- Firm sees record activity in tech M&A despite valuations
- AI, fintech, cybersecurity, face more regulatory uncertainty
- Growth equity needs adaptability from new sponsors
Scott Joachim is a lawyer at Goodwin, where he leads technology deals and advises clients in New York and Silicon Valley. He joined Goodwin in April 2018 after he founded and chaired the PE and fintech practice groups at Fenwick & West.
How do you see PE firms navigating through high valuations?
There is a lot of talk about valuations, especially in the technology space. However, the reality is that this is the sentiment for literally the past nine years and that concern has been a factor over the recent history.
If you look at TPG investing in Airbnb at objectively significant valuation and if you fast forward a few years, it looks like a great investment.
High valuation is one factor, but there is a reason for it and it’s because there is an opportunity for growth. We were still seeing record activity in tech investing in 2018, and we’ve been hearing this [talk] about valuations all along.
How has your job as a legal adviser in tech changed in past years?
One of the interesting things about the conversion of technology and private equity is how much education lawyers and partners had to go through.
You had a lot of private equity coming from New York and a lot of technology coming from Silicon Valley. So you had to merge two different ways of approaching the partnership. And that relates to risk and reward and deal terms.
As a legal adviser it’s also a cultural issue of how you are going to bring together a New Yorker and someone from Silicon Valley. They don’t always speak the same language. And this has a huge impact on the capital market.
Describe a deal you’ve worked on that represents this conversion?
My team was engaged to represent Goldman Sachs and a consortium of 15 banks, including JP Morgan,Citigroup,Bank of America Merrill Lynch,Wells Fargo, Credit Suisse,Morgan Stanley and several others in a private equity co-investment, using strategic balance sheet capital.
In 2014, the banks invested [$66 million] in Symphony Communication Services. In addition to creating this partnership, the consortium acquired Perzo, which was founded and led by a [Silicon Valley] luminary, David Gurle.
David was and is a Silicon Valley rock star, had previously been at Skype, and was well-accustomed to the deal terms, culture and cadence of raising capital on Sand Hill Road. Very few people in David’s shoes, however, could really anticipate what the experience of raising capital from 15 Wall Street investors would entail.
The deal took several months to close and our meeting would rotate between Palo Alto and New York. Now, the company has two headquarters; it’s very much a bicoastal company. They’ve done a wonderful job at creating a bicoastal culture.
What opportunities have PE firms overlooked?
The current trend in private equity investing is fairly well known: [investing] in business intelligence, data, cybersecurity, fintech, auto tech. But the areas of opportunity are areas where we are yet to predict how certain technologies are going to be regulated. The risk of compliance with regulation in U.S., Europe and Asia is hard to anticipate, and investments in technology are becoming more global.
If you took that risk out of it, there are a lot of areas in fintech that would be more attractive.
The challenge for some certain technologies — AI, fintech, even cybersecurity — there is a little more of the unknown in terms of how different countries may impose different regimes. General Data Protection Regulation is a relatively new development which needs to be modeled in the investing themes.
Which common pitfall do you see tech investors making?
One challenge for growth equity sponsors, particularly those that are new to the investment strategy, is that there is a unique need for adaptability in this investment class.
Growth equity is essentially a hybrid investment that combines elements of both venture capital and control buyouts. This hybrid mentality impacts financial and return modeling, approaches to due diligence, and ultimate deal terms including, among other things, governance.
There is no cookie-cutter growth equity template. Each growth equity deal borrows components from venture and buyout, and the profile of any particular growth company seeking growth equity capital requires a customized approach.
Action Item: Contact Scott Joachim: SJoachim@goodwinlaw.com.