Category: Private Equity

Take-privates take a break

Mark Fontecchio
by Scott Denne

Repelled by rising stock prices, private equity (PE) firms are on pace to print the fewest take-privates of tech companies in five years. The deals that are getting done this year involve, more often than not, businesses that have fallen off their recent highs. Yet many are still commanding premium valuations.

According to 451 Research‘s M&A KnowledgeBase, buyout shops have acquired 10 NYSE- or Nasdaq-traded vendors this year, setting the stage for the fewest such transactions since 2014, when they purchased just 12 (there are typically 20-25 such deals annually). The Nasdaq has risen 25% since the start of the year, although our data suggests that sponsors are reaching for targets that haven’t benefited from that by picking up companies whose share prices have fallen below their 52-week highs.

Take last week’s announcement that HGGC would purchase Monotype. The $820m transaction, at $19.85 per share, is almost 10% below the stock’s highpoint over the past year. It’s not alone. Per-share prices in seven in 10 of 2019’s take-privates landed below their 52-week high. An eighth vendor, Ultimate Software, edged out its high by less than 1% in its $11bn sale.

That’s not to say these companies are going cheap. Ultimate, for example, sold for 10x trailing revenue. And Monotype, despite the turbulence in its stock, was still able to fetch 3.4x. In fact, our data shows that the median valuation for these take-privates is running at 4.1x, its highest point in this decade. Although PE firms have increased what they’re willing to pay, stock prices might just be increasing faster.

PE, not just VC, joins the IPO parade

Mark Fontecchio

by Brenon Daly

The tech IPO parade continues, but with a twist. Rather than having its journey to Wall Street backed by truckloads of venture dollars, the first enterprise-focused company in the second half of 2019 to put in its S-1 is coming from a buyout portfolio. Dynatrace is a private equity-backed spinoff, not a VC-backed startup.

The planned offering by Dynatrace would be the latest move in a rather unconventional journey to the public market by the application performance monitoring (APM) vendor. Founded far from Silicon Valley, Dynatrace got its start in the sleepy Austrian town of Linz in 2005, taking in only $22m in funding before exiting to Compuware in July 2011 for $256m, or 10x invested capital.

Compuware itself was taken private by buyout firm Thoma Bravo three years later for $2.5bn, which, at the time, represented Thoma’s largest single transaction. Shortly after, Thoma spun off Dynatrace from its one-time parent and consolidated its new stand-alone APM holding (Dynatrace) with an existing one (Keynote Systems, which Thoma took private for $395m in June 2013).

After all that addition and subtraction, Dynatrace now looks to debut on Wall Street. That’s a trick that rival AppDynamics wasn’t able to pull off because Cisco Systems snapped the venture-backed company out of registration. Assuming Dynatrace does make it public, it would mark the first IPO in the fast-growing sector since New Relic went public in December 2014. (New Relic currently sports a $5bn+ market cap.)

But it certainly won’t be the last. Dynatrace’s sometime rival Datadog, which has raised $148m in venture backing, is thought to be eyeing an IPO of its own. (Subscribers to the Premium edition of the 451 Research M&A KnowledgeBase can see our full profile of Datadog, including our proprietary estimates for revenue for the past two years.) Meanwhile, subscribers to 451 Research’s Market Insight service can look for our full report on Dynatrace’s proposed offering on our site later today.

PE slows its roll

Mark Fontecchio

by Brenon Daly

Buyout shops aren’t buying like they have been. After seven consecutive years of increasing the number of tech acquisitions they announce annually, private equity (PE) firms are on pace for a slight decline in 2019. The slowdown comes as the formidable buyers also start to scale back their purchases, shopping much more in the midmarket than in the billion-dollar range.

As we noted in our full report on tech M&A in Q2, we recorded an uncharacteristic drop in the number of announced deals in the April-June period by buyout shops, which had been the sole ‘growth market’ in tech M&A recently. PE firms have doubled their number of tech transactions in the past five years, but in Q2, they posted a second consecutive year-over-year quarterly decline in deal volume, according to 451 Research’s M&A KnowledgeBase.

