Let’s start with a quick primer – what is private equity’s function and typical model?
While PE firms come in all shapes, sizes, focuses, etc., private equity’s basic goal is to invest a pool of capital to generate a return. PE firms accomplish this by raising capital, investing it in various assets (early stage ventures, growth companies, distressed businesses, real estate, etc.), and (hopefully) exiting said assets some years later for a much higher price. See here for more PE stats.
So why is this important?
1) “Dry powder” driving activity – by various estimates, these private equity groups have globally raised $600+ BILLION that they need to invest (called “dry powder”), otherwise they cannot generate a return. That means private equity groups are getting very aggressive about going after deals they like, in addition to simply adding to the pure number of buyers out there. This results in a much more competitive environment for assets, driving up valuations and creating a very seller favorable market.
2) Alternative model for sellers – PE provides not just another avenue for liquidity, but also a more phased out exit for sellers since PE groups often require sellers to retain some equity in the business to keep incentives aligned. This helps sellers realize liquidity, bring in a capital partner to help grow, and then obtain a potentially very lucrative second exit along with their private equity partner. PE thus provides increased options to meet different transaction objectives for sellers as an alternative to the traditional strategic buyer model.
3) Exploding interest in HCM – human capital has seen a massive amount of activity from private equity groups. HCM is a huge market opportunity that PE is trying to capture/transform by investing in a broad swath of businesses and technology. This also causes ripple effects since PE groups thrive on growth, so add-on acquisitions remain a key part of their strategy. Therefore, PE-backed companies represent strategic players who potentially focus more on acquisitions than they might have previously. It also means they have assets they are potentially selling. According to our research, financial sponsor-backed transactions in the HCM space increased over 50% from 2016 to 2017 and while strategics were the predominant buyers in 2017, HCM companies must at least be aware of these trends and understand their impact. Here’s just a sample of PE activity in the broad HCM space as Berkery Noyes views it:
- Aon’s technology-enabled HR platform (now known as Alight Solutions) acquired by Blackstone
- Bullhorn (which also acquired PeopleNet) acquired by Insight Ventures
- CareerBuilder acquired by Apollo Global Management and the Ontario Teachers’ Pension Plan Board
- Reflexis received minority investment from Great Hill Partners
- Xactly acquired by Vista Equity
- ZeroChaos received investment from Carlyle Group
- Swipeclock acquired by Inverness Graham
- Cornerstone OnDemand received investment from Silver Lake Partners
- Nintex received majority investment from Thoma Bravo
In short, over the years private equity has completely transformed the M&A landscape across essentially all industries. With HCM seen as an emerging growth sector, entrepreneurs should be mindful of how they can potentially benefit from this enormous pool of capital/investors.
About Sameer Pal
Sameer has nearly 15 years of mergers and acquisitions transaction experience. Prior to joining Berkery Noyes, Sameer helped lead the merchant banking practice at Avondale Strategic Partners, focusing on making principal investments in and providing M&A advisory services to middle market businesses. Sameer also spent a number of years with Crowe Capital Markets, where he managed a wide range of sell-side, buy-side, divestiture, and capital raising transactions, closing over half a billion dollars in deal volume. Sameer focuses on business software/services, particularly human capital, and has advised clients from multi-billion dollar global corporations to financial sponsors to entirely family-owned businesses.
Sameer holds a BS with High Distinction in Finance, Accounting, and Economics from the Kelley School of Business at Indiana University and an MBA from the NYU Stern School of Business.
About Berkery Noyes
Berkery Noyes is an independent investment bank that provides M&A advisory and financial consulting services to middle market companies in the information and technology industries. The firm offers skilled transaction management to publicly traded and privately held businesses and private equity groups in both sell-side and buy-side transactions. Berkery Noyes has managed over 500 transactions, ranging from several million to more than four billion dollars in value.