Market Top? Buyout Firms Scramble to Invest in Tech

Uh-oh. They're starting to party like its 1999. And we all know what happened after that.

The folks from Irrational Enthusiasm Inc have discovered tech. Or rediscovered it. Yes, be afraid, be very, very afraid.

The buyout boys (and let's face it, that's who they are), in their eternal search for the next big thing, are swearing they forgive the tech world for collapsing on them in 2001. And yeah, maybe they did go a little deep and a lot long on tech, but who could have predicted...well, never mind. Stuff happens.

Buyout firms like KKR, of 'Barbarians at the Gates' fame have decided that tech is back. While the rest of the global economy is no doubt deeply grateful for this affirmation, rational observers will remember that anyone this late to the game, and without anything other than quick returns in mind, is probably not going to be adding a whole lot of value. In fact this may well signal that it's time to take a breather while they bid up the prices on the digital company seconds bins now that Google, Facebook and Amazon et al have made their multi-billion dollar picks.

This should be fun to watch, assuming it doesnt tank the entire economy - and assuming that your own money is safely parked somewhere out of harm's way. JL

Anne-Sylvaine Chassany reports in the Financial Times:

KKR is considering a specialist fund to invest in fast-growing technology companies as part of a scramble by global buyout groups to grab a share of the digital boom on both sides of the Atlantic.

The New York-listed private equity investor will initially use its balance sheet to finance technology investments in smaller and faster growing companies than those it typically targets, before seeking cash from outside investors. A handful of senior dealmakers in Menlo Park and London are part of the effort, including Philipp Freise, a London-based partner who led an investment in Fotolia, a provider of digital images and videos.
“Technology is changing the world,” Mr Freise said. “Unlike in 1999 and 2000, there are companies with solid platforms and tangible revenues and profit, that need a financial partner to become global.”

KKR is not alone in boosting its technology teams. CVC Capital Partners, which last year raised nearly €11bn for European leveraged buyouts, said it had recruited John Clark, a former partner at Welsh Carson Anderson & Stowe, to unearth medium-sized technology deals in the US. The group will probably evaluate a separate fund at a later stage.

The initiatives follow Blackstone’s appointment last year of former Dell senior executive David Johnson. Last month, the New York-based group snapped up a $150m majority stake in information security company Accuvant. West coast buyout rival TPG is even venturing into the internet consumer space, with the acquisition of a $90m stake in Uber last year.

High-profile transactions including Facebook’s $16bn acquisition of mobile messaging company WhatsApp and successful initial public offerings including the listing of UK-based Just Eat last week is whetting appetite. Last month, Apax booked a $3bn profit, its largest gain on a single investment, with the listing of mobile game editor King. The London-based private equity firm spent €29m on the creator of the Candy Crush Saga in 2005, one of its last venture capital deals before it decided to focus solely on buyouts.

Buyout groups’ appetite for tech waned in the aftermath of the dotcom crash in 2000. European venture capital pioneers including 3i and Apax turned their back to a business that had delivered volatile returns, to raise larger funds and focus on more mature and predictable businesses. It has proven a more lucrative model for these managers, which levy fees on assets under management.

In Europe, Carlyle “repurposed” its venture capital fund in 2002 to target a wider spectrum of small and medium-sized technology deals. In the US, buyout fund managers went on to target larger and more mature technology companies, such as semiconductor maker Freescale, which have struggled throughout the financial crisis.

“Up until a few years ago, the trauma of the internet crash was still there,” he said. “But technology businesses can quickly become global and have become relevant to a much broader audience,” said Vladimir Lasocki, a managing director of Carlyle’s European technology fund, which invested in online food delivery company Graze.

It’s difficult to become a high tech investor in one day. One needs deep knowledge of technology ingrained in the organisation

Joseph Baratta, Blackstone’s head of private equity, says his team will stay away from the internet start-ups and focus on technology-enabled business services.
“We’re increasing our activity in the technology sector because it’s a big part of the economy and many sub-segments are growing faster than the overall economy,” he said.
Some investors are sceptical of the moves, raising questions as to whether buyout groups are too late to benefit from the technology wave or whether they will be spending money wisely. Mike Lynch, the founder of UK software maker Autonomy, who raised a $1bn tech fund last year, said many of the private equity groups “don’t have the skill sets, although they have the capital”.
“They generally come from a background of financial analysis and doing financial engineering. The skills that are going into identifying and nurturing a tech business are completely different,” Mr Lynch said.
Tech companies tend to be smaller, less mature and have to reinvest their cash to fund rapid expansion, which makes them riskier investments than buyouts, points out Bernard Liautaud, founder of software maker Business Objects.
“It’s difficult to become a high tech investor in one day. One needs deep knowledge of technology ingrained in the organisation,” said Mr Liautaud, now a partner at London-based early stage investor Balderton. “The jury is out.”