For the last couple of years, private equity firms have been buying up public software companies that had fallenout of favor with investors. In fact, many of thetop software deals in the U.S.last year were take-private transactions. Just three of them includedthe visual analytics company Qlik Technologies, which sold to Thomas Bravo; the marketing software company Marketo, acquired by Vista Equity Partners, and the event management company Cvent, also acquired byVista.
Public tech companies have largely seen their valuations rebound, however. For that reason, aseparateopportunity that Brian Ruder, co-head of technology at the global PE firm Permira, expects to see more centers on maturing tech companies that havent yet gone public. We talked with Ruder recently to learn more about Permira, and why venture-backed outfitsare more interesting than ever to him.
TC: Obviously, its not brand new, this trend of PE shops gravitating toward software companies, even if it did seem to become more of a thing beginning last year.
BR: Permira has been at it for 30 years. We grew out of being a venture capital firm that backed disruptive, late-stage companies. But we evolved [over the last decade] beyond just buying classically undervalued and under-managed companies and into buying great growth businesses that just need larger and larger pools of capitals. What were looking for are companies that have good growth opportunities and to backthem aggressively.
I think whats more new is using operating expertise and a [PE size] capital base to back companies that have been in the VC ecosystem and are looking for an alternativeto going public, where you can solve historical shareholder alignment problemswithout tapping the public market to do that.
TC: Youve done that with several companies, includingLegalZoom, where in 2014 you invested $200 million in the company just before it went public, providing some liquidity to its earlier shareholders.
BR: LegalZoom had filed to go public and was out on road in the wake of Facebooks IPO and it pulled [its offering]. But it had great shareholders and an alignment problem, where some investors had already made a great return[on paper] but newer VCs had bought in at a much higher valuation. We were able to come in and invest a lot in the company and [reduce]ownership of its earlier investors down for[a return that made them happy] and get everyone aligned. And the company has grown a lot since then. If it does go public, it will be a much bigger, healthier company.
TC: Could that be this year?
BR: LegalZoom could go public at some point. Weve grownboth its revenue and its profitability significantly. It was a heavily a transaction business, and we saw the opportunity to grow its subscription business as well, and now half its profitability is driven by subscriptions, which we think makes it much more attractive as an IPO candidate in any [type of] market.
TC: How long do you intend to hold on to companies, once youve invested?
BR: Five to seven years. The longest ones well hold for a decade or so. If shorter than five years, its a good thing.
TC: And youre looking for . . .
BR: Companies that have market leadership positions in really good growth markets. Companiesthat have a [developed]product set, whether an enterprise business or consumer business. Companies where we seeopportunities to accelerate growth, either via a new model or new geographic market or because we can invest at a different capacity than the companys previous shareholders could handle.
TC: You reportedly just closed your last fund with $7.5 billion euros; thats huge considering youve raised $30 billion ever in the history of Permira. Has your investor base changed much? Where did all that capital come from?
BR: Our investor base is very global, because were very global, with 13 offices four in Asia, two in the U.S. and seven in Western Europe. More than half of our tech team is based in California.
TC: What size checks are you writing, and how many companies are you looking to acquire each year?
BR:Id say $200 million at the low end and up to a billion dollars or more on the high end. We will use financial leverage some degree of debt, somewhere around 2x the amount in buying power. And our target would be to invest in and acquire two to three companies a year.
TC: You have 100 employees across 13 offices looking at deals around the world. How do you winnow down all that feedbackso you can make decisions about so few companies?
BR: we organize into three core areas: enterprise software, which is a lot of what weve done, including Genesys, a big contact center business that we pulled out of Alcatel; consumer internet and internet subscription, which includes LegalZoom; and niche infrastructure. For example, we think that carrier-neutral data centers is an areathats defensible and poised for exciting growth.
Were different from a lot of [PE] firms in that our folks are spending time on what they love as opposed to what happens in the market. Most [competitors] feel like they have to participate in these IB-run sale-side processes, but were not interested if it doesnt fit one of the themes were pursuing.
TC: Is it wholly acceptable in the world of PE to switch out management teams? Is it expected?
BR: Were always backing a management team to pursue a plan that we work out with them.We customize the team jointly with the company up front. Sometimes its backing the founder to continue running the tables; sometimes its backing a founder whos ready to make a transition. We typically [buy] a controlling interest in a company, and its such a large change in the shareholder basethat it usually catalyzes a discussion of what is the right structure of management team over next five years, versus incrementally figuring out what you have and what you need.
TC: Interest rates are rising. What does that mean for your business?
BR: Its a mixed blessing that could create a pretty interesting environment for PE. With rates going up, the valuations weve seen that have been on the rise for the last couple of year could settle down, which would be good for us. Of course, debt will be more expensive, too. For growthier folks like us, higher interest rates dont impact us as much as [firms that rely more heavily] on debt.
TC: Thoughts on our new president?
BR: Its too early. I keep reminding everyone its only been 50 days or so since he took office.
TC: In 2017, do you see Permira taking companies out of the public market or investing in still-private companies or both?
BR: Weve been very successful taking companies out of the public market, but I dont think in 2017 that take-privates will take off with a vengeance. Companies are expensive right now compared with historical norms. More likely, late-stage companies will get more interesting. Once a company is in that IPO pipeline and evaluating its options its in those kinds of scenarios that we play really well, and I think thats an even more exciting opportunity right now.