To be sure, we don’t want to overstate the slight decline in PE activity. Based on midyear projections, between direct investments and bolt-on acquisitions by portfolio companies, deal volume for financial acquirers looks likely to drop about 6% in 2019, compared with 2018. Buyout shops still account for about one of every three tech acquisitions, our data indicates.

Within that slight decline in the number of prints, however, is a much more significant shift in where they are looking. PE firms are moving down-market in 2019, no longer looking to bag elephants. (Our Q2 report examines this trend in much more detail, as well as compares acquisition activity by financial buyers with their strategic rivals.)

Assuming the first-half pace holds, buyout shops are on pace to ink one-third fewer billion-dollar deals in 2019 than they did in 2018. So far this year, the M&A KnowledgeBase has recorded just 11 purchases by financial acquirers valued at more than $1bn. That’s the fewest big prints for PE firms in the first half of any year since 2015, when PE held just a mid-teens percentage share of the tech M&A market, or merely half its current level.

PE’s UK holiday

Mark Fontecchio

by Scott Denne

Amid the uncertainty surrounding Brexit, private equity (PE) firms are slowing their activity in the UK for the first time in five years. With an October deadline on the horizon and little clarity about how the UK’s exit from the EU might proceed, buyout shops are scooping up fewer targets in that country than they did last year. Most of the decline, however, has occurred at the edges of the market.

According to 451 Research’s M&A KnowledgeBase, PE firms and their portfolio companies have bought just 45 UK-based tech targets in 2019, on pace for an 18% decline from last year’s total (122). That shift counters a years-long increase, as the number of sponsor acquisitions of UK-based vendors has previously risen each year since 2014. Questions about a target’s ability to hire or sell its wares abroad post-Brexit seem to be having the most impact on those buyers that don’t often purchase UK-based companies, and lowering the appetite for discounted targets.

The most frequent acquirers remain active. The PE firms that have bought the highest number of UK-based vendors this decade (TA Associates, Vista Equity, Inflexion and HgCapital) have all continued to purchase there this year. All but Inflexion have acquired more than one UK-based company in 2019. And the decline seems concentrated on deals with below-market valuations. The pace of UK-based vendors trading to buyout shops for more than 3x trailing revenue has risen, our data shows, while transactions where companies sell for less than 2x have declined.

PE firms paying SaaSy valuations

Mark Fontecchio

by Michael Hill

A years-long increase in SaaS acquisitions by private equity (PE) firms is flattening out. Yet sponsors are spending far more than in the past for those targets – typically paying more for SaaS vendors than strategic acquirers do – as businesses shift more of their budgets toward hosted software offerings.

According to 451 Research’s M&A KnowledgeBase, PE shops have bought roughly the same number of SaaS targets as this time last year, following several years of increasing the volume of those deals 25% or more each year. Despite that, sponsors have spent more than $20bn on SaaS acquisitions so far in 2019, compared with $24.7bn for the entirety of 2018. Much of the jump stems from Hellman & Friedman’s $11bn take-private of Ultimate Software. Still, even without that transaction, PE firms have spent nearly three times as much on SaaS purchases this year as they did during the same period last year.

And 2019’s larger deals are coming at a premium. So far, the median trailing revenue multiple for a SaaS target in a sale to a buyout shop or PE portfolio company stands at 4.9x, a turn higher than any full year this decade. Our data also shows that 2019 marks the first year that PE firms have paid higher multiples than strategic buyers, whose acquisitions of SaaS vendors carry a 4.5x median multiple this year.

The increase in valuations comes as businesses are pushing more of their IT budgets into SaaS. According to our most recent Voice of the Enterprise: Cloud, Hosting and Managed Services, Budgets & Outlook – Quarterly Advisory Report, 67% of respondents expect to increase their spending on SaaS this year. What’s more, 38% expect SaaS to be their largest area of spending growth among cloud and hosted services.

