Introduction
Timothy Goddard
Welcome to Part Two of our Forecast 2015 annual report. Today we’ll be looking at the key role private equity plays in tech M&A. We’ve got a compact agenda up front, and a very important panel at the end, so let’s go through that very quickly. We’ll have some brief event reports, a field report on a deal that just closed. Then we’ll have our research report on PE deals, as well as a couple of our sectors, and then into the meat of it with our PE panel, with global PE leaders sharing their thoughts on today’s market for software and related tech companies.
Event Reports
Let’s go right to our event reports, starting with Jim Perkins on Casual Connect Europe in Amsterdam.
Jim Perkins
Casual Gaming just got a lot more serious at Casual Connect Amsterdam last week. Attended by well over 2000 industry leaders from all the major gaming companies worldwide, Alina Soltys and I hosted an entire day focused on Industry Expansion, Research and Globalization. Alina revealed that there was over $33B of gaming M&A in 2014. Clearly, Asia leads the charge in this very active market.
I kicked off a series of highly-attended presentations and expert panels focused on the dominance of Asia, specifically China. I presented the differences in completing a transaction in China compared to Europe and North America, and how to best position your companies in the hottest M&A market on the planet.
Watch for a more in-depth presentation on gaming in next month’s Corum webcast.
Timothy Goddard
Thank you, Jim. Now we’ll hop across the continent to Mark Johnson, who participated in Tech Chill Baltics.
Mark Johnson
This is Mark calling in from Stockholm. Last month I had the opportunity to attend the Tech Crunch event in Riga, Tech Chill. Attendees were entrepreneurs from some of the hottest tech companies in the Baltics, the Nordics, and other regions in Eastern Europe.
The most exciting news coming from the Baltics currently is TransferWise and its recent investment round in the company at over $1B, from Sir Richard Branson, Andressen Horowitz, and others. Like Skype and Kazaa, which both have technology roots in Estonia, TransferWise is a peer to peer service, in this case disrupting the money transfer industry by providing low fee, low friction, person to person transfers.
I had the opportunity to sit on the jury voting for the best new startup. We voted for Edurio, which has a SaaS model for allowing educators to allow the progress of their student customers. There is excellent technology coming out of the Baltics right now and we’re looking forward to seeing some great companies maturing over the coming years.
Timothy Goddard
Thank you, Mark. Speaking of great companies, we’re very proud to announce a deal that closed recently, and let’s go to Rob Schram at headquarters to hear about that.
Rob Schram
We’re proud to announce that Corum client Filemobile, a Canadian user-generated content marketing software company, has been acquired by Newzulu, an Australian crowd-sourced media firm, for approximately C$5,000,000. In addition to technology, Newzulu gains instant access to the US market with top media clients like USA Today, Fox News and the Wall Street Journal, and global brands like Cisco and Underarmour.
This deal is indicative of two trends we’re watching: Foreign buyers, most of which you’ve never heard of, eager to acquire a foothold in US and European markets. We’re also seeing an increase in companies using new debt or investment to finance acquisitions.
Newzulu raised money from private investors for this acquisition, while a year ago, Corum client Campus Special was acquired by Chegg, using proceeds from their IPO for that deal and then two more. I currently have another client under Letter of Intent with a buyer who has similar plans. Both trends emphasize the importance of a thorough, professional, global M&A process. Back to you, Tim
Timothy Goddard
Thank you, Rob.
Now, let’s get into the heart of our presentation today, and turn to Elon Gasper, our VP of Research with our Corum Research Report.
Tech M&A Research Report: Private Equity
Elon Gasper
Thanks, Tim. We begin with the public markets, where indices we track saw increased volatility last month amid crosscurrents ranging from the oil glut to renewed crises in Europe and a stronger US dollar. But tech profits held up, interest rates stayed down, and balance sheets still bulged with cash, so tech acquirers saw the month’s moves as temporary and not a block to M&A, a view borne out in this month’s rebound.
Our Corum Index reflected that brisk M&A activity, surpassing 350 transactions, a 12% YoY increase. Megadeals took a breather before also popping up again in February. Exits from start-ups and VC backed outfits were overwhelmed by the many more-mature firms moving amid this seller’s market of ready cash.
