Soaring valuations, a downturn getting closer and increased competition in growth investing, mean Brian Conway, the managing partner and chairman of TA Associates, thinks now is the time to focus on higher-quality businesses.
What were some of the main trends in 2017?
There was a big shift last year toward the use of fund-level leverage for deferred calls. It really took off. Broadly speaking, half of the LPs like it and the other half do not, so what is a GP supposed to do? I think it’s something people are still wrestling with and that they will report both ways, with leverage and unlevered.
We’ve also seen PE-to-PE acquisitions in our own portfolio, and it’s true in the rest of the industry. Four or five years ago, there was a little bit of push back from investors saying, “this is not what we paid you guys to do, just to trade assets”. I think it’s much more complicated than that. I actually think that there are different stages in a company’s life. We may invest in a company that was started with venture capital and sell it to a big buyout fund. When we invested it was 25 percent growth and now it is 10 percent. But the buyout firm thinks 10 percent is fantastic. The company is more established, has multiple products and has a bigger market. That’s the life stages of a company. I did see that as a trend in 2017 and certainly in our portfolio.
How have sky-high valuations affected growth investing?
Healthcare and consumer multiples are up 50 percent or more over the last 10 years. I think tech multiples have tripled, and tech is about 40 to 50 percent of what we do. We’re beyond the level of purchase price multiples of 2007. That’s obvious, it’s fuelled by the fact that we’re in the eighth or ninth year of expansion, we have very low interest rates and fairly easy credit markets. It’s also competition. There’s an increased interest in growth, which is where we focus. We’ve always been interested in growth. People are looking for returns all across the spectrum and growth has gotten a lot of attention over the last few years.
What do you anticipate in 2018?
The private equity business is definitely cyclical and the cycles run seven years on average, maybe 10. We are in a cycle where the public market started up in 2009, and it’s been a pretty good run for private equity. There’s more political uncertainty than we’ve had in a long time. But if you call the end of the cycle, you’ll probably be wrong by two or three years. I’m guessing it will be more of the same in 2018 unless there is some major shock such as war breaking out between North Korea and the United States, or a major terrorist event.
How has TA Associates been preparing for a potential downturn?
It is standard operating procedure at TA and other firms to run more downside cases, looking at what could happen to a specific business or a product or a service. People are doing a lot of such stress testing. We can’t change prices now, but people would pay more for a higher quality business model, so we’re going to double down on quality in the face of increasing prices and potentially being closer to a downturn.
Boston-based TA Associates, which specialises in growth investing, was founded in 1968 and has more than $14 billion in assets under management.