equation of anybody looking at Amazon– Well, probably a couple people who were deep in tech, but not a lot of people in the early 2000s. It’s these low-cost bullets, and these things the management team are doing on a continual basis that can add value, which–

When you’re looking at fair value, however you do it as a private market value, is a DCF, you’re never going to be perfectly correct. Your assumptions are always wrong. It’s just a question of how much they’re wrong. It’s really easy, and I find particularly for value-focused investors, I just find a lot of us tend to underestimate our bull scenarios. So, if you’re doing a probability-weighted analysis of a bull case and bear case scenario, if your bull case is underrepresented or understated, you’re wrong out of the gate. You’re just going to keep on trimming your flowers. If you’ve trimmed your flowers too much in the last two years, you’re on Twitter suffering right now.

Value Investing Opportunities

Tobias: [laughs] It’s been probably an unusual decade in the sense that it seems that we have had exactly that experience where a lot of these companies have been much, much better than we appreciated, and so have traded at very wide discounts to probably where they should have been trading. When you look at the opportunity set now, how do you feel about that opportunity set? Does that continue to be the case, do you think?

David: I always struggle to make the broad-based statements, because there’s absolutely technology companies which are crazy overvalued right now. There’s other companies which are probably misunderstood and undervalued today. I think, on a general level, we certainly have to be more cautious today than we were a year ago or we were in 2015 or 2016. Because there’s more people who are around the space, understand it, valuations are higher. So, there’s just more risk right across the board. But there’s always things to be doing out there. We always talk about– there’s times where it’s like shooting fish in a barrel. There’s other times where you go hunting for a needle in the haystack. I don’t think we’re full needle in a haystack right now, but we’re certainly closer to that than grabbing fish out of the barrel.

Tobias: Well, let me ask it in a different way then. Which of the funds do you find it easiest to find opportunities for right now?

David: Oh, you are really trying to pin me down, aren’t you?


David: The value fund because we’re able to go larger cap and we tend to have larger weightings. We’re very happy with where we are right there. We’ve seen some spin-out opportunities recently. When you’re running concentrated portfolios, 20 names is 80% of our invested portfolio. We only need 20 good ideas, and they may be high conviction. Right now, we’ve got 20 high conviction names right across the board.

Tobias: I’ve never asked a follow-up question in my life. So, I’m glad that made you feel like you’re being-

David: [laughs]

Tobias: -cross examined or something like that.

David: [laughs] Your legal backgrounds coming in there, Toby. I totally ducked the question though, and I liked how you tried to pin me on it.

(CVE: PFM) Is An Outstanding Business

Tobias: Dave, let’s discuss a few of the holdings that you currently have in your portfolio. These are micro-cap, small so folks who are playing along at home understand what we’re talking about here. Let’s discuss ProntoForms first. What’s the thesis there?

David: ProntoForms is a nice little software company out of Ottawa. They help automate field service workers. If you think of you’re gas meter reader who shows up at your house and, either writes things down on a piece of paper or bangs it into an Excel spreadsheet, what ProntoForms allows the gas company to build a really simple app that all of their field workers can use, input the data, goes back to head office real time, done. It really actually improves the workflow process for that gas meter reader. In a COVID world, it actually speeds up their job, makes their role a lot safer in the world.

What’s great is it’s a low-code tool. You don’t need a big software development team at the gas company to build this app out to support your field service workers. Basically, a business analysts can build it. We use a similar tool at Pender for our trading. My trader built this app one day and we’re all using it. These little code tools are really interesting. Automating field service workers is early stages of a really big market. People always, they go after the really high value problems are– the really big problems first. Automating field service workers has historically been a bit of an afterthought but ProntoForms is one of the early software companies in the space. There’s them in another group which are one, two in terms of market share.

We think this has a long runway and kind of to our earlier conversation about figuring out software companies that are heavily investing for growth. They had a bit of a pause last year, but this is a company historically grew at over 30% top line, and just reinvested every dollar in accelerating and supporting that growth. We looked at what they’re doing and where can they normalized margins be at the end of the day? Well, a lot higher than they are today. [crosstalk] we think.

