It’s safe to say technology permeates almost every aspect of our lives, and that demand is evident in private equity fundraising numbers.
A look back through the top 30 firms in Private Equity International’s annual PEI 300 ranking for the last few years shows just how much capital has flowed into the sector since 2013.
In the 2013 PEI 300 list, there was just one tech-focused fund manager – Silver Lake – that landed a spot in the top 30, having amassed $7.4 billion in the preceding five years.
Fast forward a few years, and the 2017 PEI 300 list shows three tech-dedicated private equity firms ranked among the top 30. In the five years leading up to 2017, Chicago-based Thoma Bravo, Austin-based Vista Equity Partners and Menlo Park’s Silver Lake raised an aggregate $46.1 billion.
That number represents a whopping 523 percent increase, or more than six times growth, on Silver Lake’s lone $7.4 billion in 2013.
“We are seeing a very significant appetite for strong-performing tech funds amongst limited partners, despite high valuations in the sector,” Kelly Meldrum, a Menlo Park-based partner and head of primary investments at Adams Street Partners, tells PEI. “Competition for allocations is fierce, with demand coming from both existing and new LPs, especially sovereign wealth funds.”
Indeed, the tech space has seen some high prices for transactions in recent years. In its Global Private Equity Report 2017 released in February, consultant Bain & Company notes that four of the 10 largest leveraged buyouts involved tech companies: Dell, BMC Software, Veritas Technologies and Solera Holdings.
Tech businesses are demanding high prices; the five largest software take-private transactions closed in 2015-16 had an average purchase price of 18.1x EBITDA, nearly double the 10.2x among the five largest non-tech deals in the same period, according to Bain.
Vista Equity Partners’ fundraising records reflect the fast growth in the sector. In the 2013 and 2014 PEI 300 reports, Vista ranked 59th and 48th, respectively. The tech buyout firm landed in the top 30 in 2015 with a five-year fundraising total of $11.8 billion, surpassing Silver Lake by two spots.
It closed its fourth fund, Vista Equity Partners Fund IV, in May 2012 on $3.5 billion, and increased the size of its next fund, VEPF V, which closed on $5.78 billion in October 2014.
Now, the firm is raising its biggest fund yet; VEPF VI is eyeing more than $10 billion, according to PEI data.
And Vista is not the only one forming mega-funds. Silver Lake has closed its fifth fund on $15 billion. The date of the close, early April, means that mountain of capital will be included in next year’s PEI 300.
But according to one tech-focused GP in the US, activity in the space could slow down.
“I think investors, and particularly LP co-investors, are tired of seeing big headline multiples being paid,” he says. “And the cohort of deals that got done in 2015 and 2016, their results are going to come out in 2018, 2019, and I’m a little bit concerned about that in general. So, I think people will pause.”