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THISYEAR’S techmodel

What are 2019’s big opportunities in technology? We asked 10 of the top private equity fi rms in the sector for their perspectives and investment plans

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TheMiddleMarket.com February 2019 Mergers & Acquisitions 1

February 2019 | VOL. 54 | NO. 2Contents

This year’s tech model What are 2019’s big opportunities in technology? We asked 10 of the most active PE firms investing in the sector for their perspectives and investment plans.

20

Watercooler6Betting on software M&A PE fundraising is benefiting from a boost in M&A in the tech sector, and young PE firms such as Luminate Capital and ParkerGale are raising second funds.

8Executives face tech challenges Divergence and disruption were the largest contributors to 2018’s M&A environment, according to EY.

12Ares raises debut direct lending fundAres sees improving market condi-tions to invest in high-quality, senior secured loans with attractive pricing and terms.

Cover Story

Guest Articles26Augmented infrastructureDigitalization is transforming the role played by physical assets explain Ard-ian’s Stefano Mion and Mark Voccola.

34Mitigating data risksConducting due diligence on data is more important than ever in dealmak-ing, write Neil Coulson and Cynthia Cole of Baker Botts.

38Teaming upRecent deal activity suggests a return to private equity club deals and collaborations, says Hugh Stacey of Augentius.

M&A Insights40Where is the middle market headed?Transaction pros Ramsey Goodrich, Bharat Ramprasad and Mark Emrich share their views.

Private Equity Perspective16Confidence prevails Most companies in the U.S. middle market say they are optimistic about M&A in 2019, according to a recent survey.

The Buyside18Streamlining construction Autodesk and Trimble are among the buyers in a fragmented construction data industry.

Q&A30Private Equity “Investing in an education program, especially through scholarship, is the very best ROI investment you can make philanthropically,” says GTCR’s Phil Canfield.

THISYEAR’S techmodel

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2 Mergers & Acquisitions February 2019

Tech M&A is enjoying a boom, and private equity firms are excited by the potential of many innova-tions. Among the most notable are: artificial intelli-gence, data management, data virtualization, digital marketing, healthcare IT, industrial automation, the Internet of Things, machine-to-machine learning, payment processing and Software-as-a-Service.

To gain insights into the types of tech deals ex-pected to make a splash in 2019, here in the Febru-

ary issue, we profile 10 PE firms that are actively investing in technology. We asked them to share their investment approaches, recent and representative

deals and thoughts about some of the technologies they are keen on.

Beyond the gee whiz factors, PE investors are laser focused on the impact that technology is having on their portfolio companies. PE buyers seek developments that will drive sustainable value to custom-ers and make companies more efficient, more effective and less expensive to run.

“Technology, in and of itself, is invading every end market, and it is driving companies to be more competitive than their peers,” points out Richard Law-son, CEO of tech-focused PE firm HGGC.

One piece of advice for dealmakers: Don’t forget the Amazon Effect. “End markets everywhere are being changed by Amazon,” Lawson points out. “As Amazon scales, it will challenge all kinds of industries and it will have a cas-cading effect across all sectors.” M&A

– Mary Kathleen Flynn

Inside Word

To gain insights on what will drive tech deals in 2019, we asked 10 PE firms active in the sector to share their investment approaches

All about the tech

February 2019 | VOL. 54 | NO. 2

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Mergers & Acquisitions Vol. 54/No. 2 (ISSN 0026-0010) is published monthly with combined issues in July/August and November/December by SourceMedia, One State Street Plaza, 27th Floor, New York, NY 10004-1505. Yearly subscription is $1,995; $2035 for one year in all other countries. Periodical postage paid at New York, NY and U.S. additional mailing offices. POSTMASTER: Send address changes to Mergers & Acquisitions / SourceMedia, One State Street Plaza, New York, NY 10004. For subscriptions, renewals, address changes and delivery service issues contact our Customer Service department at (212) 803-8500 or email: [email protected]. This publication is designed to provide accurate and authoritative information regarding the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering financial, legal, accounting, tax, or other professional service. Mergers & Acquisitions is a registered trademark used herein under license. © 2019 Mergers & Acquisitions and SourceMedia, Inc. All rights reserved.

