The firm earlier this week purchased Endurance International, a Burlington, Mass.-based web hosting and management business for an undisclosed amount. It was Accel-KKR’s third deal in as many weeks, following the buyout court reporting tech business Alexander Gallo Holdings and the sponsorship of a merger between Amphire Solutions and its portfolio company iTradeNetwork. Plus, Accel-KKR held an oversubscribed close of its third fund.
I had to ask, how is the Bay Area firm so prolific in such slow-moving times, and will it continue?
The answer to the “how” part is what you might expect. Accel-KKR uses very low leverage. Low leverage is key in any growth investment, but an economic slowdown amplifies its importance. How can a young B2B company gain new customers and new sales in a time when businesses are cutting costs across the board? If that’s the way a company grows, and the investment’s success relies on that growth, any bit of leverage will only get in the way.
Accel-KKR used leverage in all three of its recent deals, but not as much as the firm could have, Managing Director Ben Bisconti said. “We felt like we could have gotten more leverage but didn’t go for that last turn or half turn that might have been available,” he said. He later added, “The reality is we did that even in robust credit markets.”
But beyond low leverage, Accel-KKR’s three purchases have a common theme. Endurance International is a platform buy. The business had been built up with add-ons with help from its PE-backer, Audax, and the firm plans to continue to buy up competitors. The purchase of Ampire International was essentially an add-on deal, since the company merged with Accel-KKR’s portfolio company. And the third deal, Alexander Gallo, included an add-on acquisition with plans for further consolidation.
The other element Accel-KKR argues the will stave off recessionary shrinking is the revenue stream of the companies it targets. “We focus on businesses that have predicable, recurring revenue,” said Managing Director Tom Barnds. If the company does not have subscription-based sales, then it has highly repetitive customers. Barnds said the companies in Accel-KKR’s businesses offer “mission critical” services that are essential to customers. The revenue and cash flow for Endurance will sustain itself even if end market growth dims, unlike, say, a consumer-facing venture, he added.
But even with these three deals, the firm has taken a mere nibble out of the $600 million pool of capital it recently closed. And since these deals were conceived in prelapsarian times, it is unclear whether Accel-KKR will continue to strike deals at this breakneck pace. Indeed, Bisconti said, “We don’t want to pretend deals aren’t falling apart left and right.” He added: “This one had all the ingredients.”