For the last couple of years, private equity firms have been buying up public software companies that had fallen out of favor with investors. In fact, many of the top software deals in the U.S. last year were take-private transactions. Just three of them included the 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 by Vista.
Public tech companies have largely seen their valuations rebound, however. For that reason, a separate opportunity that Brian Ruder, co-head of technology at the global PE firm Permira, expects to see more centers on maturing tech companies that haven’t yet gone public. We talked with Ruder recently to learn more about Permira, and why venture-backed outfits are more interesting than ever to him.
TC: Obviously, it’s 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 we’re looking for are companies that have good growth opportunities and to back them aggressively.
I think what’s 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 alternative to going public, where you can solve historical shareholder alignment problems without tapping the public market to do that.
TC: You’ve done that with several companies, including LegalZoom, 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 Facebook’s 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. We’ve grown both 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 you’ve invested?
BR: Five to seven years. The longest ones we’ll hold for a decade or so. If shorter than five years, it’s a good thing.
TC: And you’re looking for . . .
BR: Companies that have market leadership positions in really good growth markets. Companies that have a [developed] product set, whether an enterprise business or consumer business. Companies where we see opportunities to accelerate growth, either via a new model or new geographic market or because we can invest at a different capacity than the company’s previous shareholders could handle.
TC: You reportedly just closed your last fund with $7.5 billion euros; that’s huge considering you’ve 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 we’re 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: I’d 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 feedback so you can make decisions about so few companies?
BR: We organize into three core areas: enterprise software, which is a lot of what we’ve 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 area that’s defensible and poised for exciting growth.
We’re 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 we’re not interested if it doesn’t fit one of the themes we’re pursuing.
TC: Is it wholly acceptable in the world of PE to switch out management teams? Is it expected?
BR: We’re 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 it’s backing the founder to continue running the tables; sometimes it’s backing a founder who’s ready to make a transition. We typically [buy] a controlling interest in a company, and it’s such a large change in the shareholder base that 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: It’s a mixed blessing that could create a pretty interesting environment for PE. With rates going up, the valuations we’ve 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 don’t impact us as much as [firms that rely more heavily] on debt.
TC: Thoughts on our new president?
BR: It’s too early. I keep reminding everyone it’s 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: We’ve been very successful taking companies out of the public market, but I don’t 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 — it’s in those kinds of scenarios that we play really well, and I think that’s an even more exciting opportunity right now.