The PEs produced steady action comparable to the prior January, which led off a 2014 PE leaderboard that printed with a record-breaking number of smaller bolt-ons for existing portfolio companies, as hybrid models reached down towards start-up levels to poach on VC’s traditional turf. Such small fry weren’t the only catch but sure filled the bucket of our repeat top PE acquirer Insight, whose venture roots helped it drive that model to nearly double its annual acquisitions achievement.
Amid its portfolio we highlight Kansas City security intelligence company FireMon, bought midyear, followed by an estimated $20M paid for Canada’s Scorpion Software, whose authentication service tucked neatly into cloud IT company Kaseya.
Second place on our leaderboard was also a total value leader, as Vista Equity made 31 acquisitions with 3 megadeals ranging from $4B for TIBCO, the largest PE purchase of 2014, to transaction processor TransFirst and UK ERP provider ASC for just over a billion, at 3.3x sales. Vista also grabbed Oregon-based GRC NAVEX Global for half that at 3.7x multiple, part of a rollup which included Corum client PolicyTech, orchestrated by The RiverSide Company, number 8 on our list, whom we’ll have the pleasure of hearing from in a couple minutes.
Abry rounds out our top three with 20 transactions in 2014. One was MVNO KORE Wireless, to which Abry added Cincinnati's Raco Wireless, for analytics, reporting at a value of $150M. Abry also managed to parlay acquisition of retail digital coupon company Inmar early in the year into a rollup with several subsequent acquisitions, including gamified coupon booster Hopster in November.
Looking back further confirms the increased importance of bolt-ons, though platform plays have also increased across nearly all our top 10 PEs. We’ll delve into these broader patterns more in our written report.
Vertical Software Valuation Metrics
Updating a couple sectors’ January activity, a bit of pullback in Vertical Market values last month didn’t escape the attention of PEs, particularly in healthcare, where Riverside extended its 75-transaction healthcare investment tradition with Philly-area Greenphire. Now here’s a twist on healthcare payments: Among Greenphire’s SaaS offerings for payment processing is one that pays the patients, to reward their participation in clinical trials. That’s a switch!
We also highlight Cincinatti’s ClinGenuity, which applies AI software to medical writing, acquired by another 2014 PE bolt-on, the Synchrogenix subsidiary of PE Arsenal Capital’s Certara.
Consumer Software Valuation Metrics
In the Consumer market last month we spotted a pair of PEs making parallel Consumer Education bolt-ons related to drivers training:
One of them, Falfurrius Capital, named for the Texas town where these guys hunt, bagged e-Learning solutions provider American Safety Council in Florida for a brace with The Online Traffic School; while New York’s CIP Capital acquired San Francisco based DriversEd.com, merging it with I Drive Safely as eDriving.
Entertainment Software Valuation Metrics
Finally, in entertainment, a firm owned by rap music mogul Jay-Z paid $56M for Sweden’s Aspiro to enter the expanding music streaming market. With his fans, fame, industry insights, and half-billion dollar net worth, Jay Z may be taking a song out of Dr.Dre’s playlist, financing higher-quality streaming to compete with Spotify and Beats.
So, Tim, to ‘rap’ up our report I propose instead of PE for Private Equity, we call Jay-Z’s firm CE: for Celebrity Equity. Back to you.
Timothy Goddard
Thank you, Elon.
PE Panel
While they may not be Jay-Z, we have some excellent panelists coming on, and to introduce them, I want to in turn introduce the president of the Corum Group, Nat Burgess.
Nat Burgess
Thank you, Tim, and thank you very much to our panelists for joining us today. We are thrilled to have four panelists from the PE community with us. Two are live and we’ll be going through a Q&A round table shortly. The other two panelists had unavoidable conflicts, and they have given us brief recordings in order to give us their perspective on the market. So we’ll kick off with our recordings and then go to our round table. Back to you, Tim.
Timothy Goddard
For the first recording, we’re going to go to Dr. Martin Scott from Riverside Europe.
Martin Scott
My name is Martin Scott. I am the head of Riverside in the UK and Ireland and I lead Riverside software and IT vertical. Riverside is a global PE firm, investing in growth businesses at the small end of the mid-market in the $20-250M EV range. We have offices and funds active across Europe, North America, Asia and Australia. For Riverside, software, technology, and tech-enabled services are a key vertical. We are particularly seeking areas where innovative technology can enter well-established markets and provide market innovation and/or market disruption.