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Data

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Luminate Capital Partners has raised its second fund at $425 million. The PE firm, founded by Hollie Moore Haynes (pictured), focuses on the software sector. In 2018, Luminate invested in AutoQuotes, a technology provider for the foodservice equipment industry.

“We are very pleased with the investor response to Fund II which exceeded our expectations,” says Haynes, who is a former managing director at Silver Lake Partners. “As we have demonstrated our ability to generate attractive returns, we have continued to build additional

institutional support from investors who understand our emphasis on the software sector.”

PE fundraising is benefiting from a boost in M&A in the tech sector, and young PE firms, including those that focus on tech and software, are raising second funds. ParkerGale, co-founded by Kristina Heinze, Devin Mathews, Jim Milbery and Ryan Milligan, has recently raised its second fund at $375 million. Moelis & Co. (NYSE: MC) served as Luminate’s placement agent and Kirkland & Ellis provided legal advice.

By Demitri Diakantonis and Mary Kathleen Flynn

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Packaging growth strategies

CPPIB is increasingly active in the middle market

Canada Pension Plan Investment Board is investing $500 million in packaging company Berlin Packaging. Oak Hill Capital Partners and the target’s CEO, Andrew Berlin, are investing alongside CPPIB. Berlin Packaging offers compa-nies a “one-stop shop” for glass, plastic, metal containers and closures. The target has $1.4 billion in annual sales.

“This transaction allows us to take our business to an even higher level as we pursue multiple strategic initiatives, includ-ing acquisitions in North America and Europe, additions to our sales and service teams, and more investment in our e-

commerce capabilities,” says Andrew Berlin. CPPIB has been increasingly active in the middle market.

In perhaps its most notable deal, CPPIB bought mid-mar-ket lending powerhouse Antares Capital from GE Capital in 2015. Oak Hill began investing in 1986 as the family office for

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TheMiddleMarket.com8 Mergers & Acquisitions February 2019

Why PE firms love construction data The deal comes on the heels of MidOcean raising its fifth fund at $1.2 billion

MidOcean Partners has acquired construction data providers Hanley Wood and Meyers Research. The lat-ter is being bought from real estate development company Kennedy Wilson (NYSE: KW). The two targets offer data on land acquisition, property develop-ment, new home sales and marketing.

The combined company will be led by Meyers Research founder Jeff Meyers. Kennedy Wilson will own a minority stake in the combined company.

“We are excited to bring together two of the premier players in the residential construction data industry.” This transformational merger creates a significantly expanded offering for customers and provides for greater benefits and growth opportunities than either company could have achieved alone,” says MidOcean managing director Barrett Gilmer. The deal comes on the heels of MidOcean raising its fifth fund at $1.2 billion.

Robert Bass, one of four brothers who founded Bass Brothers Enterprise. The firm invests in companies in the consumer, industrial, media and retail sectors.

Biting healthy food deals Food conglomerates are diversifying their product lines to appeal to consumers who want healthier snacks

Kraft Heinz Co. (Nasdaq; KHC) is buying Primal Nutrition LLC, a better-for-you brand that makes mayonnaise, salad dressing and avocado oil under the Primal Kitchen brand, for $200 million. “My mission has always been to change the way the world eats,” says Primal Kitchen co-founder Mark Sisson.

“Our partnership with an industry leader like Kraft Heinz now offers an unrivaled opportunity to reach millions more of the consumers who have been seeking products like ours for years.” Paul, Weiss, Rifkind, Wharton & Garrison LLP is advising Kraft.

Food conglomerates are diversifying their product lines to appeal to consumers who are opting for healthier snacks. For example, in 2018, Hershey Co. (NYSE: HSY) paid $420 million for Pirate Brands.

