By Patrick Reames
Managing Director, The Americas
We recently had the opportunity to sit down with Eldon Klaassen, CEO of Allegro Development to get his take on a broad range of topics, from recent developments within Allegro to the current state of the ETRM/CTRM market place.
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CommodityPoint: Early last year, Allegro, after almost 25 years in business, brought in the company’s first outside investment. Can you elaborate on your decision to bring aboard North Bridge Growth Equity and Tudor Ventures?
Eldon Klaassen: Allegro is a software company that has been profitable for 25 years and has been self-funded. However, we understand we need to be positioned for future growth in a very complex market. Significant investment by institutional investors such as North Bridge and Tudor sends a clear message to our customers, partners, banks and employees. It says that we have a clear vision for profitable growth in this market and that sophisticated investors share that vision. This experience has proven very positive for our company and we feel we have chosen the right partners with this investment.
CommodityPoint: What have been the impacts, both internally to Allegro and to your client base, as a result of the investment?
Mr. Klaassen: Our company has continued to change over time, but it’s not change that has been necessarily a result of the investment. Our investors have confidence in our management team. They understand the issues of this market and, given that confidence, have taken a hands-off approach to the daily operations.
CommodityPoint: We’ve seen a number of your competitors making acquisitions over the last couple of years, buying or investing in companies that have helped them expand their product capabilities and market footprint. Allegro, however, has avoided following a similar strategy, instead building similar capabilities in-house. What has been the advantage to Allegro with this strategy?
Mr. Klaassen: Our strategy is not limited to organic growth. We are always looking to expand our market reach—how we gain access to those markets is the real question. So far, we have grown our presence in those markets organically, because, after examining the available options, we felt it was the best choice for us. We also consider growth through partnering with quality companies, such as our partnership with Indra in Spain. Every new market is a build, buy or partner decision.
We, like our competitors, had a look at the companies that have been acquired over the last several years and made the determination that the prices weren’t right for us.
CommodityPoint: Clearly, a few of Allegro’s competitors are, or have been, targeting a public stock offering. In fact OLF has gone so far as to issue their S-1, only to have recently withdrawn it. Do you see an opportunity for Allegro or any of your competitors to go public within the next year or two?
Mr. Klaassen: We’re patient—an IPO is unlikely for us in the near future, and certainly not until the IPO markets open up. OpenLink’s withdrawal of their S-1 is clearly not a reflection of the quality of the company; it’s a reflection of the state of the IPO markets.
CommodityPoint: Do you believe there is “room” in the public markets for more than 1 or 2 pure ETRM/CTRM technology companies?
Mr. Klaassen: It will depend on a number of factors. Defining what the ETRM market is can be somewhat elusive. If a more liberal interpretation is used, I think certainly the market could support three, four, or even more companies. I think the biggest challenge in going public is one of scale. If you assume a market cap at $500 million—large for this space, but is relatively small for a public company - It’s going to be hard for an offering that size to gain the attention of the equity markets. Twenty-five years ago, $500 million was a good sized valuation; unfortunately, today, it may limit access to analyst coverage and larger institutional investors.
CommodityPoint: With the collapse in the commodity markets last year, the market for new ETRM systems, particularly in NAM, fell off significantly, with most vendors indicating that the last half of 2008 was particularly difficult. How has the market been in 2009 for Allegro?
Mr. Klaassen: We’ve definitely seen an uptick. This market, despite whatever economic issues arise, will always have inherent needs, such as the ability to manage positions and perform risk management. Despite capital expenditures going on vacation for six months, those underlying needs have still been there, and we’re seeing that the market is coming on strong. It reminds me of the Enron period—the market was very strong in 2000 and 2001. Then Enron happened and everyone was trying to get out of trading. It wasn’t until 2004 that the market came back, but it came back very strong. We’ve been able to successfully weather these periods for two reasons; one, we have a large, diverse install base and with that install base you can survive almost any downturn, and two, we have a strong balance sheet.
CommodityPoint: At CommodityPoint, we believe that even though North America will continue to be a reliable market for ETRM solutions, the real growth in the future will be global, including Europe, Asia, South America and Africa. How do you see these markets in terms of growth potential for Allegro’s products?
Mr. Klaassen: Europe is a big market, second only to the US and our metrics show strong continued growth for us there. Asia is a market requires patience. Six months is not an unusual deal cycle in North America—from RFI to deal closing. In the Asia market, you have to build relationships, with the hope that eventually those relationships will lead to a sales opportunity. We established our Singapore office in 2004 for that reason, to build relationships in the region and look for the opportunities that might grow from those relationships.
CommodityPoint: What capabilities are selling systems these days - what are potential clients pointing to most often as their critical need in a new ETRM system?
Mr. Klaassen: Several things—but really they are all about growing or scaling their business in complex markets. Our prospects, and current customers, are seeking to add suppliers and customers, entering into more complex pricing arrangements, developing new markets. They need a system that can scale with an ever-increasingly complex business environment. They’re also focused on improving their ability to understand the impact of their operations on their capital structure, and subsequently their credit facilities. CFOs are asking “how does this impact the elements of my capital structure—including debt, equity, and cash flows. Will these transactions bring about future funding requirements?” We feel we are able to answer these questions better than anyone else.
CommodityPoint: There been much talk recently about greater government/regulatory oversight and involvement in the financial and commodity markets. If this comes to pass, what do you believe will be the impacts on the systems and technology providers in this space?
Mr. Klaassen: It’s really hard to forecast. So far, it’s all been a lot of rhetoric, with little or nothing in the way of concrete legislation. Indications are that if anything ultimately happens, it’s going to take a long while and it probably won’t be very invasive.
CommodityPoint: Cap and trade has been receiving lots of press this last year and legislation is pending in congress, though it’s increasingly clear that legislation won’t happen this year. Is the prospect of Cap and Trade driving any sales and/or delivery activities for Allegro?
Mr. Klaassen: Many of our customers have been using our system for some time to manage their business in the emissions and renewable markets. However, the issues surrounding cap and trade continue to be unsettled. Until there is more clarity from the government, industry will continue to be unsure of how to respond. Certainly some form of legislation is coming, whether cap and trade, or some other form of tax, and when we start to see clarity about what’s going to happen, we will work with our customers to ensure they are prepared for the outcome.
CommodityPoint: What’s your and your company’s greatest challenge these days?
Mr. Klaassen: Continuing to evolve as an organization. We view maintaining a responsive organization as an ongoing process, and an ongoing opportunity to always provide incremental value to our clients.
