Private equity's secret sauce has long been its knack for operationally transforming businesses. The name of the game is growing market share, revenues and profits before selling upgraded companies for a higher multiple than they were acquired for. And nearly all businesses can be improved in some form through technology, especially software.
Business intelligence is a big value creator. Data analytics dashboards help CEOs and senior management teams understand what is going on under the hood of the business. For example, an understanding of various key performance indicators (KPIs) can reveal what is driving sales and profits and analyzing the return on investment from marketing campaigns can help to unlock growth.
In recent years, “digital first” seems to have become a mantra. Even the most mature companies in the most traditional industries have come to recognize that they face disruption and that their futures are far from guaranteed. There is now huge demand for products and services that digitally enable companies to not just stay relevant, but to achieve new growth. And this is often where private equity steps in.
Digitalizing the economy
PE continues to invest in the companies that are accelerating digitization across sectors to help companies invigorate their operations and deliver value.
Arguably the largest such deal of 2021 came in November, when Hellman & Friedman, Bain Capital, Abu Dhabi Investment Authority and GIC Private paid US$17 billion for Athenahealth, taking it off the hands of its previous owners, PE firm Veritas Capital and activist investor Elliott Investment Management.
Athenahealth serves healthcare providers through its AthenaOne product, an integrated suite of cloud-based services that combines practice management, electronic health records and care coordination. AthenaOne has stated that it aims to optimize the performance of its customers by offloading administrative tasks at scale and through revenue cycle performance analysis.
In another thematic megadeal, Thoma Bravo acquired Proofpoint for US$11.3 billion in a take-private transaction. The terms of the deal represented a 37.5% premium to the cybersecurity firm’s share price one month before the transaction’s announcement.
Proofpoint started as an email security specialist but has branched out in recent years via a series of acquisitions. The company purchased data loss protection firm MSSP InteliSecure for US$62.5 million last February, insider threat management platform provider ObserveIT for US$225 million in November 2019, and in May 2019 paid US$120 million for Meta Networks, a company that helps clients develop layered, multi-authenticated networks.
One sizable deal that more squarely meets the digitalization thesis is the acquisition of Ironsource. The company went public in March 2021 through a business combination with a Thoma Bravo Advantage, a SPAC backed by PE firm Thoma Bravo, valuing Ironsource at US$10 billion. Ironsource serves the so-called “app economy,” helping companies to monetize and distribute their apps as widely as possible.
Supplies and labor
Digitalization is not expected to subside in the face of the pandemic. In a recent survey conducted by Fujitsu, 82% of offline organizations say that the COVID-19 pandemic has accelerated digital transformation.
In December, Dutch recruitment software firm Textkernel, which has been owned by private equity firm Main Capital Partners since 2020, acquired US competitor Sovren. The deal, which is valued at US$45 million, aims to expand Textkernel's business across North America and Asia-Pacific, and to strengthen its technology base.
Supply chains also have come under immense pressure since the pandemic, a fact that has not bypassed the attention of private equity. In December, KKR invested in German warehouse management software maker Koerber in a deal valued at US$1.7 billion.
In June, Thoma Bravo undertook a US$2 billion take-private of QAD, a provider of cloud-enabled manufacturing and supply-chain software. In the SPAC space, meanwhile, B2B supply chain software firm E2open went public through a de-SPAC transaction valuing it at US$2.6 billion with the blank check company CC Neuberger Principal Holdings I.
It seems that no matter where you look, financial sponsors are continuing to hone in on value creation through digitalization, not only within their own portfolio companies, but across the economy at large.