PE investments soar The number of PE-backed companies will grow, reducing the amount of investment opportunities

Valuations for North American middle-market private equity firms are expected to remain robust heading into 2019, according to Quarton International. This is mainly due to the abundance of capital and the growing number of PE-backed businesses. The first three quarters of 2018 yielded 8,283 PE-backed companies, compared with 7,988 for all of 2017, according to Pitchbook and Quarton. Private equity investments are outpacing exits at over 2.1 to 1. With this pace of investment, the total number of U.S. PE-backed companies will continue to grow and reduce the amount of available investment opportunities, according to the two firms.

Executives face emerging tech challenges Divergence and disruption were the largest contributors to 2018’s M&A environment, according to EY

Sector convergence will drive M&A 2019, allowing com-panies to adapt to pressure from technologically savvy competitors and increasing activity from activist investors, according to a EY report: Transformative M&A in a Chang-ing World. Divergence and disruption were the largest contributors to 2018’s M&A environment. EY anticipates an active dealmaking climate to persist into 2019, supported by portfolio rationalization, deconglomeration, divestitures and the pickup in private capital available to absorb these assets.

“Executives are facing a chessboard of challenges — including emerging technology, volatile equity markets and changing geopolitics — that are adding unparalleled complexity to their organizations’ transformation strategies,” says EY Americas vice chair Bill Casey.

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Why PE firms love construction data The deal comes on the heels of MidOcean raising its fifth fund at $1.2 billion

MidOcean Partners has acquired construction data providers Hanley Wood and Meyers Research. The lat-ter is being bought from real estate development company Kennedy Wilson (NYSE: KW). The two targets offer data on land acquisition, property develop-ment, new home sales and marketing.

The combined company will be led by Meyers Research founder Jeff Meyers. Kennedy Wilson will own a minority stake in the combined company.

“We are excited to bring together two of the premier players in the residential construction data industry.” This transformational merger creates a significantly expanded offering for customers and provides for greater benefits and growth opportunities than either company could have achieved alone,” says MidOcean managing director Barrett Gilmer. The deal comes on the heels of MidOcean raising its fifth fund at $1.2 billion.

Gibson Dunn & Crutcher is repre-senting MidOcean. Evercore (NYSE: EVR) and Skadden, Arps, Slate Mea-

gher & Flom are advising Hanley Wood. Vaquero Capital and Latham & Wat-kins are advising Meyers Research.

PE investments soar The number of PE-backed companies will grow, reducing the amount of investment opportunities

Valuations for North American middle-market private equity firms are expected to remain robust heading into 2019, according to Quarton International. This is mainly due to the abundance of capital and the growing number of PE-backed businesses. The first three quarters of 2018 yielded 8,283 PE-backed companies, compared with 7,988 for all of 2017, according to Pitchbook and Quarton. Private equity investments are outpacing exits at over 2.1 to 1. With this pace of investment, the total number of U.S. PE-backed companies will continue to grow and reduce the amount of available investment opportunities, according to the two firms.

Executives face emerging tech challenges Divergence and disruption were the largest contributors to 2018’s M&A environment, according to EY

Sector convergence will drive M&A 2019, allowing com-panies to adapt to pressure from technologically savvy competitors and increasing activity from activist investors, according to a EY report: Transformative M&A in a Chang-ing World. Divergence and disruption were the largest contributors to 2018’s M&A environment. EY anticipates an active dealmaking climate to persist into 2019, supported by portfolio rationalization, deconglomeration, divestitures and the pickup in private capital available to absorb these assets.

“Executives are facing a chessboard of challenges — including emerging technology, volatile equity markets and changing geopolitics — that are adding unparalleled complexity to their organizations’ transformation strategies,” says EY Americas vice chair Bill Casey.

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Businesses give back “We understand that business success today is more than finances”

Blackbaud Inc. (Nasdaq: BLKB) has acquired YourCause for $157 million. YourCause is a software company that helps businesses and their employees make and track do-nations, and signup for volunteering.

“We understand that business success today is more than finances; it’s also critical to engage on social issues,” says Blackbaud CEO Mike Gianoni. “In a time where 84 percent of Americans believe businesses shoulder a responsibility to bring social change, providing those businesses with the right tools not only helps attract and retain customers and employees, but it helps to build a better world.”