A change of guard in the infosec market

Mark Fontecchio

by Brenon Daly

After an uncharacteristic half-year absence from the top end of the information security (infosec) market, a private equity (PE) shop has now put up the largest print in the bustling sector so far this year. Insight Venture Partners built on an earlier investment in Recorded Future to take a controlling stake in the threat intelligence startup in a deal valued at $780m.

Other than that, however, most of this year’s activity has been coming from newly resurgent strategic acquirers. In fact, except for Insight’s reach for Recorded Future, strategic acquirers account for all of the 10 largest infosec transactions listed in 451 Research’s M&A KnowledgeBase so far in 2019.

Already this year, Palo Alto Networks has announced three acquisitions totaling a cool $1bn in aggregate spending, Sophos has doubled up on deals, and FireEye has shelled out a quarter-billion dollars in its largest single purchase in a half-decade. Other infosec M&A mainstays such as Symantec, Akamai and Proofpoint have also been heard from this year, with all of them inking $100m+ acquisitions.

The key to many of these corporate deals getting done is that buyers are paying up. That’s particularly true for Palo Alto, which has made a practice of paying hundreds of millions of dollars for startups that measure their revenue in the tens of millions of dollars. But FireEye and Symantec have also paid double-digit valuations this year.

As strategic acquirers stretch on valuation, they have been able to elbow PE buyers aside. According to the M&A KnowledgeBase, buyout firms are behind just one of every five infosec transactions so far in 2019, down from at least one of four deals in each of the previous three years. Further, our data indicates that PE shops’ slumping market share of only 21% in infosec M&A so far in 2019 is a full 10 percentage points lower than their share of the overall tech M&A market.

PE’s customer experience play

Mark Fontecchio

by Scott Denne

As budgets for customer relationship management (CRM) software hit a four-year high, private equity firms (PE) are pouring into the space, picking up new platforms and inking bolt-on deals. The number of acquisitions by sponsors is heading toward a record as customers spend more in the face of complex customer experience challenges, our data shows.

Across sales, marketing and customer service, businesses are grappling with finicky customers. In 451 Research’s VoCUL: Digital Transformation survey, 75% of respondents said they are dealing with rising expectations among customers in recent years and 78% said their customer experience processes have increased in complexity. As a result, they’re spending more on software. In a separate survey last summer, 15% of respondents said they would increase their spending on CRM software – the highest reading since August 2014.

Last year, PE shops and their portfolio companies bought a record 45 customer experience and CRM software vendors, spanning subcategories such as marketing automation, contact center and social media analytics. According to 451 Research’s M&A KnowledgeBase, those buyers are set to surpass that level with 24 so far in 2019. Many of the transactions are aimed at addressing a larger market through bolt-on deals. SugarCRM, for example, printed its second acquisition of the year with today’s purchase of marketing automation specialist SalesFusion. Prior to its sale to Accel-KKR last year, SugarCRM hadn’t bought a company since 2016, our records show. In another deal this week, Insight Venture Partners’ Campaign Monitor printed its third transaction of the year with the acquisition of Vuture.

PE’s pricey paper

Brenon Daly

by Brenon Daly

Deals in which one private equity (PE) firm sells a company to another PE outfit are sometimes referred to as ‘paper trades.’ These transactions have become increasingly popular in recent years as yet another way for buyout shops to put their record levels of cash to work. By our count, secondary transactions currently account for almost one out of every five deals that PE firms announce, roughly triple their share at the start of the decade.

However, there’s a price for that popularity: the paper is getting a lot more expensive. PE firms paid an average of 4.5x trailing sales for tech vendors owned by fellow buyout shops since the start of 2018, according to 451 Research’s M&A KnowledgeBase. That’s 50% higher than the average PE-to-PE valuation from 2010-17.

There are a lot of reasons for the increase, not least of which is that overall valuations for the broader tech M&A market have been ticking higher, too. But that doesn’t fully explain it.

