This article was originally published on Business information.
Scott Arnold was preparing to take over his company, Audit councilSouthern California-based providers of audit and risk management software to the public markets.
Hg had other ideas. European private capital company He had been watching the late-stage startup for five years, impressed by its momentum and focus on customer success. When word got out that AuditBoard was looking for investors for its initial public offering in early March, Hg jumped at the probability. He desired to take over the company and boost next phase growth and was able to pay dearly for it.
Pages we have arranged an offer greater than half an hour at an airport bar. Four weeks later, they’d reached a sale price of about $3 billion, greater than 20 times AuditBoard’s valuation when it last raised primary funding from a VC.
The speed of transactions and the impressive multiplier show how private equity funds were capable of acquire startups increasingly often currently. While many founders still yearn to enter the public markets, a period of high rates of interest is causing late-stage startups to remain private longer. Meanwhile, antitrust crackdowns, especially on Big Techhas deprived some enterprise capital-backed corporations of an alternative choice to exit the market.
The freeze on exits has caused some founders to reconsider investing in private equity, he said. Michael Browngeneral partner at Battery Ventures, a firm that supports corporations at all stages, from seed and early stage to growth and buyout. Battery was also the largest institutional shareholder of AuditBoard.
“They’re moving very quickly. They’re actually paying very good prices for things — as attractive as they are strategic,” Brown said, adding: “And you get immediate liquidity, whereas if you go public, management can’t just sell on day one.”
PitchBook data shows software buyouts are on the rise, with estimates 59 offers in the first quarter. That may not sound like a lot, but it is significant as a growing share of results, said Derek Hernandez, senior technology analyst at PitchBook.
Software M&A activity is down about 20% from pre-pandemic levels, in line with PitchBook, and software buyouts are headed toward a five-year high.
The software-as-a-service category is particularly ripe for consolidation, he said. Aaron Fleishman, software investor at Tola Capital. The software market exploded during the pandemic, with people working from home and businesses spending more on all things cloud. But with inflation and rates of interest rising, software customers from tech startups to brick-and-mortar stores have tightened their budgets.
Fleishman said that as software spending has fallen significantly, many corporations with subscription revenues in the $20 million to $50 million range have hit a plateau. Their slowing growth has made it harder for these corporations to draw recent enterprise capitalists. They are not sufficiently big to go public and likely won’t be raised by the incumbent.
“There aren’t many buyers for these assets because at this point it feels like this is the last generation,” Fleishman said.
Their weak point is the profit of personal capital. Companies similar to Thoma Bravo or Vista Capital Partners — the leading providers of personal capital in the technology industry — should purchase a company, dismantle it, build it as much as several hundred million in annual recurring revenue, and turn it around or take it public. Or they will join other corporations to create a Frankenstein of software giants.
“We’re going to see a lot of this consolidation over the next year or two,” Fleishman said.
The redeemed one becomes the buyer
In this market, some software corporations are trying to sell more to personal equity funds. Others are shopping around.
This spring, Metropolis, a startup that creates a parking app, followed in the footsteps of personal investors and acquired privately held SP+, one of the largest parking networks in North America.
Yoni Rechtman, investor in Slow ventureswho first backed Metropolis at the seed stage, said the growth buyout helped Metropolis not only expand its market presence but also capture more value. “Owning the assets means owning all the benefits,” Rechtman said.
The deal follows October’s news that Metropolis had raised $1.8 billion in financing led by Eldridge Industries, a provider of equity and debt financing. With the money, Metropolis is effectively “using its equity to acquire companies, not to acquire customers,” Rechtman said.
It’s not only startups that are imitating private equity. Sequoia has modified its model so it could hold public corporations longer. General Catalyst bought the healthcare system. Andreessen Horowitz plans to take a position in the private equity asset class through its family office.
These trends suggest that the worlds of personal equity and enterprise capital are colliding in recent ways, with startups caught in the middle, weighing the lure of faster liquidity against the traditional dream of going public.
High rates of interest and a liquidity crisis are changing the landscape, and private equity investors are seizing the opportunity.