PE firms like corporate carveouts The divestiture is part of Regal’s strategy to focus on core businesses

Sun Capital Partners is buying industrial machine parts maker Regal Beloit Corp.’s (NYSE: RBC) drive technologies business. The target designs and manufactures engineered controls, voltage starters and drives that are used in motor control systems, and is estimated to generate $131 million in revenue in 2018.

“The acquired motor control solutions platform is a great fit in our portfolio, and in line with Sun Capital’s experi-ence investing in both corporate carve-outs and industrial companies,” says Sun Capital co-CEO Marc Leder. “We see enormous potential in these businesses, and will provide the support and resources needed to grow them into a successful, stand-alone company.” The divestiture is part of Regal’s strategy to focus on core businesses. Baird and Foley & Lardner are advising Regal.

Fat Brands adds Mediterranean flavors Demand for authentic, healthy cuisine is one of the drivers in restaurant M&A

Fat Brands Inc. (Nasdaq: FAT) has acquired Yalla Medi-terranean, a restaurant chain that offers authentic, health-ful Mediterranean cuisine that is served in “environmentally-friendly operations.” The target’s menu features Greek wraps, power greens salads, and basmati rice platters, and has around seven locations mainly in California. Yalla joins Fat Brands’ portfolio of brands, including: Fatburger, Buf-falo’s Café, Buffalo’s Express, Hurricane Grill Wings, Pon-derosa and Bonanza Steakhouses.

“Yalla Mediterranean’s commitment to authentic, healthy and responsibly sourced products aligns strongly with Fat Brands’ commitment to providing guests with high-quality, made-to-order meals,” says Fat Brands CEO Andy Wieder-horn. “By bringing Yalla Mediterranean into the Fat Brands family, we’ll be able to help the brand grow its footprint in its existing markets and expand to new markets through our extensive network of franchise partners.”

Fat Brands franchises more than 300 restaurants worldwide and has over 300 additional restaurants under development in 32 countries. Demand for authentic, healthy cuisine is one of the drivers in restaurant M&A.

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Ares raises debut U.S. senior direct lending fund Ares sees improving market conditions to invest in high-quality, senior secured loans with attractive pricing and terms

Ares Management Corp. (NYSE: ARES) has closed its first U.S. senior direct lending fund at $3 billion. With anticipated leverage, total capital is for the fund is expected to be around $5 billion. The fund has already committed to more than 20 companies representing more than $700 million.

“Based on recent volatility, we are seeing improving market conditions to invest in high-quality, senior secured loans with attractive pricing and terms,” says Ares U.S. direct lending co-head Mark Affolter. “Our significant capital avail-ability, deep and longstanding relationships and market-leading position with middle market sponsors and manage-ment teams provides significant advantages during times of market uncertainty.”

The Ares credit group manages $60.4 billion in global direct lending, with $39.2 billion in the U.S. and $21.2 billion in Europe, as of Sept. 30, 2018. Other firms that have raised new lending funds include: The Carlyle Group LP (Nasdaq: CG) closing its third CLO fund; Madison Capital Funding closing a new fund; and Monroe Capital raising its third private credit fund.

The future of retail JD.com and Intel are jointly developing algorithms that analyze customer traffic and in-store purchasing habits

JD.com, China’s largest retailer, and Intel have launched a joint lab that will explore retail applications for the Internet of Things (IoT). The Digitized Retail Joint Lab will develop next-generation vending machines, media and advertising solutions, and technologies to be used in the stores of the future, based on Intel architecture.

The new lab marks the extension of the existing partner-ship between Intel and China’s largest retailer. The compa-nies are jointly developing algorithms that analyze customer traffic and in-store purchasing habits to help store owners provide a more personalized and convenient experience to their customers.

“As China’s most influential retailer and a leader in data-driven offline retail innovation, JD is an important partner for us to continue to develop a wide range of use cases for our latest technology developments,” said Wei Chen, vice presi-dent of Intel and general manager of Intel IOTG China. In June, JD announced a $550 million investment from Google, owned by Alphabet Inc. (Nasdaq: GOOGL).

