Private Equity Dealflow Q4


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Private Equity Dealflow Q4

  1. 1. InformationTechnology:McGladrey® QuarterlyPrivate Equity DealFlow Profile Q4 2011Insight | Analysis SMExperience the power of being understood. Powered by PitchBook
  2. 2. Information Technology McGladrey Quarterly Private Equity Deal Flow Profile RSM McGladrey announces the Q4 2011 Private Equity Deal Flow Profile The RSM McGladrey team is proud to present the Q4 Quarterly Private Equity Deal Flow Profile for the information technology (IT) industry. Powered by PitchBook, the Deal Flow Profile provides a representation of U.S. private equity deal activity, performance and trends for the industry. Year to date, the IT industry has seen 169 completed U.S. deals, totaling $20.27 billion of invested capital. IT deal flow was down in the third quarter, serving as a reminder that “the economy has yet to fully recover, financing can still be a challenge to obtain and there is still a small supply of quality deals,” according to Donald Lipari, national executive director of Private Equity Services for RSM McGladrey. The nature of the industry is very dynamic with new companies and major trends appearing almost out of thin air. These present private equity firms with a number of challenges and opportunities alike, forcing them to adapt and change their investment strategies. Recent examples include a shift in preferences away from smaller companies and towards better established middle-market companies, as well as a willingness to acquire companies in the software sector at higher multiples because of their ability to serve as good platforms for acquisitions of additional software and technology companies. Private equity firms, though, are beginning to catch on, and the information technology industry has grown over the last couple of years to become the third most active industry for private equity investment. The reason IT companies have attracted so much interest from PE firms, according to Kartik Sundar Raj, director, Transaction Advisory Services for RSM McGladrey, is that “these are companies with momentum, proven revenue and the ability to explode or even partially explode upwards.” Dedicated to serving the middle market, the primary area of private equity investment, the McGladrey team meets the needs of private equity firms and their portfolio companies with integrated transaction advisory, tax, audit, consulting and investment banking services. With more than 300 clients in the information technology industry, we have a large team of professionals who work almost exclusively with emerging and technology-based organizations. In the past two years, we have completed more than 50 due diligence engagements in the software/technology industry. The rest of this report profiles investment trends and activity to give you a better understanding of the current private equity environment in the U.S. IT industry. Donald A. Lipari Kartik Sundar Raj National Executive Director, Private Equity Services Director, Transaction Advisory Services RSM McGladrey, Inc. RSM Mc.Gladrey, Inc. 212.372.1235 703.336.6400 David Van Wert Director, Transaction Advisory Services RSM McGladrey, Inc. 415.848.5338 [2]
  3. 3. Information Technology McGladrey Quarterly Private Equity Deal Flow Profile IT private equity deal flow IT Private Equity Deal Flow by Year After a strong start to the year, U.S. private equity activity in the IT industry experienced a fairly dramatic slowdown during the third quarter. The 39 completed deals and $4.22 billion of invested capital are equivalent to only about half of 2Q’s totals, and from a deal flow perspective, it was the third slowest quarter for IT since 2005. Sundar Raj believes this might have been a bit of a one quarter anomaly, since “things felt better. There is a lot of activity, but it appears to just not have translated into closed PE deals as of yet.” Lending support to this is the fact that 2011 as a whole is still on track to be the best year since the financial crises in terms of private equity deal flow and capital investment. Source: PitchBook Private equity investment preferences in the IT industry have been shifting in 2011. Some of those changes started several years ago, while others are more recent developments. Examples include a shift towards software-related companies and an increasing willingness to make growth investments instead of buyouts. IT may be a relatively young industry for private equity, but its attractive investment prospects have propelled it to be the third most active industry in terms of PE deal flow. This will likely continue according to David Van Wert, director, Transaction Advisory Services, who believes, “4Q, on a micro level, has already started strong, and there will likely be an uptick in activity before year-end.” IT Private Equity Deal Flow by Quarter Source: PitchBook *Through 3Q [3]
