As a principal in Goldberg Kohn’s Commercial Finance Group, Maria McGuire has been watching for signs of a second tech bubble.
“I’ve done a lot, probably the most of anyone in our group, of technology deals,” McGuire said. “When I talk to clients in this area, they have not had a lot of workouts or troubled deals.” Interest from private equity and other lenders has allowed them to easily refinance. “And so there’s talk about, is there a bubble? Are we coming to the top and starting to turn? And we keep saying maybe this is it and maybe we’re there, and we haven’t seen it.”
McGuire’s group represents exclusively lenders, coordinating due-diligence reviews and negotiating loan documents. For tech deals, typical points of contention include dividends (“money leaving the company … that’s not going to pay down your client”) and intellectual property registered outside the U.S. (“because there are cost and documentation challenges”).
Tech firms have a bit more protection these days than in the past, McGuire said. In the mid- to late-1990s, tech firms were narrowly focused, either on consumers (e-commerce) or companies just getting into web-based services (Internet consulting). Now these companies apply their models across all sectors of the economy. McGuire has worked on deals in construction, healthcare, healthcare IT, education and telematics. “The diversification is unlike what we saw in the dot-com bubble.”
Which isn’t to say the tech sector is invulnerable. “What could affect [these companies] as a whole would be any sort of retraction in available credit,” McGuire explained. “What they do have in common is that their products easily become stale. They either need to be investing in their product to stay ahead of the competition, which requires capital, or they need to acquire.” A recession might threaten future financings, as would new regulations affecting lenders in the space.
“Some of those deals have zero EBITDA or negative EBITDA,” she says. “If it became more difficult to do these types of deals, then it would affect a lot of these smaller or growing businesses.”
The same diversification that might safeguard tech against bubble status is also what draws McGuire to the space. “It’s interesting to be able to work on deals that have similar components, but you still get to see all of these different sectors.” And within sectors, traditional businesses are being transformed. McGuire mentioned a deal with an academic publisher that started to license its indexing software to educational institutions: “So you take something like publishing and turn it into a SaaS company.”
When she started, lenders in the tech space “were really focused on reviewing material license agreements [and] delivering source code into escrow.” But since “the competition in the marketplace has not been in favor of the secure parties recently for a number of years,” that second requirement has mostly gone away.
Still in a strong position, “in terms of bargaining power,” are PE firms buying or investing in tech targets, McGuire said. “So we always want repeat business. A lender likes to develop a relationship with a PE firm and be their go-to lender as they continue to build their portfolio.”
Reach Maria McGuire:
Phone: +1 312-201-3942