Monday, January 7, 2019

What the Heck Is Private Equity Doing in The Tech Biz?

That was the implicit question re: KKR in cybersecurity biggie (67% of the Fortune 500) Optiv Security in Sunday's:
"Former CIA director Petraeus joins KKR backed security firm"
Um, why is private equity backing a "security firm"?
There aren't any assets to strip, or leverage before a bankruptcy bust-out....
It turns out FT Alphaville has part of the answer this morning:

Private equity – tech's best kept secret
In this guest post Victor Basta, managing director of boutique investment bank Magister Advisors and a specialist in the technology sector, examines the surge in private equity-backed late-stage technology funding, and the implications for the sector.

While strategic M&A deals involving large technology companies like Microsoft or Cisco often grab headlines, there is a far more powerful and pervasive trend that accelerated in 2018 and looks set to continue in 2019. Quietly, tech has become a private equity-backed industry.

Tech companies on both sides of the pond are turning to private equtiy (PE) as a serious and even preferable exit route. Over the last 12 months, 75 per cent of the most active “buyers” of $100m+ technology companies have been PE firms. This is despite the fact that the combined cash balances of the “Big Five” tech companies is an eye-watering $330 billion. Today’s most active tech buyers are private equity firms like Silver Lake, Francisco Partners, and Vista Equity. Not Google, Facebook or Amazon. 
A wholesale shift of tech into PE hands has profound implications for the industry’s future. PE firms manage tech companies differently to venture investors, balancing growth with profitability, meaning investment is done at a slower pace -- both in people and technology -- with a reduced risk appetite for major new innovations. Also, PE firms often use debt to part-fund deals, which can only increase tech’s business risk once we head into the next downturn.

The IPO market is also likely to be seriously affected, as tech companies eschew public scrutiny in favour of continued private ownership. Silicon Valley giants Lyft and Uber have waited to reach huge valuations before even considering an IPO. And it remains to be seen whether these IPOs come to fruition, with companies such as Qualtrics and Appdynamics last year opting to sell for a combined $11bn to industry giants, rather than follow through on rumored public offerings -- a move seen as a blow to the credibility of public markets for technology companies....
...MUCH MORE, the comments are interesting as well.