Are buyouts the new IPOs?

Buyouts may replace IPOs as the exit of choice for tech companies in the coming months. This comes as the number of startups unable to exit into a frozen market continues to grow.

With only two tech IPOs so far in 2016, and poor market returns for the majority of those already public, companies are turning elsewhere to cash in on their efforts.

Just this week, analytics firm QLik was acquired by Thoma Bravo for $3 billion after a mostly successful IPO in 2010 followed by five years of turbulence.

Another private equity firm, Vista Equity Partners, has gobbled up three tech companies in the last six weeks. First, SaaS events management platform Cvent sold for $1.35 billion, followed by marketing automation platform Marketo for $1.79 billion and identity management firm Ping Identity for a sum that has yet to be announced.

Ping Identity’s sale is unique in that the company skipped the IPO process entirely, instead opting to be acquired by the San Francisco-based software and technology private equity firm.

“My eyes started to open up to what was happening and the advantages of growth private equity,” said Andre Durand, CEO of Ping Identity. “I think about how history could have played out and I now look at this and think growth private equity is the new IPO.”

Durand told TechCrunch back in October 2015 that he reasonably believed an IPO would be possible for the company in late 2016 or early 2017.

“In this case, I look at this outcome and actually see it as superior. The liquidity here was significantly faster than in the public markets, market timing not withstanding,” added Durand.

Durand also said that nothing precludes the possibility of an IPO later once the company has more scale.

Not only is Ping unique in being acquired by a private equity firm while still private, it is also one of a small number of tech companies with notably robust financials.

“We were not burning cash, nobody was afraid we would go under or have a down round. We were past that. This was not a conversation around fear,” said Durand.

Moving forward from Ping Identity’s surprising acquisition, the question remains of whether tech unicorns will begin considering private equity as a viable means of exit. Private equity has more than enough dry powder to begin making more moves in the technology sector.

“In the last 12-18 months, private equity had $15 billion dollars going after tech companies with total dry powder available sitting between $300 and $400 billion,” said Richard Davis of Canaccord Genuity. “In theory this is enough to take every software company on the planet private, except giants like Microsoft.”

Larger private equity firms like KKR and Carlyle Group can be expected to hop on the tech acquisition bandwagon in the coming months. 

They are going to want to buy companies that are pretty close to making money, it’s harder if you’re losing tons and tons of money,” continued Davis.

While short-term memory loss is epidemic in the valley, private equity has historically stepped in to return order to inefficient markets.

“It’s like how a forest fire clears out the underbrush,” said Davis.

In 2005, Canaccord Genuity began tracking business software companies that had undergone an IPO. Within 10 years, 78 percent of the 95 software companies they were tracking had been acquired. Despite such staggering numbers, some tech unicorns are more ripe for buyout than others.

“Some may end up here because public markets are not available but I’m not sure how a private equity investor would look at the cash requirement,” added Durand.

Some unicorns have hit multiples of 12-15X revenue. Public companies average 5X revenue multiples. This discrepancy may be enough to scare potential buyers away, but if exit opportunities continue to become more limited, companies may be forced to take what they can get at lower valuations.