More PE cybersecurity deals expected; tech valuations are ‘not sustainable’

Good morning. MK Flynn here, with today’s PE Hub Wire.

It’s a news-packed Friday. CNN just reported that President Biden has selected Ketanji Brown Jackson as his nominee to the Supreme Court. If confirmed, Jackson would be the first Black woman to sit on the court. The Personal Consumption Expenditures index, a key indicator of inflation, rose again in January, marking a 40-year high. And banks and other financial services firms are worrying about cyberattacks from Russia in retaliation for sanctions imposed by the U.S. and allies after the invasion of Ukraine.

Cybersecurity is seeing a lot of interest from private equity this year. Earlier in the week, for example, Equistone Partners acquired a majority stake in Eperi, a provider of cybersecurity software for cloud applications. We’ll be on the lookout for more cybersecurity deals to come.

PE pros. PE Hub’s Q&A series with high-profile private equity professionals continues today with insights from Alok Singh, founder and CEO of Bridge Growth Partners, a New York PE firm that invests in tech companies. Bridge Growth sold Finalsite, a provider of school website and digital communications tools, to Veritas Capital in December. Singh shared thoughts on the deal and on trends in tech investing.

“The last 24 months have had a profound impact on the education landscape in the US,” Sing said. “The importance and relevance of technology and digital tools within the classroom and for driving student outcomes is now well appreciated.”

Exit signs. Singh also shared Bridge Growth’s approach to exits.
“We believe the market is populated with middle market companies that are innovative, agile and can introduce new products and services to the market quicker than larger competitors,” he said. “This fragmentation in the middle market creates significant opportunities for firms like us to organically and inorganically build highly strategic assets that are attractive for future buyers. As such, after we acquire a company, we seek to optimize the strategic value of our investments by building relationships and partnerships with logical strategic acquirers of our businesses well in advance of an exit.”

High prices. Singh had an interesting response when I asked about valuations and returns:
“We have been carefully watching the valuations that have been attributed to technology companies in the last two years, and in our opinion, these have been overly inflated and are not sustainable, particularly for younger, newly established businesses,” he said. “We believe that many growth equity firms are not sufficiently considering the potential negative effects of financing down rounds or even flat rounds, which can include structural subordination for existing investors and employees, or a delayed exit, which can extend an investment holding period. While this can have obvious negative equity return implications to these investors, this can also have additional negative implications on employee morale, recruitment, and retention at these young companies. At Bridge Growth, we have a seasoned team of investors and operators that have invested in and ran businesses across multiple cycles in their careers, and as a result we remain highly focused on staying disciplined and true to our investment process, approach and style.”

For more, read the full interview. And visit pehub.com for more interviews in our ongoing series.

Volatility. Uncertainty is creeping into secondaries pricing amid market volatility, Chris writes. “While private markets are generally insulated from volatility in public markets, sustained turmoil on the public side eventually leaks through to private equity, including in pricing in the secondaries markets. Secondaries professionals report they have been seeing impact from the public markets volatility that have roiled markets since the beginning of the year. Pricing had been rich for buyouts funds as of the fourth quarter, but buyers and sellers are watching closely to determine how exactly to price assets and portfolios. And with Russia’s invasion of Ukraine this week hammering markets around the world, volatility will likely continue to be a feature of the market for the near future.”

In case you missed. As February draws to a close, check out our most-read stories of the month:

General Atlantic sees opportunities in healthcare system’s inefficiencies: “Virtual care was tiny before the global pandemic, but there is an enormous number of players now,” said GA’s Robb Vorhoff. “We believe there will be a big consolidation trend in that space.”

Healthcare is 20 years behind in tech, which spells opportunities for Silversmith: “I think of how painful banking was in the 1980s and 1990s and how tech has transformed and makes things smoother, and healthcare has not changed a whole lot,” said Silversmith co-founder Jeff Crisan.

‘Valuation is a view of the future,’ says William Blair CEO Brent Gledhill: ‘Many sectors – consumer services, logistics, distribution, for example – are terrific sectors with higher valuations today that align with long-term trends.’

Coming up next week: On Tuesday, Buyouts will publish the annual Women in Private Equity, featuring 10 rockstars in dealmaking. Don’t miss the special report written and produced by Chris, Karl, Kirk, Iris, Aaron and me.

Hope you have a safe and healthy weekend,

MK