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Expert Investing Advice From Tom Astle, Head Of Investment Strategy at Difference Capital

Written on December 1st, 2013

SMALLCAPPOWER.COM In Association with the Financial Post

There are some blue-chip tech names that are still trading at low double-digit multiples that are quite attractive,” says Tom Astle, Head of Investment Strategy at Difference Capital Financial Inc., in an interview with Mr. Astle discusses why he likes the technology and media sectors, why investors should avoid the resource space, and the factors he considers when choosing an investment.

Q: Can you briefly describe Difference Capital, what the company does, and how it distinguishes itself from other companies operating in your space?

A: Sure. Difference Capital is a publicly listed company that invests mainly at this point in private, late-stage growth companies and particularly in the tech and media space and a little bit of healthcare. And then once we make those investments, the team here is a very experienced capital markets group and we try to add as much value as we can to the company and then look for exits in a two to three year timeframe. We target very strong returns per investment. So investors can think of us as a portfolio approach to private investments versus individual angel investments. At DCF you have a professional team managing your private investments. And because we’re publicly listed investors still get all the liquidity of a publicly listed name.

Q: What are some factors that you look at when considering an investment for Difference Capital?

A: We look for strong I.P., i.e., intellectual property. We think that’s a big differentiator. We look for a proven business model. As I said we’re a late stage investor so companies we look at typically have in excess of $10 million in revenue. So they have customers that we speak to and make sure that the product is very attractive and will continue to do well. So those are things we look for in the company itself. And then in the investment, we like to be as high up the cap table as possible. A lot of our investments are actually convertible debentures so we have some protection on the downside but still have equity upside. And we like to see that the management team is investing along beside us or other funding partners are at the table. And generally the companies we target in the market are what we call, pre-IPO. So within 18 to 24 months of potentially being a public company or an M&A sale.

Q: Do you have any favourite companies that you can mention for our investor audience?

A: We’ve recently invested in a private company called Build Direct which is one of Canada’s leading ecommerce plays. They are basically the Amazon for building materials. They’ve built, I think, seven or eight warehouses across North America and can deliver products that are over 150 pounds directly to consumers very quickly and very efficiently and they’re growing like crazy. So that’s one example. Another company we invested in recently was a company called Vena Systems. A lot of companies run their businesses on spreadsheets that are not trackable, auditable or connected. And they put a software-as-a-service back-end into these companies that makes the spreadsheets all be compatible, all working to a central database. And they’ve got great customers like McKinsey & Company and Deloitte & Touche and so on. So those are the type of investments that we’re making. And you’ll see more of that from us in the future.

Q: Great, so the last time we spoke, you discussed the opportunities in the technology sector. Are there any other sectors that you believe have upside that investors should be looking at right now and why?

A: Well, we continue to like the tech space. Especially the private tech and media segments. There’s just a lot of activity happening, both there and at the public level. We are seeing some of the media names in Canada really starting to fly. So we’re going to continue to focus on that area. Personally, I still see a lot of value in some of the big global tech names especially the large blue chip names. These guys are really become the new industrials in the market. And if you look at the tech space in general, it’s a bit bifurcated. You’ve got some of the concept stories out there like Tesla and Twitter that are getting crazy evaluations. It’s hard to justify. But behind that, though, you’ve got the, what I call blue-chip tech names that are still trading at low double-digit multiples that are quite attractive. I would avoid the resource space. We still think the commodity cycle is slowing, if not stopped for a while here.

Q: Good. Why do you think the technology sector has been so hot recently and is there more upside to come? Should investors be wary of a possible bursting of the tech bubble?

A: Well, as I said, it’s a bit bifurcated right now so again some of these names are concept stories and I followed the tech space back in the last major bubble back in ‘98 through 2001. And evaluation becomes very tricky because– regular fundamentals seem to go away for a period of time and valuations continue to climb. And that period of time can be longer than people expect. So my view is there’s still probably a good run here, but I would be careful with the concept-only stories. Only people that have high-risk tolerances should be going into the names that have multiples that are hard to justify at this point.

Q: And finally, what’s your outlook for the broader U.S. and Canadian equity markets during the next of the 12 months?

A: I don’t think we’re really very qualified to answer broad stories. But we generally are pretty optimistic overall. We think the U.S. market in particular looks the best given its focus on growth names and we stay pretty constructive on equities overall.

Q: That’s great, Tom. Thank you for your time for the interview.

A: You bet.

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