PE firms like TPG find fertile M&A ground in VC-backed tech companies

TPG’s recent deal for ed-tech startup EverFi reflects an emerging trend that one partner says the firm is well positioned to exploit.

That trend, said TPG Partner Nehal Raj, is more cross-pollination between what would traditionally be thought of as growth equity and buyouts.

In other words, more companies that have previously chosen to go public — those that are VC- and growth-equity-backed — may increasingly opt to sell to private equity, said Raj, who leads the firm’s investments in the tech arena for both TPG Capital and TPG Growth.

At the same time, PE historically hasn’t invested in “growthy” companies where leverage or cash flow is minimal, he said.

Steady increase

The past decade saw the number of PE buyouts of VC-backed tech companies in the U.S. steadily increase, PitchBook data shows.

This year is on course to produce more than 80 such deals, based on the 43 transactions the data provider tracked in the first half. Some 80 percent of the 43 buyouts were in software.

That compares with 71 deals of this structure in 2016, 35 in 2012 and 18 in 2007, according to PitchBook.

Raj pointed to TPG’s April investment in EverFi, the firm’s first investment out of Rise Fund, its newly launched social-impact fund. The provider of digital learning software-as-a-service in late April raised $190 million, $150 million of which came from Rise Fund and TPG Growth.

“NEA had been in it awhile,” Raj said, referring to one of EverFi’s earliest investors, New Enterprise Associates. “Management didn’t want to sell to a strategic and didn’t think it was the right time to go public. We had just raised Rise, which resonated with the mission orientation of EverFi, and allowed us to negotiate a deal one-off.”

“EverFi went from having many smaller shareholders to one large controlling shareholder — us,” he went on. “It’s not a deal type we’ve really seen in large volumes yet, but I suspect we will see more deals like this in the future.”

Indeed. Many of the buyouts PitchBook tracked involve more than one new investor.

Other recent platform plays by bulge-bracket firms include Vista Equity Partners’ May purchase of a majority stake in Zapproved, the VC-backed provider of e-discovery software for corporate legal teams. The February sale of VC-backed payments startup Revel Systems to Welsh, Carson, Anderson and Stowe is another notable deal.

A wave of VC-funded software players hitting the market is precisely what Boston Consulting Group predicted in a May report. The firm estimated that VC investors from 2017 through 2021 will exit 900 late-stage software investments through sales, 200 of which will go to PE.

As additional EverFi-like opportunities present themselves, TPG’s multipronged approach could prove advantageous.

One differentiator for TPG, Raj said, is that the same tech team is investing out of three different funds with three different mandates: TPG Capital, its flagship fund; TPG Growth, its growth-equity fund; and Rise Fund.

“That allows us within different quarters or different years to shift our attention to whatever is most interesting,” Raj said. “If the big buyout market is really frothy because leverage is readily available, we may find more opportunities on the growth side, and vice-versa. The ability as one tech team to see the whole spectrum and make a decision where we want to play is unique.”

McAfee deal

The advantages of being able to invest in both startups and mature companies in a specific vertical was evident when TPG shelled out $3.1 billion in a proprietary deal for McAfee. The deal, led by Raj’s colleague, TPG Partner Bryan Taylor, represented the sixth largest sponsor-backed transaction to close in Q2.

“A big reason we were able to approach Intel with a lot of credibility and confidence is because we knew what other disruptive companies were doing, having invested in two of them,” Zscaler and Tanium, Raj said.

TPG Growth’s investments in the pair of cybersecurity startups came in 2015. Less than two years later, TPG Capital and Intel said they planned to jointly invest in the cybersecurity spinout of the latter. TPG assumed a 51 percent stake in McAfee in a deal that valued the new company at $4.2 billion.

Action Item: TPG’s investments: https://www.tpg.com/portfolio

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