- Technology, media and telecom sector remains active
- Fintech banker bullish as pipeline increases
- Consumer GP talks up value-oriented companies
With the fourth quarter now well underway, it’s easy to spot a pronounced trend in the active world of sponsor-led mergers and acquisitions, based on recent history.
Of the 10 largest third-quarter private equity deals, seven were in technology, media and telecom, or TMT. It’s a hot sector in the middle market as well, with brisk activity in the final months of 2016 and looking toward 2017. That’s particularly true for the world of financial technology, or fintech, deals.
“Things are extremely active,” said Peter Davis, managing director and head of financial-technology banking at Macquarie in New York. “You’ve got a whole crop of meaningful and very valuable companies that are either creating major efficiencies for incumbents, like banks, brokers, wealth management and payment companies, or they’re effectively competing with those providers.”
To emphasize the point: Just two weeks into the fourth quarter, Hamilton Lane marked its fourth investment from its own balance sheet by becoming the largest private shareholder in financial-technology company Bison. Terms weren’t disclosed.
Attractive valuations
Some businesses — many not even 10 years old — now draw valuations in the hundreds of millions if not billions of dollars, he said.
“The attractiveness of the valuations — 5x to 10x revenue for businesses with narrow and growing margins — motivates people to seek growth capital at those valuations or pursue full or majority sale transactions,” Davis said. “The goal is to either take some money off the table or to seek strategic partners to help companies achieve their objectives.”
The fintech business fueled robust third-quarter M&A activity by PE firms. Across all sectors, U.S. sponsors closed 385 acquisitions in the quarter, down 5.2 percent from 406 in the year-earlier period, according to Thomson Reuters data.
Led by the blockbuster $10.3 billion buyout of antivirus-software company Qihoo 360, disclosed dollar volume more than tripled to $39 billion from $11.3 billion.
Other large deals in the quarter included the buyout of Zuffa LLC-Ultimate Fighting by Silver Lake platform IMG Worldwide and Kohlberg Kravis Roberts for a reported $4 billion; Apollo Global Management’s $3.1 billion buyout of Diamond Resorts International and Thoma Bravo’s $2.6 billion take-private of Qlik Technologies, the data analytics firm.
Apollo closed 13 deals in the quarter as the most active sponsor, followed by 10 each for Carlyle Group and KKR and eight from Advent International.
After a correction in public valuations among some names in the energy, technology, materials and other sectors in 2016, sponsors swooped in for take-private deals with more regularity than in recent quarters. Plenty of these fell into the realm of the middle market. Vector Capital took Sizmek private for $75 million in the third quarter, after shares of the ad-technology company continued to weaken this year.
And as in any quarter, middle-market buyouts with no financial terms disclosed comprised the majority of deal-making by a wide margin. Among them, Hammond Kennedy Whitney closed its buyout of Gatekeeper Systems, the Irvine, California, specialist in shopping-cart containment, management and loss prevention.
HKW didn’t release terms of the deal, but the Indianapolis buyout firm typically invests in platform companies with $5 million to $30 million of EBITDA, with stable cash flow and a low risk of technology obsolescence.
Purchase-price multiples weaken
In a sign that the environment is slightly less frothy than last year, purchase-price multiples fell to an average of 10.94x EBITDA in the third quarter, from 11.01x in the year-ago period, according to LCD, an offering of S&P Global Market Intelligence.
Average leverage levels dipped to 5.13x EBITDA from 5.33x, LCD said.
The slight drop in prices and borrowing came as buyout pros voiced caution about a turn in the economy and bumpier credit markets that started becoming more volatile about a year ago.
Reflecting a more tentative environment, pending and closed deals fell 11 percent to 487 at Sept. 30 from 549 in the year-ago period.
While M&A seems more sluggish than it was in the bumper-crop year of 2015, plenty of pockets of strength remain.
Mike Wilkins, managing director at investment bank Harris Williams, said he’s seen activity pick up since the summer, but some deal-makers may avoid running auctions too close to the U.S. elections “in case there’s some noise,” he said.
Credit for middle-market deals, particularly in recurring-revenue software companies with $15 million to $50 million of EBITDA, remains plentiful, Wilkins said at PartnerConnect West 2016.
“We’re continuing to see lenders compete very, very aggressively,” Wilkins said. “For buyouts, deals in TMT remain pricey, but there are subsectors where valuations have pulled in somewhat.”
Deal pipeline
Looking ahead, Macquarie banker Davis said he’s expecting more fintech deals from providers serving the incumbents by making them more nimble and efficient. A second category of deals comes from technology platforms competing directly with incumbent financial institutions.
“A lot of people are assessing whether and how they want to either raise capital or sell,” Davis said. “Part of the motivation is that valuations are strong. The business environment for fintech has been very supportive over the last two years. That may continue. … The companies are drawing multiples based on a continued constructive environment for financial technology.”
Davis said the deal pipeline for Macquarie’s sponsor group may be 25 percent to 50 percent stronger than a year ago in terms of the number of deals expected and the overall quality of the firms. The firm is working on a few transactions at the moment.
“It feels like there are a lot of businesses coming of age and will look either for a new owner or for fresh capital to drive growth,” he said. “There’s demand from private equity firms and strategic companies. When high-quality companies get sold at attractive valuations, that may motivate other sellers to think about what they want to do in terms of strategic capital.”
Gauging opportunities in sluggish economy
Looking ahead at consumer-sector deals for 2017, Jeff Mills, managing partner of San Francisco-based Main Post Partners, said he’s seeing continued opportunities for deals tapping into the bifurcated U.S. economy.
“There’s the top of the pyramid that’s doing very, very well, where you’re seeing a lot of consumers spending big money on brands with great stories and fitness concepts that match the most exotic fitness regimen,” he said. “But a much bigger segment comes from the disappearing middle class — the population on a budget. They’re much more focused on where they’re spending their money and getting a value for it.”
In the fitness segment, a tremendous number of $10-a-month, no-annual-contract-model gyms have started, he said.
Taking aim at this opportunity, Main Post Partners is working to grow Chuze Fitness, its portfolio company offering lower-priced gym memberships coupled with plentiful amenities.
In the beauty space, prestige brands such as Too Faced Cosmetics, a former portfolio company of Weston Presidio, where Mills worked before launching Main Post, is growing quickly at the top end of the market with backing from General Atlantic.
Meanwhile, e.l.f. Beauty, a TPG-backed company offering cosmetics for $6 or less per bottle, went public in September at $17 a share. The shares are now trading at more than $26.
While the economy has strengthened overall in recent years, many U.S. consumers will continue to struggle in the coming year, he said. “We’re in the eighth year of a recovery …but other than deal multiples, it sure doesn’t feel like 2007,” Mills said.
Action Item: Q3 2016 U.S. Sponsored M&A Charts
Photo of Macquarie banker Peter Davis courtesy of the firm
Additional Data
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