PC Symposium: Tech buyouts: What's attractive, what's ahead
E-mailA panel moderated by The Deal’s Senior Editor Mary Kathleen Flynn that included Apax Partners partner Nico Hansen, Battery Ventures general partner David Tabors and Chip Meakem, a general partner with Kodiak Venture Partners, agreed management changes are essential to effect change and improve companies but that they have a hand in creating the stigma around private equity.
In the tech space as many others, PE firms can carry negative reputations. It is true in the U.K., Hansen said, but perhaps more so in traditional investment sectors. By contrast, in telecom and tech: "You put companies together. You buy up adjacent markets. ...It's still growth oriented."
Meakem said the strip-and-flip mentality is fine in an exit scenario, but when there’s still equity in, it’s about working together. Tabors concurred—it's about building relationships.
Where the buyouts are
Attractive tech sectors for PE investors include business service providers, like outsourcers, Battery’s Tabors said, and while he would generally steer clear of industries like semiconductors, there are exceptions like Freescale Semiconductors Inc., where at a certain scale, the end markets have strong growth associated with them and the trend line is in a positive direction.
Apax’s Hansen said software and telecom have good LBO models. "The debt model has changed," he said, in the last two years. The spectrum has broadened because the debt markets allow it. Hardware and semiconductors are the new playing field. "Telecom is almost standard" he said, with stable, long-term foreseeable revenue streams.
Will there be more buyouts like Freescale? Yes, panelists agree.
Tabors said he also looks at companies at the bottom end, companies with enterprise values of $200 million and below, but at that level, scale can be a problem, as well as overreliance on too few customers individually making substantial contributions to revenue. "There are some things that happen at a lower scale," he said, but that each type of business will have a floor.
Kodiak's Meakem added companies like Internet marketing services firms, grown by bootstraps in early 2000s when there weren’t a lot of venture dollars available, built recurring cash flow, have nice growth rates and some option value that can be transformed to open distribution, for example.
VC exits via buyouts
The barriers to entry for the public markets and lack of competition in the M&A market, the lack of liquidity has drawn PE investors to venture-backed companies. On the VC side, Meakem said, when there is leverage and scale in a company going forward, it becomes an exit option.
Sometimes, Tabors said, “broken” venture-backed companies are attractive targets, those which have revenue below $20 million and some customers, but are in a niche market where there really isn’t a huge opportunity. They usually make nice add-ons, he said.
Looking ahead
Tabors said there are great opportunities for tech in that “public equity markets are going to start to understand these business models,” and value them accordingly.
A correction will likely come, but whether it will be as dramatic as the last, some aren't so sure.—Carolyn Murphy
