PE firms repurpose portfolio company resources to tackle covid-19, Gryphon Investors hits market with Fund VI, Sponsors keep tabs on staples beyond canned goods or toilet paper

COVID-19 crisis could bode well for new M&A tech opportunities and Gryphon launches sixth fund.

Wednesday, March 25, 2020

Happy Wednesday, Dear Reader! This is Milana Vinn with your weekly Tech Take.

As you may know, New York City went on complete shutdown on Sunday. While I’ve been sitting at home for the past two weeks, this development didn’t immediately strike me as a big change. Still, when on Sunday night I managed to take a quick walk around the block in Cobble Hill, reality set in.

Seeing my lively neighborhood full of beautiful brownstones and ethnic eateries looking so empty put the meaning of “shutdown” into perspective. I am thinking about every person out of work on the global scale here. It’s scary and I truly hope that we will come out of this pandemic healthy and strong.

The world also has changed for the PE tech community. And where some see misfortune, others see opportunity. But I’ll address this in order.

Valuations
“As we think about valuations, every metric that we used to assess businesses just a few a weeks ago is now out of the window,” Rich Lawson, chairman and CEO of HGGC, told me in a recent conversation.

“Valuation multiples, revenue growth and business expansion have given way to optimizing debt capital structures, ensuring liquidity and building capital reserves to weather this new normal,” the investor explained.

Indeed, according to Jefferies’ research, higher-growth software companies have seen multiples compress by nearly 30 percent over this month-long stretch.
On average, a higher-growth software company was valued at 12.5x forward annual revenue, as of February 19. The same company was valued at 8.9x forward revenue on March 20, the research report said. Still, many of these companies have yet to reforecast their revenue for the next year, which will almost certainly be lower considering the shutdowns happening globally.
While unfortunate for the sellers, it creates an opportunistic environment for PE firms that are still hungry for new business.

New M&A
Lawson sees tremendous opportunity to take advantage of the dislocation in the public markets. HGGC is closely evaluating potential take-private opportunities — a strategy the firm has long pursued. The firm typically identifies technology companies that are thinly traded, not followed and have a market cap of $1 billion to $2 billion, he said.

“Well now [public companies] are really dislocated,” he told me, “and this is an enormous opportunity.”
The firm looks to execute buy-and-build strategies, as well as pursue opportunities where CEOs and PE investors can sell but stay involved.

“We are getting a lot of calls because people can no longer go in a traditional process with a banker, because everyone has shelved their processes for a couple of quarters.” Firms are saying: “Hey, what can we do here that make sense? We want to stay involved; we want to be heavily invested in the business,” Lawson said.

“This situation is providing even more opportunities for middle-market PE firms that are focused on a win-win partnership mentality with sellers,” the investor told me.
That said, HGGC last week closed two deals via existing platforms. Idera tacked on FusionCharts, a provider of JavaScript charting components and tools, while Integrity Group acquired Killimett Agency (FFL Southeast), an insurance marketing organization.

Another tech investor told me that his firm is evaluating and very much open to toehold investments, through which it would build a stake in public company with the intention of taking it private later. Debt investments in companies that it would eventually like to buy are also being considered, as are divestiture opportunities , which are emerging as companies look to shore up liquidity.
But according to M-III Partners’ Colin Adams, who spoke to me in a recent Q&A, this rich environment for new M&A has one precaution.

“I think it’s a very robust time, it’s a rich time to [acquire companies]. As long as when they buy the company they understand that they are going to be equity financing a period of low demand, which will eventually come back when this is all over,” Adams said.

Top Scoops
Gryphon Investors is back on the fundraising trail with a sixth, lower mid-market buyout vehicle only 10 months after closing its predecessor, writes Kirk Falconer on Buyouts. If Gryphon meets its goal, Fund VI will be the firm’s largest yet in its 25-year history. Check it out here.

Have a great day! Reach me with your thoughts, tips, gossip, whatever at mvinn@buyoutsinsider.com.