Tech-focused PE investment
James Williams (pictured) examines the trend for PE firms to invest in data, telecoms and tech-enabled businesses.
Private equity groups are increasingly gravitating towards buy-out opportunities in the technology and data communications space as they seek to leverage not only attractive cash flows (given that many technology groups run subscription models) and growth opportunities, but also the potential to quickly sell their acquisitions.
Take Bain Capital LLC by way of example. As reported by the Wall Street Journal on 30 June 2016, having only acquired Blue Coat Systems Inc – a leading provider of advanced web security solutions – just over 12 months ago, Bain Capital nearly doubled its investment when selling it to Symantec Corp for USD4.65 billion in June.
That ability to identify strong performers in the highly crowded technology sector and capitalise on rising valuations is part of the reason why there is so much attention. The lack of IPO activity in 2016 (just USD14.4 billion in Canada and the US) is adding further velocity to rising valuations for PE-backed company listings. As Gillian Tan wrote in a Bloomberg article on 30 September 2016 (Private Equity Firms Nail IPO Timing), new issues of private equity-backed companies have gained 34.5 per cent on average this year, compared to 28.2 per cent for all US and Canadian IPOs.
In 2012, 22 per cent of private equity acquisitions involved technology companies according to Preqin data. Year-to-date that percentage has risen to 39 per cent of all buyout deals, having already surpassed last year’s figure of 33 per cent. Technology investments make up more than half the aggregate deal value this year (54 per cent) compared to 29 per cent in 2012.
Network software and security company Infoblox Inc is just one of the latest examples, having agreed to be acquired by Vista Equity Partners for approximately USD1.6 billion.
Christopher Elvin is Head of Private Equity Product at Preqin and isn’t surprised by the level of US buyout activity in tech this year. Technology companies have been a mainstay of the venture capital industry for some time, and many of the technology companies being acquired (by private equity groups) have been high-profile companies for some time.
“What has been changing over recent years is that companies such as these have become targets for larger acquisitions, moving from the purview of venture capitalists to that of private equity buyout fund managers, corporate investors, and public markets. This is partly due to the increasingly central role that technology plays in the lives of many: a very broad term, ‘technology’ used to be thought of primarily as internet-based companies and electronic gadgets, but now includes sectors as distinct as medical devices, defence technologies and agricultural improvements.
“Beyond that, though, the revenue model of some sectors makes technology-related companies increasingly attractive to potential acquirers. For instance, in the software and cloud-based computing industry, there has been a general drive towards subscription-based models of leasing. This means that the same product can effectively be sold many times over, and at regular intervals, for no extra cost. These dynamics mean that investors see a lot of value in these kinds of portfolio companies,” explains Elvin.
The ability to grow revenues by extending software licenses into new markets makes technology companies attractive, scalable businesses and this is prompting new tech-focused growth funds to come to market with significant LP support.
Chicago-based Thoma Bravo is the latest example, having just raised USD7.6 billion for a new fund. The manager has made a range of acquisitions in recent times including Qlik Technologies Inc, and Riverbed Technology, whose website refers to itself as being at the ‘centre of hybrid networking’. Indeed, on 28 September 2016, the firm announced that it had completed its acquisition of TRADER Corporation, Canada’s leading digital automotive marketplace and software solutions provider.
Affiliates of Siris Capital Group, LLC, a PE manager with a particular focus on investments in data, telecommunications and technology enabled business service companies, acquired Xura, Inc on 19 August 2016 in a transaction reflecting an equity value of approximately USD643 million.
Describing the acquisition of Xura, Hubert de Pesquidoux, Siris Capital executive partner and Xura’s new executive chairman, said: “With its broad product portfolio and industry-renowned technology, which has underpinned mobile messaging for many years, Xura is well-positioned to continue to bring value to the 300+ customers it supports and the broader digital ecosystem.”
Although the technology umbrella is now very diverse, it is still software and internet companies that attract the largest number of deals and the highest aggregate deal value, according to Elvin. He says that in 2015, this sector saw a record 579 deals involving private equity firms, for a total value of USD139 billion.
“This is almost 10 times as much capital as was deployed into the next largest tech sector.
“This is partly because of the size of the market – there are thousands of internet- or software-based companies operating – and as the internet becomes more common in the developing world, the potential market for these companies only grows,” comments Elvin. He adds that another factor for the volume of capital allocated is down to the size of some of the privately owned companies currently operating in that space.
“Some of the largest tech-related private equity-backed deals of recent years have been public-to-private buyouts: that is, the firms being acquired have been large enough to function as public companies in their own right. The most high profile of these is the recent Dell/EMC deal, which alone represents around USD67 billion of the total value of deals done in 2015.”
The first announcement that Dell was planning to acquire EMC came in October 2015 and was finalised last month. Dell EMC has since announced that Yair Snir, formerly the director of M&A and business development at Microsoft in Europe and Israel, will head up Dell Technologies Capital, the group’s venture capital arm.
One firm that has intentions of expanding their investments into the technology and communications sector is Dallas-based Highlander Partners LP, which manages more than USD1.2 billion of private capital. The firm focuses on making direct private equity investments in middle market companies and to support its foray into the tech space it has just appointed Rashid Skaf.
“We continue to strengthen our team to enhance our sourcing capabilities, execute transactions, and grow our portfolio. Highlander remains one of the most active middle market firms in the country, and we intend to accelerate our growth over the next few years. The addition of Rashid will broaden our capability to develop new platforms in the B2B collaborative technology and communications industry. Consistent with our core strategies, we desire control positions in established companies within these sectors,” commented Highlander’s Managing Partner, Jeff L Hull.
Preqin’s Elvin says that, unsurprisingly, it looks as though North America is the largest market for private equity firms buying tech companies. The region has seen sustained growth in the number of such deals over recent years, “and in 2015 it recorded a record USD129 billion in aggregate deal value from the sector. Similarly, Europe has also seen the number of such deals increase, and 2016 looks on track for the region to record the highest number of private equity-backed deals in technology-focused companies.
“Asia, by contrast, has seen the number of private equity deals in tech companies fall over recent years, from 108 deals in 2012 to just 44 in 2016 so far. However, the value of these deals has increased, and in 2015 deals in the region were worth a combined USD23 billion,” confirms Elvin.
Between them, North America and Europe have recorded more than 1,000 deals YTD, with the aggregate deal value in North America currently standing at USD90.5 billion. By contrast, Asia has recorded just 44 deals with an aggregate deal value of USD4.7 billion.
In terms of deal type, six out of the 10 largest PE-backed deals involving technology firms so far this year have been buyouts, as shown in the table above. Three have been three public-to-private deals and one has been a merger: this involved home security firm ADT Security Services, Inc being merged with Protection 1 when global private equity firm Apollo Global Management acquired it for nearly USD7 billion on 16 February 2016.
As for primary industries, much of the deal activity this year has centred on Information Technology companies (483 deals YTD), Healthcare (159 deals YTD) and Industrials (137 deals YTD).