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Technology Private Capital Market Update Q3 2013
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Technology Private Capital Market Update Q3 2013

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Falvey Partners latest technology private capital market update covers the environment for both tech private equity and venture capital investing and fundraising. The update also covers trends in tech …

Falvey Partners latest technology private capital market update covers the environment for both tech private equity and venture capital investing and fundraising. The update also covers trends in tech portfolio exits via the IPO and strategic M&A markets.

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  • 1. Technology Private Capital Market Update Q3 2013 Peter Falvey Managing Director peter.falvey@falveypartners.com P. 1.617.598.0437 TECHNOLOGY PRIVATE AND CONFIDENTIAL Jeffrey Cook Vice President jeffrey.cook@falveypartners.com P. 1.617.598.0439 Jeffrey Monk Analyst jeffrey.monk@falveypartners.com P. 1.617.598.0445 FOCUS. BROAD REACH. OPTIMAL RESULTS.
  • 2. I. Technology Private Equity Market Update 2
  • 3. Technology Private Equity Investing Posts Record Quarter... Following a weak first half of 2013, large deals helped drive a rebound in Q3, with total capital invested reaching $11.7B, the highest level in the post-recession era TECHNOLOGY PRIVATE EQUITY INVESTING ACTIVITY ($B) $14.0 160 139 133 $12.0 139 135 141 140 123 112 115 113 117 114 109 120 109 100 91 $8.0 76 100 79 80 68 $6.0 $11.3 $10.3 $9.4 $8.1 $4.0 $9.4 $5.1 60 $8.9 $8.9 $7.3 $6.7 $5.5 40 $6.1 $4.4 $2.0 $11.7 $11.0 $11.1 $4.0 20 $2.7 $0.6 $0.0 Q1 Q2 0 Q3 2009 Q4 Q1 Q2 Q3 Q4 Q1 2010 Q2 Q3 Q1 Q2 2011 Total Capital Invested ($B) 3 Q4 Source: PitchBook. Data Includes closed transactions only. * Capital invested data excludes transactions with undisclosed transaction amounts. Q3 2012 Deal Count Q4 Q1 Q2 2013 Q3 Deal Count Amount Invested $10.0 117
  • 4. ...as Middle Market Leveraged Lending Trends Improve The leveraged loan market continues to improve, fueled by low rates and availability of debt KEY BASELINE INTEREST RATES Rate October 2013 October 2012 Fed Funds Target Rate 0.25% 0.25% US Prime Rate 3.25% 3.25% 3-Month LIBOR 0.24% 0.31% MIDDLE MARKET LEVERAGED CASH FLOW TRENDS Metric October 2013 October 2012 CF Senior Debt (x EBITDA): 1.50 - 2.50x 1.50 - 2.25x Total Debt Limit (x EBITDA): 3.00 - 4.25x 3.00 - 4.00x L+ 3.5% - 4.5% (bank) L+ 4.5% - 6.5% (non-bank) L+ 3.0% - 4.5% (bank) L+ 4.5% - 6.0% (non-bank) 14.0% - 17.0% 14.0% - 17.0% 9.0% - 11.5% Fixed L+ 7.5% - 9.0% Floating 10.0% - 11.5% Fixed L+ 9.0% - 10.0% Floating 25% - 35% 25% - 35% Senior Cash Flow Pricing Subordinated Debt Pricing "One Stop" Pricing: Minimum Equity Contribution 4 Source: Market Intelligence
  • 5. Private Equity Fundraising Remains at Record Levels... The success of smaller funds and an absence of new mega-funds has resulted in a median fund size of $255M in Q3 2013, $100M lower than the year-ago period PRIVATE EQUITY FUNDRAISING ACTIVITY BY QUARTER ($B) $70 $60 60 49 46 45 40 $50 38 40 $40 31 30 $66 27 $35 31 27 26 28 27 29 30 30 26 $30 20 $48 $44 $20 11 $29 $10 $26 $17 $16 $12 $10 $6 20 $40 $16 $16 Q2 Q3 Q4 $25 $25 Q4 Q1 $24 $20 10 $9 $0 0 Q1 Q2 Q3 2009 Q4 Q1 Q2 Q3 Q4 Q1 2010 Q1 2011 Total Capital Raised ($B) Source: PitchBook. Data Includes closed transactions only. * Capital invested data excludes transactions with undisclosed transaction amounts. Q2 Q3 2012 Number of Funds Q2 2013 Q3 # of Funds Capital Raised 36 5 50