In Europe, for example, we can see this theme repeated in a number of our interesting investments. For example, Transporeon is a logistics software provider that is changing the nature of the market between producers of goods and suppliers of shipping and logistics solutions. Bohemia is a leading provider of game-based technology for military simulation and training that allows military to reduce their exposure to high cost and high hazard physical training environments. Brookson, a recent acquisition in the UK, provides a cloud-based platform and applications to deliver financial services, accounting, tax, and legal advice to individual companies or micro SMEs that would otherwise be serviced by brick-and-mortar high street accountants and solicitors. Mintra is an innovative eLearning platform for health and safety, with a particular focus on the oil and gas sector, which provides ultra low cost solutions to its customers at a time when cost is a significant issue for many oil and gas players.
Themes that we see as interesting in 2015 across the globe are internet of things, financial services from the big end, banking and insurance, right through to the micro end, where Brookson plays, and security and defense technology, to name a few.
For Riverside, our interest in technology and its applications doesn’t end at our platform investments. We apply our insights and learnings and bring technology to bear across all of our portfolio companies. For example, we have a global security and IT program that enables audit and remediation to take place at any one of our portfolio companies where there may be an IT security threat or indeed a breach. We bring big data analytics to bear to try and give an operational edge to the companies that we invest in. For example, our recent exit of BabyJogger) shows where big data analytics could super fine tune the pricing approach taken by a consumer goods manufacturer. We also provide ecommerce and eretailing expertise that want to expand internationally. A good example would be Remia our children’s clothing manufacturer based in Scandinavia that is expanding in both Asia and North America with a highly successful e-retailing platform.
Thank you.
Timothy Goddard
Next, let’s go to John Hodge with RUBICON technology partners.
John Hodge
Hi, this is John Hodge from RUBICON. I want to thank Corum for inviting us to be part of the panel again. RUBICON is an operationally focused PE firm with over $315M of committed capital, focused exclusively on enterprise software companies in the lower middle markets. Our portfolio will only be 6-8 companies where the company management wants fundamental help in growing the business and creating value through growth. We have had the honor of working with Corum last year on one of our two portfolio companies, Astute, they’re a fantastic company that was a founder of the business, Joe, who is a fantastic leader of the company. We have partnered with Joe to help him grow a very interesting consumer engagement and software business and really help them grow the business from their go to market strategy perspective and grow that business from 90 or so people to 150 over three years. We were very honored and excited to work with Corum on that. Last year we had another portfolio called Personify.
Thoughts around PE market for 2014 and 2015, I think the themes we’re finding in the market have been the same over the past couple years. One is fundamentally to believe that the strategic environment has been very consistent over the past five or six years for enterprise software where larger corporations are looking for smaller, innovative companies to help grow their top line and therefore M&A becomes a major tool for them to grow their own role.
Saying that, many of these larger corporations have looked at the smaller lower middle market companies and are really looking for more operational maturity and therefore we have found that in our portfolios as well as what we’re seeing in the pipeline of working with companies that are fantastic product companies or fantastic growth companies and helping them both scale the business through M&A or growth strategies to the point where they have the operational infrastructure to be sold to a larger strategic. I think that the strategics are placing higher values on companies that have that kind of operational maturity as well as more scale.
That theme is the major theme that we continue to focus on and help management teams with. I think the environment for PE overall is that technically is that there continues to be quite a bit of capital in the PE market and therefore both founders as well as sellers of the business, that’s good news for them. I think that the deal environment for PE will be robust for 2015 and continue to be robust, but I think that fundamentally it always comes down to what are you looking for in a PE partner and what is the value the PE partner is going to add, operationally and/or growth?
Nat Burgess
Thank you, John. I’m now going to turn to our live panelists. All four of our guests today on the PE panel we have gotten to know through transactions. We’ve negotiated on opposite sides of the table and when you do that, you really get to know somebody. I can tell you that all four firms are tough negotiators, and that means you really have to have your act together, you have to be prepared and professional before you show up in the board room.
A couple of examples, in our recent project with Blair from Bregal Stagemount, his team identified many areas where our client needed to fix some things, to renegotiate contracts to clean up the company, and this was all necessary before we could get to closing. Getting through these details and fixes was painful and ultimately the best thing that could have happened to the company. It created a clean slate, more value in the firm, and really a better platform moving forward.
For George Kase from Marlin, bear in mind that George was captain of the UCLA football team, so if you were a quarterback playing against UCLA, George was often the last thing that you would see before you got sacked.
Both of these guys, as you get to know them, you want them on your team. You start on the other side of the table, but ultimately recognize them as people you want to play with not against.
