Private equity firms are starting to outbid strategic investors for technology assets, according to a partner with law firm Hogan Lovells, a trend not seen since the financial crisis.
Speaking at a media breakfast in London on Tuesday, Silicon Valley-based M&A partner Rick Climan said that combined with high levels of dry powder and cheap debt, some private equity firms now have enough of a presence in the tech space to be able to leverage advantages that were once unique to strategic buyers.
“That’s not supposed to happen, because theoretically strategic buyers can generate cost synergies and revenue synergies that a pure financial buyer can’t,” he said. “Some of these private equity firms have amassed such remarkable portfolios that they can achieve those same synergies as strategics and use their fund as a kind of roll-up vehicle.”
Last year saw a number of high-profile tech acquisitions by private equity firms, including the $5.3 billion buyout of Norwegian software company Visma Group by a consortium comprising HgCapital Trust, Cinven and Intermediate Capital Group, among others.
This trend was last seen in 2006-07 when it represented the very top of the private equity cycle, Climan added. The more careful use of debt and covenant-lite loans means that a strong market correction is less likely this time around.
“We realise now, and some of us realised at the time, that the debt PE buyers rely on was just mispriced [in 2006-07]. I don’t think anyone thinks the debt is mispriced at this point. People are being a lot more judicious about how much leverage they let private equity players pile on top.”
Another trend that could emerge is an increase in the number of club deals. Climan believes that this will be stronger in Europe than the US, where firms are still mindful of the heavy fines levied by the Department of Justice after its 2006 investigation into private equity firms conspiring to artificially reduce the purchase price of target companies.
“The second reason [club deals might not take off in the US] is that investors in private equity funds won’t put up with it,” he added. “They invest in multiple funds to hedge their risk and if all the funds are clubbed together that’s not going to be there.”