  • 6. ...as Firms Continue to Chip Away at the Near-Record Overhang PE Firms continue to chip away at the significant amount of ‘dry-powder’ while the fundraising environment continues to improve  Significant amount of ‘dry powder’ built-up from large fund raises prior to the financial crisis  Successful fundraising in recent quarters ensuring no shortcoming of dry powder in coming years PE FUNDRAISING YEAR CAPITAL OVERHANG 300 272 235 $250 $150 117 117 130 150 128 97 $100 100 $50 50 $239 $223 $140 $44 $91 $111 2008 2009 2010 2011 2012 $350 $66 $300 $57 $60 $250 $200 $40 $31 $30 $150 $18 $20 $100 $50 0 Capital Raised ($B) Source: PitchBook $500 $400 $80 2013* $0 6 $100 $105 2007 $109 $0 $0 2007 # of Funds 2008 2009 Cumulative Overhang Source: PitchBook 2010 2011 2012 Overhang by Vintage Cumulative Overhang ($B) 200 VINTAGE $450 250 $200 BY Cumulative Overhang $348B $120 Oveerhang by Vintage ($B) $300 BY
  • 7. Technology Private Equity Portfolio Company Exits Rebound After a weak H1 2013, tech PE portfolio company sales posted a record quarter, with 37 exits contributing to $32.8B in exit value TECHNOLOGY PRIVATE EQUITY PORTFOLIO COMPANY EXIT ACTIVITY ($B) $35.0 60 $30.0 48 41 38 $20.0 39 43 41 36 23 $10.0 40 31 25 $32.8 30 21 19 $25.0 20 14 8 $7.5 $6.4 $6.4 $0.6 $1.6 Q1 Q2 Q3 10 $7.5 $7.2 $5.1 $4.3 $14.1 $13.8 $12.4 $11.3 $10.2 $10.7 $10.9 $5.0 $7.0 Q1 Q2 0 2009 Q4 Q1 Q2 Q3 Q4 Q1 2010 Q2 Q3 Q4 Q1 2011 Total Exit Value ($B) 7 37 34 31 $15.0 $0.0 38 36 Source: PitchBook. Data Includes closed transactions only. * Total exit value data excludes transactions with undisclosed transaction amounts. Q2 Q3 2012 Exit Count Q4 2013 Q3 Exit Count Exit Value $25.0 50
  • 8. Larger Deals Fueling Strategic Technology M&A Activity Technology M&A market marked by consolidation from major tech acquirers as they snap up sector leaders leading to fewer, but larger deals STRATEGIC M&A MEDIAN DEAL SIZE NOTABLE CASH POSITIONS ($MM) $140 $79.9B 36 $1B+ strategic acquisitions since beginning of 2011 $119 $120 $50.6B $100 $39.1B $85 $80 $80 $76 $13.3B $70 $65 $60 $43 $40 $50 $47 $50 $51 $50 $35 $11.8B $10.6B $23 $20 $10.2B $0 1Q'11 2Q'11 3Q'11 4Q'11 1Q'12 2Q'12 3Q'12 4Q'12 1Q'13 2Q'13 3Q'13 8 Source: PitchBook YTD YTD YTD 2011 2012 2013 $5.8B
  • 9. Technology IPO Market Rebounding After a weak start to 2013, the inconsistent / sporadic tech IPO market is beginning to stabilize, posting a solid Q2 – Q3 of 23 IPOs accumulating $3.6B in raised capital TECHNOLOGY IPO MARKET ($B) $6.0 Capital Raised Excludes Facebook’s $16B IPO 17 $5.0 14 18 16 14 14 12 12 12 11 9 9 9 10 $3.0 8 7 $4.8 $2.0 5 6 5 $1.7 $1.0 5 3 3 $0.6 Q1 Q2 $0.4 Q1 $0.9 $0.5 Q4 $1.6 $1.1 $1.0 0 $1.6 $1.6 4 $2.5 $2.3 2 6 5 $0.3 $0.7 $1.1 $1.0 $0.4 $0.0 0 Q3 2009 Q2 Q3 2010 Q4 Q1 Q2 Source: PitchBook, CapitalIQ Q3 Q4 Q1 2011 Amount Raised ($B) 9 2 Q2 Q3 2012 IPO Count Q4 Q1 Q2 2013 Q3 IPO Count Amount Raised $4.0