With that I’d like to first go to Blair for an introduction on him and his firm, and then to George, and then we’ll get to the Q&A. Over to you, Blair.
Blair Greenberg
Great. So first, thanks again for the invitation, it’s great to be part of this. Just quickly on the fund, I work with a PE firm called Bregal Sagemount. We have a $650M fund. We’re a little bit different in that our fund has a very flexible mandate. We have the ability to do a couple of different types of transactions. We can do a full scale majority buyout, we can also do minority growth equity deals where we’re sometimes putting capital on the balance sheet, sometimes providing partial liquidity to founders, and then we also have the ability to do debt transactions where we can do everything from senior debt all the way to mez.
That very flexible mandate is something that we really use to go out and find companies, sectors and management teams that we want to partner with and then come to the table with whatever the right tool is.
In terms of where we spend our time, most of it is in financial technology, traditional software businesses, we do some financial services investing and then broader healthcare and business services. The smallest check we’ll write is about $10M, biggest we’ll write is up to $150M. The sweet spot for us is really investing in companies that have very strong recurring revenue models.
We have a couple of different platforms that we’re working with today, one in government software, several in healthcare, one in automotive, and also one in ecommerce enablement.
Looking forward to answering any questions folks might have today.
Timothy Goddard
Thanks for the introduction, Blair. George, let’s go to you for a brief introduction of yourself and your firm.
George Kase
Perfect. First, thanks to the Corum team for having me on the panel. My name is George Kase, I’m a partner at Marlin Equity, a member of the investment committee. Marlin is a PE firm based just outside of LA in Hermosa Beach, CA. We started relatively recently in 2005 as a $60M fund. We’ve grown pretty rapidly and have five funds with over $3B of capital under management. We’re very much an operationally focused firm in that most of our folks are in operations, but we have a vertical expertise operating partners on one end of the matrix and then functional expertise in things like finance, HR, tax on the other end of the matrix. The only thing that we typically outsource in the deal is the actual legal documentation, the rest is done in house by Marlin’s operations team.
We broadly focus on the technology sector and all different nuances within technology and technology enabled services. In our transaction structure we’ve done a lot of corporate carve-outs.
Myself, I spend most of my time in healthcare IT and lead that vertical here at Marlin. I’d say from a perspective going forward it’s a vertical that we at the firm and my personally are very excited about. I think you’re seeing trends where there are unprecedented levels of regulatory changes going on within healthcare and this could be anything from ACOs, paper value, ICD10, that’s just putting tremendous pressure on healthcare providers. I think the ability of technology to do two things, one is to improve clinical outcomes, and two is to take costs down in the system, that’s just imperative, so we’re looking for companies within healthcare IT that can do one or two of those things, hopefully both of them, and that’s really our sector of focus.
Nat Burgess
Thanks, George. It’s interesting that you both mentioned healthcare, there’s a lot of focus on that sector.
We’ll get to that in a moment. I wanted to make a brief comment as a sell side M&A advisor. If we go back 15 or 16 years, we used to go to the NASDAQ for the publicly traded companies for our buyers on deals and there were roughly 2000 publicly traded companies and 40% of venture backed companies went public back then. That was where you found your M&A option. That’s not true anymore, a lot of the options, a lot of the best options for sellers now are with the PE firms.
On that note, Blair, when you were doing your intro, you mentioned that you guys were working on several projects in government, ecommerce, automotive… Can you talk about what that means in terms of building those out and having to use M&A to accomplish that?
Blair Greenberg
Absolutely. One of the things that we do here at Sagemount is spend a lot of time in the market talking to companies. I’ll use Accela as an example, which is a company that I’m the board of. We identified in the government sector that there are a lot of different software applications used by state and local governments. None of them was particularly woven together in a larger platform. Our general thesis on the space was we could go make investments or buy some of these regional providers or companies that were experts in specific sub-verticals within government and then build them into a larger platform. From a procurement perspective it’s a lot easier for a city, let’s say, to buy software from one provider as opposed to trying to cobble together a couple of different solutions.
In our travels in the government IT space we have met probably over 100 different software companies that focus on the government vertical, and through our portfolio company Accela, have been acquiring those. Over the past, call it, 16 months since we made our investment in October of 2013, we’ve acquired 7 companies through Accela, and continue to plan to build that business up and then eventually either take I public or look at a strategic exit.