  4. 4. Information Technology McGladrey Quarterly Private Equity Deal Flow Profile Deal Activity by Sector Median Deal Size ($M) Source: PitchBook Source: PitchBook Deal flow details Capital invested details The software sector has slowly but surely taken over private The median deal size in the IT industry has skyrocketed this equity investment in the IT industry. The sector has seen 88 deals year to almost $200 million, the result of both larger totaling $9.2 billion so far in 2011 and is well on pace to top last companies being acquired and higher valuation multiples. In year’s total of 105 deals, which represented $4.4 billion of invested general, PE firms have been displaying a bigger appetite for capital. Within software, Sunda Raj sees “new applications, cloud larger companies and a renewed ability to finance these computing, education and government related software larger deals. The $200 million also shows that the primary companies driving the growth.” interest for private equity has been moving away from younger and smaller IT companies and towards more The amount of private equity capital flowing to software established middle-market ones. Additionally, the IT industry companies is currently at its highest since 2007, and the software has seen significant competition for deals from both strategic sector is on track to eclipse communications and networking as acquirers and other PE investors. As Van Wert notes, the top IT sector for only the second time. In the IT services sector, “Strategics are having little trouble throwing money at deals deal flow has not slowed down with 30 completed deals in 2011 right now, which is basically requiring PE firms to up the ante to date despite a drop in investment to just over $1 billion, to even stay in the bidding.” This competition has led to indicating that PE investors have switched their preference to higher multiples for an industry that already had higher smaller companies and growth investments. multiples than most. PE Transactions (Total $ Amount) by Sector % PE Transactions (Count) by Deal Type % Source: PitchBook Source: PitchBook *Through 3Q [4]
  5. 5. Information Technology McGladrey Quarterly Private Equity Deal Flow Profile Percentage of Deals by New Investors Number of Investors Source: PitchBook *Through 3Q 2011 Deals by new investors in the IT industry This chart shows the number of private equity firms investing in the information technology industry each year, as well as the portion of those investors that were making their first investment in the industry. Despite the drop in deal flow during the third quarter, there is clearly still widespread interest in the industry, since almost 190 private equity firms have made investments in it so far this year. The decline in percentage of new investors is explained by Van Wert: “In the current uncertain economic times, it is not the best time for an investor to move into an industry they don’t have experience in.” Selected IT Q3 2011 PE transactions Company Name Investor(s) Sector Amount ($M) Lawson Software Golden Gate Capital, Infor Global Solutions Software $2,000 Smart Modular Technologies Silver Lake Partners Hardware $645 Wall Street Systems ION Trading, Kairos Partners, TA Associates Software $500 BankServ GTCR Golder Rauner Software $300 LightSquared Harbinger Capital Partners Communications & Networking $265 TelePacific Communications Investcorp Communications & Networking $125 Plimus Great Hill Partners Software $115 BigMachines JMI Equity, Vista Equity Partners Software $106 Opera Solutions Accel-KKR, Invus Group, Jge Capital Management, Software $84 Silver Lake Partners, Tola Capital Education2020 Kohlberg Kravis Roberts, Weld North Software $50 Thought Equity Motion Shamrock Capital Advisors Software $ [5]