  • 10. Recent High-Profile Technology Transactions  Robust demand and activity in SaaS, e-learning and social media sectors  Interest from PE and strategic buyers driving valuations higher ─ ─ Dell bidding war between Silver Lake and Icahn Enterprises Quest bidding war between Dell and Insight Venture Partners PRIVATE EQUITY STRATEGIC Devices & Services Business Has been acquired by Has been acquired by Has been acquired by Has been acquired by October 2013 May 2013 May 2013 December 2012 Has been acquired by Has received an investment from August 2012 Has been acquired by September 2012 Has been acquired by May 2012 10 Has been acquired by Has been acquired by Has been acquired by September 2013 June 2013 June 2013 June 2013 Has been formed by portfolio companies of Has been acquired by Has been acquired by Has been acquired by Has been acquired by August 2012 August 2012 June 2013 May 2013 January 2013 November 2012 Has been acquired by Has been acquired by Has been acquired by Has been acquired by Has been acquired by April 2012 January 2012 December 2011 July 2012 June 2012 Has been acquired by Has been acquired by August 2012 Has been acquired by May 2012
  • 11. II. Venture Capital Market Update 11
  • 12. Overall Venture Capital Investing Continues to Rise… Venture capital investing has continued at its steady incline through 2013. The $7.8B invested in Q3 represents the largest quarterly outflow of VC since Q2 2011 QUARTERLY VENTURE CAPITAL INVESTING ACTIVITY ($B) $9.0 1,200 1,081 1,023 $8.0 1,015 941 886 $7.0 910 1,034 991 956 937 904 1,005 979 1,000 906 876 821 762 765 800 681 $5.0 600 $8.2 $4.0 $7.5 $7.1 $6.5 $3.0 $5.1 $2.0 $7.4 $5.4 $5.9 $5.4 $5.1 $7.8 $7.4 $6.6 $6.3 $7.0 $6.8 400 $6.0 $5.7 $3.8 200 $1.0 $0.0 Q1 Q2 Q3 Q4 2009 Q1 Q2 Q3 2010 Q4 Q1 Q2 Source: NVCA, PWC MoneyTree Q4 Q1 2011 Amount Invested ($B) 12 Q3 Q2 Q3 2012 Deal Count Q4 Q1 Q2 2013 Q3 Deal Count Amount Invested $6.0
  • 13. …as Early-Stage Deals Continue to Gain Momentum Early-stage deals continue to gain momentum, rising sharply after a weak Q1 and outpacing both expansion and later-stage deals in the previous two quarters QUARTERLY VENTURE CAPITAL INVESTING ACTIVITY ($B) $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 3Q'11 4Q'11 1Q'12 2Q'12 Seed 13 Source: NVCA, PWC MoneyTree Early Stage 3Q'12 Expansion 4Q'12 Later Stage 1Q'13 2Q'13 3Q'13
  • 14. VC Fundraising Still Lagging $11.6B has been raised by VCs YTD in 2013, significantly below levels seen for the same period in recent years QUARTERLY VC FUNDRAISING NOTABLE RECENT FUNDS ($B) $18.0 $3,500M $16.4 $16.0 $2,700M $14.0 $12.9 $11.6 $12.0 $2,600M $10.0 $8.1 $2,000M $8.0 $6.3 $6.1 $6.0 $4.8 $4.0 $5.2 $4.3 $3.4 $2.7 $1,250M $4.1 $3.2 $2.1 $900M $2.0 $0.0 1Q'11 2Q'11 3Q'11 4Q'11 1Q'12 2Q'12 3Q'12 4Q'12 1Q'13 2Q'13 3Q'13 14 Source: NVCA, PWC MoneyTree YTD YTD YTD 2011 2012 2013 $750M
  • 15. VC Overhang Continues to Dwindle Amid Smaller Funds At the current investing rate it will take ~8 quarters for VC firms to wipe out the current amount of VC ‘dry powder’  Average VC fund size has been cut in half since peaking in 2011  Stable investing during slower recent fundraising quarters contributing to decrease in dry powder AVERAGE VC FUND SIZE VC CAPITAL OVERHANG ($MM) $350 ($B) $90 $301 $300 $250 Cumulative Overhang $53B $80 $270 $70 $215 $200 $60 $201 $191 $178 $50 $149 $150 $40 $30 $100 $20 $50 $10 $0 $0 2007 2008 2009 2010 2011 2012 2013* 2007 Average Fund Size ($M) Source: PitchBook 15 2008 2009 2010 Cumulative Overhang * As of 6/30/13 Source: PitchBook 2011 2012
