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.
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.
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.
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.
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.
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.