The M&A KnowledgeBase shows that the average multiple for tech deals since January 1, 2018 with buyout firms on both sides is nearly a full turn higher than the average multiple paid by PE shops to tech providers in that same period. Recent secondaries that secured price-to-sales multiples in the high single digits include Mailgun, Quickbase and the significant minority stake of Kaseya, according to our understanding.

So why do paper trades go off at a premium? Part of it is explained by the view that companies in a PE portfolio have largely been cleaned up, operationally. They are something of a ‘known quantity,’ which takes at least some of the risk out of the purchase.

From there, it’s just a short step for the new buyout owners to one of their favored activities: optimizing the businesses for cash flow. That financial focus, which is undeniably supported by the broad economic growth and continued increases in tech spending, has contributed to the current cycle of ‘pay big now, find a bigger buyer later.’ But if the economy turns, PE firms may well find that high-priced secondaries are one of the first types of deals to disappear, leaving them holding some very expensive paper.

Exclusive: Ivanti in market

Mark Fontecchio

by Brenon Daly

One of the larger private equity (PE)-backed rollups may be rolling into a new portfolio. Several market sources have indicated that Clearlake Capital Group currently has infrastructure software giant Ivanti in market, with second-round bids expected soon. If the process moves ahead, the buyer is almost certain to be a fellow PE shop, with the price likely to be in the neighborhood of $2bn.

Buyout firm Clearlake has built Ivanti from a series of acquisitions, with the bulk of the business coming from the January 2017 purchase of LANDESK Software. (Subscribers to 451 Research’s M&A KnowledgeBase can see our estimates for the price and valuation of that significant secondary transaction.) After it bought LANDESK, Clearlake rolled a pair of existing portfolio companies into that platform, which then took the name Ivanti in early 2017. The rechristened business went on to pick up another two companies later that same year.

Although two years is a relatively short holding period for a buyout shop, Clearlake is looking to take advantage of a hot secondary market. Large PE-to-PE deals have become a popular way for buyout firms to put their record amounts of cash to work in transactions that – rightly or wrongly – they tend to view as less risky than other big-ticket acquisitions. The M&A KnowledgeBase lists roughly a dozen secondary deals valued at more than $1bn over the past year.

A classic rollup, Ivanti offers a broad basket of infrastructure software products, with a particular focus on ITSM and information security. According to our understanding, the business runs at a roughly 30% EBITDA margin. Subscribers to the premium edition of the M&A KnowledgeBase can see our full profile of Ivanti, including financial performance, competitors and other key measures.

Software valuations soar in sponsor deals

Mark Fontecchio

by Scott Denne

The coordinated efforts of strategic and financial acquirers took purchases of application software vendors to a new height last year. Now, it’s the efforts of the latter alone that are pushing software deals back toward a record as sponsors place hefty valuations on such companies.

According to 451 Research’s M&A KnowledgeBase, $23bn of software assets have traded hands through the first quarter of the year, putting 2019 on pace to match 2018’s record haul ($93bn). As we discussed in 451 Research’s Tech M&A Outlook 2019, the reentry of strategic buyers played an equal role in driving last year’s total. This year, private equity (PE) buyers have contributed the lion’s share of investment through the first quarter, having spent more than $17bn on such transactions, our data shows.

PE shops are acquiring application software providers at a slightly higher clip, having bought 117 of them in the first quarter, compared with 108 in the same period of 2018. More importantly, those firms are paying an unprecedented premium through the start of the year. According to the M&A KnowledgeBase, software vendors selling to buyout shops are trading hands at a median 5.5x trailing revenue, a full turn higher than last year and extending a streak of soaring prices for software companies in sponsor-led deals.

That rise in software valuations largely follows the rise in public stocks (which usually corresponds with an increase in tech M&A valuations, as my colleague Brenon Daly pointed out last week). Looking at the three largest sponsor acquisitions of application software providers this year, two of the targets – Ultimate Software and Solium – sold above their all-time-high share price. The third, Ellie Mae, was a few percentage points below its peak, but still sold at roughly 50% higher than where it finished 2018. With the S&P 500 up 15% this year, prices for software deals don’t look ready to settle.