  • 16. Stable VC Investing Overshadowing Decreased Fundraising While VCs continue to put capital to work from prior funds, capital inflows are well below 2011 highs and are still tracking lower QUARTERLY VC INFLOWS / OUTFLOWS ($B) $9.0 Capital Outflows $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 Capital Inflows $1.0 $0.0 1Q'09 2Q'09 3Q'09 4Q'09 1Q'10 2Q'10 3Q'10 4Q'10 1Q'11 2Q'11 3Q'11 4Q'11 1Q'12 2Q'12 3Q'12 4Q'12 1Q'13 2Q'13 3Q'13 16 Source: NVCA, PWC MoneyTree
  • 17. Software Companies Continue to be Most Attractive Targets for VCs VC ALLOCATED TO SOFTWARE $3.6B invested in software companies in Q3 represents 46 percent of all VC invested dollars. Later-stage raisings continue to attract majority of software VC 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 46% of all VC dollars invested in Q3 went to software companies Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 2010 Qtr 3 Qtr 4 Qtr 1 Qtr 2 2011 Qtr 3 Qtr 4 Qtr 1 2012 Qtr 2 Qtr 3 2013 SOFTWARE VC INVESTING ($MM) $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 $2,939 $851 $195 Qtr 1 $1,270 $966 $184 Qtr 2 $336 Qtr 3 2010 $1,350 $1,208 $1,186 $287 $338 $464 Qtr 4 Qtr 1 Qtr 2 $1,735 $502 Qtr 3 $1,827 $359 Qtr 4 2011 First Sequence Financing ($MM) 17 Source: NVCA, PWC MoneyTree $2,124 $1,399 $347 Qtr 1 $445 Qtr 2 $1,509 $510 Qtr 3 2012 All Other Stages ($MM) $1,684 $1,786 $1,819 $563 $524 $468 $627 Qtr 4 Qtr 1 Qtr 2 Qtr 3 2013
  • 18. Corporate VCs Post Record Quarter of Investing Corporate VCs invested $909M in Q2 2013, the highest level in over 4 years and a 23% increase over the high seen in Q2 2011 QUARTERLY CORPORATE VC INVESTING ACTIVITY ($MM) $1,000 $909 $900 $800 $742 $700 $686 $665 $600 $554 $500 $463 $400 $441 $437 Q3 Q4 $572 $533 $514 $494 $461 $473 $371 $359 $296 $300 $223 $200 $100 $0 Q1 Q2 Q3 Q4 2009 18 Source: NVCA, PWC MoneyTree Q1 Q2 2010 Q1 Q2 Q3 2011 Q4 Q1 Q2 Q3 2012 Q4 Q1 Q2 2013
  • 19. Falvey Partners Snapshot We are an entrepreneurial investment banking firm focused exclusively on capital raising and M&A for leading software companies   Founded in 2012 by Peter Falvey and key members of the Morgan Keegan / Revolution Partners team Falvey Partners professionals have closed dozens of software transactions representing billions of dollars in transaction value FOCUS SERVICES  Sell-side or buy-side M&A  Growth capital raising  Board and corporate advisory SELECT, RELEVANT TRANSACTION EXPERIENCE Project Leaf Project Bay Project Port Project Swift Project Anthem Retail Marketing Software Cloud Accounting Software Provider Ecommerce Software Provider Content Management Software Provider Enterprise Mobility Software Provider Web Infrastructure Software Provider Strategic Minority Investment Placement Agent Sell-Side Advisor Sell-Side Advisor Sell-Side Advisor Placement Agent December 2012 Has been acquired by Has acquired Series D Convertible Preferred Stock led by Has been acquired by a portfolio company of Has been acquired by July 2012 December 2011 September 2011 July 2011 July 2011 Series C Convertible Preferred Stock Led by Has been recapitalized by August 2010 August 2004 SECTOR  Software / SaaS  Has been acquired by Tech-enabled business services A portfolio company of  IT services  Internet / digital media September 2012 COMPANY TYPE  $50M - $250M in enterprise value  Profitable or near-term path to profitability A portfolio company of Growth equity investment from PGI Notify and Send platforms acquired by Growing, with established scale  Has been acquired by 19 April 2011 February 2011 Has received an investment from November 2010 October 2010