Buyout funds scoop up tech companies in P2P deals

Buyout giants make strides to bring public companies under their control, looking to unlock value and future-proof portfolios

Private equity’s appetite for taking public companies private has been strong over the past 18 months. Buyout funds are bidding high, particularly in the tech sector where software companies have been prime targets. What is motivating these moves, who is involved, and where could it go wrong?

Through the first half of 2022, $96bn in public-to-private deals have been announced or completed. This is well on pace to surpass last year’s record $118bn. What’s more, is that tech’s share of that interest has gone from about one-third to more than half over the past 18 months compared to the previous five years (Fig. 1).

Business-to-business software companies have headlined this year’s deal-making. Pending or completed transactions for companies such as Citrix, Anaplan, and Zendesk have highlighted the demand and value for enterprise software companies. The combined value for these three deals currently exceeds $37bn. However, only Anaplan has been completed. 

The draw

These enterprise deals showcase not the spread of under-valuation, but the sector’s revenue growth and potential that GPs seek to capitalize on. Private capital has a distinct appetite for taking software companies private, especially SaaS software companies (Fig. 2). SaaS, and the broader software industry remains favored by large institutional investors and sovereign wealth managers, even as venture capital fundraising has dipped from recent highs. 

Over the three years ending 2021, revenue from Anaplan and Zendesk grew 38.6% and 30.8%, respectively, on an annual average basis. Citrix, an industry mainstay since the dawn of the internet, rose a far more modest 2.7%, but with revenues over $3.2bn and profitability margins well in the black. And while these target companies may be profitable the common thread in these deals is shifting the focus to a longer-term vision, rather than a quarter-to-quarter focus many public companies are tied to.

Who's buying?

A relatively small number of firms have had a hand in the biggest deals made over the past 12 months. Chicago-based Thoma Bravo, a mainstay in tech-focused buyouts, has taken part in seven public-to-private deals in the software space since the start of 2021, totaling $42.4bn. Uniquely, Thoma Bravo almost exclusively enters these deals alone. This includes a rejected bid for Zendesk in February for an undisclosed amount. The Thoma Bravo Fund XV, which announced its first close in May, included public-to-private deals for Anaplan (see below), Sailpoint Technologies ($6.9bn, March 2022), and Bottom Line Technologies ($2.6bn, December 2021).

Other firms, including Brookfield, Clayton Dubilier & Rice, and TPG, have chosen to go it alone with software deals as well, yet not to the degree of Thoma Bravo. Apollo has also been active in taking public companies private, but it has shown greater diversity in building its portfolio and adding retail, travel, and media assets.

Whether this momentum can be sustained remains to be seen. North America-focused buyout funds entered 2022 with their highest AUM on record – and the lowest proportion of dry powder of the decade. Heading into the new year, the collective AUM of this group was $1.81tn, of which $480bn was held in cash, down from $527bn at the end of 2020 (Fig. 3). That’s a drop from just over one-third of AUM to just over one-quarter of it. 

On again/off again
While the Anaplan deal was closed in late March, its path wasn’t without obstacles. Elon Musk’s saga with social media platform Twitter has been a closely covered affair and a glaring example of how these deals are not done so cleanly. Following a $44bn proposed deal to take the social media company private, the Tesla/SpaceX boss looked to renegotiate some of the finer points before reneging on the deal altogether. Similarly, deals for Zendesk and Anaplan have not been so smooth, notable with Thoma Bravo’s pending lawsuit over its Anaplan deal.

In March Thoma Bravo announced its plan to purchase all outstanding shares of analytics-software platform Anaplan for $63.75 per share, taking the company private after a near-decade on the public market. The deal settled on $10.4bn despite being amended $300mn lower from the original $10.7bn following disagreements on employee pay.

Zendesk, a SaaS company similar to Anaplan, followed a far more fraught path. Zendesk’s board, led by activist fund Jana Partners, rejected an initial $17bn offer in February, only to eventually come back to the table and accept a $10.2bn deal. The agreed-upon deal will still bring shareholders a 34% premium. The yet-to-be-completed deal involves PE firms Hellman & Friedman and Permira and sovereign wealth funds Abu Dhabi Investment Authority and Singapore-based GIC. The former two were also involved in the earlier, rejected bid.

Citrix Systems’ route to privatization has been comparatively smooth. The $16.5bn plan was agreed to in principle in January and stands as the largest deal of its kind to be completed so far in 2022. Pending regulatory and financing approval, the first part of the deal is set to close in July 2022.

Market influences or good business?

Historically we haven’t seen a very strong relationship between public market performance and public-to-private deals (Fig. 4). Large declines in public market valuations didn’t result in the situation we see here in 2008, where average deal values are rising amid market declines. Nor is a pattern apparent in the years following. Moreso, the corresponding rise in relative valuations in 2021, and fall in 2022, also appeared to have little impact on fund managers’ appetite for these deals (Fig. 5).

More likely is the case that these software companies are future-proof. These companies are less threatened by the chance of a recession due to the essential, and subscription-based, products they sell to businesses across a diverse set of clients. As private equity becomes more competitive, and manager selection becomes more critical for LPs, funds with this vision will stand out.