A decade ago, the common reason given for private equity investors avoiding buying venture capital-backed businesses was the assumption that the sellers had maximised the price and hence limited the returns to be made by follow-on investors.
This was regardless of the fact that PE firms happily bought secondary or tertiary buyouts from their peers. But it probably reflected the different worlds that VCs and leveraged buyouts partners came from in terms of how they made money.
Last year, the Economist put it as the “standard operating procedures of private equity – purchasing businesses, adding debt, minimising taxes, cutting costs (and facilities and employment), extracting large fees” but what has tended to infuriate the VCs has been how their buyout peers have tended to make more money than them through this process.
The two worlds are starting to come together more often, according to Declan Kelly, head of investors at next month’s Web Summit, which brings together 60,000 people to Portugal for what is effectively a week of conferences on multiple topics.
Kelly said when Web Summit started around the turn of the decade in Ireland it was focused on early-stage entrepreneurs and their seed-stage investors, but over the past two years had moved to cover everything from early to pre-IPO (initial public offering) and so had started attracting later-stage investors such as TCV, TPG and Softbank as well as sovereign wealth funds, funds-of-funds and private equity firms, particularly through its Growth Summit*.
This is a much-needed gathering, especially in Europe, which outside of Web Summit, Slush in Finland* and our GCV Symposium of course, has seemed to struggle to attract much attention from global heavyweights.
The change is starting to show up in dealmaking. When PetSmart, which is backed by UK-based buyout firm BC Partners, bought US-based online pet food retailer Chewy.com in April for $3.35bn, it was the largest PE-sponsored purchase of a VC-backed company since at least 2007, according to data provider PitchBook.
PitchBook’s 2017 PE & VC Exits report, covering North America and Europe, said: “Acquisitions continue to be the most common exit route (for VC-backed companies), but through May, over 20% of 2017 (such) exits have been buyouts by PE firms, a large proportion compared to past years, which have observed that percentage generally hover between 10% and 12%.”
Pitchbook asked why the shift toward buyouts as a preferred VC exit route, and speculated that “the IPO market hasn’t exactly been fruitful” as a cause, even though its data showed no drop-off in flotations.
Instead, the shift seems to be more about PE firms’ willingness to pay more given the delta is coming from reduced trade sales. Average buyout deal values are among the highest on record in the UK and across Continental Europe, and deals with between €10m and €100m ($11.6m to $116m) of enterprise value had average entry earnings before interest, tax, depreciation and amortisation (Ebitda) multiples increase to 10.4x for the first six months of this year from 9.5x last year and just above the multiples (10.3x) for larger deals, according to provisional data from CMBOR at Imperial College Business School.
And they are following the money. This week, Saudi Arabia has hosted its Future Investment Initiative and invited its main clients to visit and speak. Over the past year or so the kingdom’s sovereign wealth fund has given out two large cheques, one for buyout firm Blackstone to manage through an infrastructure fund, and another to Softbank to manage in its $93bn Vision Fund targeting technology companies.
Softbank is planning further, similar-sized funds. While the world’s global financial assets – all the stocks, bonds and other securities – is about $300 trillion, Deutsche Bank estimated two years ago, about $336bn was invested in tech last year by venture capital and private equity firms, according to PItchBook.
If even a shift of a few basis points is made from public to private markets on the back of attempts to follow Softbank and its attempts to buy stakes in this generation’s defining companies, then expect more such meet-ups between buyout and venture capitalists and, who knows, in the future they might even start to look like each other if their visions pan out.
* Disclosure I will be speaking at both events and hosting with Helsinki Business Hub and Nestholma a corporate venturing lunch on November 29 – please let me know if you can join or meet up at either event.