  6. 6. Information Technology McGladrey Quarterly Private Equity Deal Flow Profile IT PE Exits (Count) by Exit Type Source: PitchBook Private equity exit activity There were eleven private equity exits in the information technology industry during the third quarter, bringing this year’s total to 44. Exit flow is up from the past couple of years, but a large difference between new investments and exits still exists in the industry. The number of private equity backed-IT companies rose to 586 by the end of the third quarter. 414 of those companies are over three years old, including 243 that are more than five years old. Consequently, a number of IT companies backed by PE firms will likely be on the block in the next year or two. The exit strategies for private equity firms in the IT industry are mainly concentrated on sales to strategics (corporate acquisitions) and other PE firms (secondary buyouts). Corporate acquisitions have historically accounted for the majority of the exits, and 2011 is no different with 30 such exits. On the other hand, the IPO market has continued to be rough for PE-backed companies. Freescale Semiconductor is the only PE-backed IT company to go public so far in 2011. One area of exit activity that is seeing significant growth is IT secondary buyouts. If PE deal flow turns around, this exit type could become an even bigger source of both deals and exits for private equity investors. IT PE Exits (Count) by Exit Type % IT PE Exits by Sector Source: PitchBook Source: PitchBook *Through 3Q [6]
  7. 7. Information Technology McGladrey Quarterly Private Equity Deal Flow Profile The following list shows a detailed breakdown of the PitchBook industry codes for the information technology industry. 6. Information Technology 6.1 Communications and Networking 6.4 Services 6.1.1 Cable Service Providers 6.4.1 Consulting and Outsourcing 6.1.2 Connectivity Products 6.4.2 Systems and Information Management 6.1.3 Fiberoptic Equipment 6.4.3 Other IT Services 6.1.4 Internet Service Providers 6.5 Software 6.1.5 Telecommunications Service Providers 6.5.1 Application Software 6.1.6 Wireless Communications Equipment 6.5.2 Automation/Workflow Software 6.1.7 Wireless Service Providers 6.5.3 Communication Software 6.1.8 Other Communications and Networking 6.5.4 Database Software 6.2 Hardware 6.5.5 Educational Software 6.2.1 Computers, Parts and Peripherals 6.5.6 Internet Software 6.2.2 Electronic Components 6.5.7 Multimedia and Design Software 6.2.3 Electronic Equipment and Instruments 6.5.8 Network Management Software 6.2.4 Office Electronics 6.5.9 Operating Systems Software 6.2.5 Storage 6.5.10 Software Development Applications 6.2.6 Other Hardware 6.5.11 Vertical Market Software 6.3 Semiconductors 6.5.12 Other Software 6.3.1 Application Specific 6.6 Other Information Technology 6.3.2 General Purpose 6.6.1 Other Information Technology 6.3.3 Production 6.3.4 Other [7]
  8. 8. Power comes from being understood. SMWhen you trust the advice you’re getting, you know your next move is the rightmove. That’s what you can expect from McGladrey.That’s the power of being understood.800.274.3978www.mcgladrey.comMcGladrey meets the needs of private equity firms and their portfolio companies with integrated transactionadvisory, tax, audit, consulting and investment banking services. Clients benefit from a single-point-of-contactservice model and teams that operate as strategic partners throughout the private equity life cycle. Our transac-tion advisory services emphasize responsiveness and drive appropriate purchase price and optimal exit price. Weoffer scalable audit and tax services to meet the business needs of our fund and portfolio company clients, andcontinually monitor tax and regulatory changes to inform clients of relevant issues. Our investment bankingpractice provides carefully tailored acquisition opportunities or divestiture services.McGladrey is the brand under which RSM McGladrey,Inc. and McGladrey & Pullen, LLP serve clients’ businessneeds. The two firms operate as separate legal entities in an alternative practice structure. McGladrey & Pullen isa licensed CPA firm providing assurance services. RSM McGladrey provides tax and consulting services.RSM McGladrey, Inc. and McGladrey & Pullen, LLP are members of the RSM International (“RSMI”) network ofindependent accounting, tax and consulting firms. The member firms of RSMI collaborate to provide services toglobal clients, but are separate and distinct legal entities which cannot obligate each other. Each member firm isresponsible only for its own acts and omissions, and not those of any other party.McGladrey Capital Markets is a member of FINRA. International mandates are handled by or in conjunction withMcGladrey Capital Markets Canada Inc. (limited market dealer registered with the Ontario Securities Commission)or McGladrey Capital Markets Europe Ltd (authorized and regulated by the Financial Services Authority).McGladrey, the McGladrey signature, The McGladrey Classic logo, The Power of Being Understood, Power Comes from BeingUnderstood and Experience the Power of Being Understood are trademarks of RSM McGladrey, Inc. and McGladrey & Pullen, LLP.©2011 RSM McGladrey, Inc. All Rights Reserved.