Nat Burgess
That’s helpful. I think George, in a similar vein, I wanted to touch on healthcare because that’s an area where you all have a lot of focus, a lot of expertise. I wanted you to talk briefly about how you approach that market. I know it’s not just a bunch of MBAs (no offense to the MBAs) with theories on the market, you’ve actually brought in some talent, people who have lived it and who have some insider knowledge of that market. Give us the quick playbook on how you guys go after healthcare.
George Kase
I would say that if you want to be a player in healthcare IT, you either need to be a player or you’re not, it’s not something you can dabble in. There’s enough regulatory complexity in the business, and when you factor in HIPAA and those things, you’re either in the space or you’re not.
The way we attack it is we had a dedicated Marlin employee, in this case a guy named Jim Brady, who spent his whole career in healthcare IT as a CEO and in different operating roles. What’s different with him versus other operating partners is he’s a former CEO as opposed to an MBA type like Nat mentioned. That’s how we attack the market with deep vertical expertise and to kind of piggy back in on the previous comment, we see healthcare IT as a very strong buy and build strategy for us. Healthcare is locally delivered, and when you have locally delivered healthcare and locally focused companies that tend to be very regional in focus and also have more point solutions. Every healthcare IT investment we’ve made, we have been very active doing followup acquisitions, trying to build up a more comprehensive product suite and also expand the geographic focus of the business. Those are two ways we focus on healthcare IT, with strong vertical expertise and with a very acquisitive buy and build nature.
Nat Burgess
Thanks, George. We’ve seen both of those elements at work in your model.
I’m going to zoom out a little bit now, and for our audience, primarily CEOs of software companies, one of the things we’ve seen over the last few years has been more capital coming into PE and more focus on software, a disproportionate percentage of the total PE has been put to work in the software industry, which means more competition for deals, growing attention on that asset class. I want you to both sort of look in your crystal ball, if you’re a CEO of a software company, building toward a PE reach out, minority or majority over the next few years, A: What is driving your interest in this sector and B: How should I feel about where we’re going to be in two or three years? Is this kind of a flash in the pan, a fashion of the month, or is software going to continue to be an overweighted focus?
Let’s hear from Blair first.
Blair Greenberg
Why don’t I start with the second part of that first. Do I think it’s sort of a flash in the pan? I don’t. I think that PE will continue to have a very sustained interest in software, for a couple of reasons. Primarily it’s due to the recurring revenues we see in these kinds of companies. Our view is that if you’re investing in a good software business, it has a couple of attributes. One is very strong recurring revenue. Related to that, the software is often very deeply integrated into the operations of the end customers. As we think about the businesses we care about, I would say those are the two top characteristics. As executives look to build out their businesses, I think retention rates and deep integration with their customers are the things that we’ll look at most stringently.
Nat Burgess
George, you mentioned when you were talking about healthcare that it is locally sourced and locally delivered. There is an opportunity to start aggregating knowledge and best practices across a broader offering, which I think is an answer to the question that I asked. Any other elements here for CEOs to be thinking about if they’re building toward an exit? Do you guys see this as being a sustained trend, the PE interest in software?
George Kase
Absolutely. If you take healthcare IT specifically, I mentioned it earlier, but the litany of regulatory challenges just around billing codes, IC10, a move away from paper services, other trends coming, if you’re a physician’s office or even a hospital and you want to survive this environment, IT is your single best way to do it. That trend is only going to accelerate and we’re a big believer in that thesis. I don’t see that abating any time in the foreseeable future.
I think that the things Blair hit on in what we look for in a business are the same, and it’s really assessing the quality of a recurring revenue stream. We dig into things around bookings, around the sales forces expected to drive those bookings, around attrition, around the skill, that recurring revenue base, that’s what makes these events attractive for a PE buyer like us, really understanding the quality of that recurring revenue base. If I was a CEO and I had a technology business, I would really make sure I had the KPIs right for how to assess the quality of that recurring revenue base.
Nat Burgess
I hope everyone was taking notes for those last comments, because that is absolutely on target. If you’re building value in a business and you’re going to have a Marlin or a Bregal Sagemount look at it, that’s exactly where they’re going to be paying a lot of attention and where you want to be building value.
So, we’re at the end of our session, but Blair, George, thank you so much for joining us today. And with that I’ll hand it back over to Tim.
Timothy Goddard
Thank you, Nat, and thanks to everyone for attending. Let’s go to our close.