Tobias: Sorry, I didn’t mean to interrupt. Keep going, please.

David: No, go ahead.

Tobias: I was just going to ask. When you look at something like ProntoForms, how do you get comfortable with the competitive advantage there? Because it seems to me that– is there some network effect and something like that folks get comfortable with constructing the forms for their workers, or how do you get comfortable there?

David: What they’re doing isn’t rocket science. It’s not a technological advantage. It’s a lot of the industry knowhow and use cases, which is built into the flexibility of their platform. The CEO came from field services automation in the 90s. He’s been in this field his entire life, so he understands the issues. So, having that deep customer experience, really helps him and how the company has built out their product over time. Then, I think when you’re looking at– in the early innings of these markets, you’ll see a whole bunch of participants.

See a bunch of companies going after market share. We’ll talk to customers and see what they did in a bakeoff, why they would have chosen ProntoForms or somebody else. You also look at market share, which is a pretty good indicator that customers are choosing this product over another product. But a lot of times in the early innings, which is where they are here, a lot of this is greenfield opportunity.

There’s not a lot of competition. It becomes a bit more of a race to scale, because where your competitive advantage really starts to kick in is when you’re able to iterate your software platform with feedback from your clients, from the use of the from the actual users, so the more user data you’re using, if you’re reinvesting that back in the platform and building a better mousetrap, the bigger you get, the bigger your competitive edge becomes, and then you get into a winner take all the top two, three players in the market, own the market.

Use Private Market Valuations On Public Companies

Tobias: When you’re looking at something like this, how do you think about valuation? Do you have your VC hat on when you’re looking at something like this? How do you think about it?

David: There’s two aspects. We wear our VC hat, and what that really allows us to do is conceptualize what the bull case scenario is. Where could this company be in five years, if they execute, how they think they’re going to, or we think they’re going to? Then, the other nice thing we can do is and what was great is we saw one of their competitors taken out by private equity, just do a private market value check. ProntoForms today is trading at a lower multiple than what one of their competitors was acquired for about two years ago now. Having that market data point on what private market value is, but then also understanding from a cash flow perspective what the business is worth, and then having that bull case scenario built into where we think the company could go, it all frames how we value the business today.

(CVE: WE) Is Not Expensive

Tobias: Let’s talk about another holding. I’ve had Andrew Wilkinson on the show before, WeCommerce. What’s the opportunity in WeCommerce?

David: WeCommerce is one of the largest holdings in our small cap fund. It’s a software firm, which is buying companies that help support the Shopify ecosystem. A lot of people are familiar with Shopify. It’s a wonderful e-commerce platform for physical retailers that want to go into the online space, but it’s also– I look at the way the world works, and I reflect on Michael Porter, he says, “If you want to have a long-term sustainable competitive advantage, you either need to be a low-cost provider or you need to provide a differentiated service.” Kind of look at the game out there right now in terms of e-commerce, and you’ve got Amazon there, you’ve got Walmart, you’ve got Costco pretty aggressive in the space.

You’re not going to win the low-cost game. But there’s a whole bunch of smaller producers, differentiated providers, the creator economy that is going to be looking to monetize, and I think Shopify is going to become or has a great chance to become the platform for that and right now, it is the market leader in addressing that. I think there’s a big tailwind behind Shopify, and what’s really interesting is when you look for mental models, you look at how Salesforce built out their Force.com platform. Shopify is building a similar ecosystem, where there’s a lot of– If you’re a retailer on Shopify platform, you can buy someone who will help you with skins for your store, help you with your back end, there’s all these little tools. Shopify supports this ecosystem much like Salesforce supported their ecosystem around the Force.com platform. We think it’s just a wonderful long-term opportunity being associated with the Shopify platform.

And then, you’ve got Andrew and Chris there. I love listening to those guys, because they’re hardcore operators. They bootstrapped everything. They go nuts when people are spending a ton of money. When Chairman and CEO are talking about stuff like that publicly, that just puts a big smile on my face. They’re very disciplined operators in the technology space. And then, you’ve got those two guys, they got busts of Buffett and Munger in their office. Not only have they figured out how to operate technology companies profitably, I’m pretty sure they know how to acquire them. They’ve made a couple of really great acquisitions already. When you look at a software business you want to be invested in, you want people who can drive margins, you want organic growth, and if you can throw on some great acquisitions on top of that, it’s a company I apparently really like today.

Tobias: [chuckles] Well, I agree with you, and I’m a huge fan of Andrew’s. I’m a huge fan of Shopify’s as well. But then the question, I guess becomes, what are you prepared to pay for that opportunity? WeCommerce looks optically expensive to me, but perhaps you can help me understand it a little bit better.

David: We participated in the IPO, so we had a decent position size, and the majority of our position is bought between IPO price and up to $12. That’s where we find it attractive. People got very excited about it when it came out of the gates, and it was well over $20 but it’s going to be challenging for people to value it for about 12 months. They had a recent acquisition, which when we layer that in, you see the economics coming through, that’s when in 12 months, I think people are going to be saying, “Ah, I wish I bought it a year ago.” But you definitely need to be forward thinking on the business, in particular the recent acquisition.

(CVE: STC) Trading At A 50% Discount To U.S Peers

Tobias: Let’s talk about your third position, Sangoma. What is the opportunity there?

David: Sangoma is an unified communications provider. There’s a lot of excitement in the space, particularly in the US. Companies doing various aspects of it like RingCentral and Trulioo. Sangoma here is a Canadian pubco, and this is one of those where’d the idea come from? I don’t know. I’ve been following it since the mid-2000s. Bill Wignall, the CEO, came in there in the early part of the 2010s, and I’ve been watching him ever since. When he went in there, it was a one-product company where the product was about to go end of life. He comes into my office, and he’s like, “Well, I’ve got one product and $10 million in the bank. So, I’m going to invest all that $10 million, and build a great company.” I said, “Well, good for you.” [chuckles]

Tobias: “Good luck.”

David: Yeah, and I watched him and well, son of a gun, he did it. A couple years later, I was like, “Wow, he’s just doing everything he says he’s going to do.” We took a position in the company, and we’ve recently made it one of our larger holdings. In the unified communication space, you can look through the RingCentral information, there’s this massive transition going on from analog to digital telephony. There’s a whole bunch of players that are capitalizing on that opportunity. Sangoma’s in that market. Everybody has some off–

All companies address that market in different ways, servicing different client bases, different technology stacks and go-to market strategies. They’ve just been very successful in the small to medium business market, because they offer a true end-to-end solution. So, small business can just deal with Sangoma. When we look at how they’ve built the business out, it was a hardware business, I think software revenue is now up to 66% of the revenue, and from a valuation perspective, trades at about a 40%, 50% discount to what US peers trade at. Pursuing a US listing right now, which maybe we got a rate on the stock. Kind of to my earlier point when I was talking about the appetite in Canadian markets compared to US markets, here’s the company which because in Canada, not as well known or followed in the US, it trades at a discount to what their US peers are trading at.

Tobias: It’s absolutely fascinating, Dave. We’re coming up on time. If folks want to follow along with what you’re doing or get in contact, what’s the best way to do that?

David: I’m on Twitter @PenderDave, and our website, we have penderfund.com. We podcast every now and again too. We’ve had some wonderful guests over the years.

Tobias: [laughs]

David: And yeah.

Tobias: And me.

David: First and foremost, Toby.

Tobias: [laughs] What’s the ticker of your closed end-fund?

David: Pender Tom Frank, PTF on the [crosstalk] exchange.

Tobias: Dave, Pender Capital Management, Thank you very much.

David: Thank you, Toby. It was fun.

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