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Lending a handFirms are raising lending funds to invest in loans with attractive pricing and terms

• Antares

• Ares Management

• Audax Private Debt

• Madison Capital Funding

• Monroe Capital

Source: Mergers & Acquisitions

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Pets draw investors The pet sector is attractive to buyers because people treat pets as part of their families

Sentinel Capital Partners has acquired pet supply store chain Pet Supplies Plus. In addition to selling pet supplies and food, PSP also offers services such as dog grooming, bathing and flea treatment. The target operates 448 stores across 33 states.

“The pet industry is very attractive due to its stability, growth, and passionate consumer base,” says Sentinel Prin-cipal Marc Buan. “PSP has a strong position in the pet retail

segment and a very loyal customer base.” The pet sector is attractive to buyers because people treat

pets as part of their families. Arbor Investments is buying the Pedigree, Iams, Greenies brands from Mars Inc. and Waud

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Capital Partners has created pet care services platform Heart + Paw.

Sentinel is a lower middle-market private equity firm that invests in businesses that have up to $65 million in Ebitda across the business services, consumer, industrials and restaurant sectors. In 2018, the PE firm raised around $2.5 bil-lion across two funds, and acquired auto parts maker Holley Performance Products from Lincolnshire Management.

The new age of healthcare Medical professionals are looking to reduce costs while improving patient results

TPG Growth is buying health data company Q-Centrix from Sterling Partners. Q-Centrix offers technology-enabled data management services for more than 500 healthcare providers. The company processes more than 2 million data transactions annually related to regulatory matters, clinical registries and infection screenings.

“As the trend toward value-based care continues, more and more health systems are relying on quality data to measure clinical outcomes,” says TPG Growth partner Matthew Hobart.

“We provide our partners with smart, technology-enabled data management solutions that help streamline operations and improve the safety and quality of care,” adds Q-Centrix CEO Milton Silva-Craig.

In today’s climate, medical professionals are looking to re-duce costs while improving patient results. That is one of driv-

ers attracting buyers in healthcare data. For example, in 2018, Medidata (Nasdaq: MDSO) agreed to buy the stake it did not already own of Shyft Analytics for $195 million, and Inovalon (Nasdaq: INOV) agreed to buy Ability Network for $1.2 billion.

Houlihan Lokey Inc. (NYSE: HLI) and McDermott Will & Em-ery are advising Q-Centrix and Sterling Partners. Gibson, Dunn & Crutcher is advising TPG Growth. Varagon Capital Partners is providing financing.

Louis Vuitton owner adds luxury hotel chain

Belmond operates 46 luxury hotels mainly under the Belmond brand, river cruises, along with the 21 Club restaurant in New York

French Luxury goods maker LVMH Moët Hennessy Louis

Vuitton is buying high-end hotel chain Belmond Ltd. for $3.2 billion. Belmond operates 46 luxury hotels mainly under the Belmond brand, river cruises, along with the 21 Club restaurant in New York.

LVHM owns the Louis Vuitton brand. The deal comes as as consumers shift spending toward trips, health clubs, restaurants and entertainment and interest in shopping malls dwindles, reports Bloomberg News. The acquisition addresses another challenge facing LVMH and rivals Kering SA and Richemont. They’ve snapped up so many of the world’s leading brands that there are few prominent leather and couture labels left to buy, according to Bloomberg.

In 2016, LVMH backed middle-market private equity firm L Catterton, by combining its PE arm L Capital with consumer-fo-cused investment firm Catterton. L Catterton is majority owned

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by the partners of the firm, with the remainder being held by LVMH and Groupe Arnault, the family holding company of LVMH Chairman and CEO Bernard Arnault. In 2018, L Catterton announced plans to buy hot sauce distributor Cholula.

Fundraising in the mid market is robustRidgemont focuses on the business, industrials, energy, healthcare, technology and telecommunications sectors

Middle-market private equity firm Ridgemont Equity Part-ners has raised a new fund at $1.65 billion. The fund will target

investments between $50 million and $250 million across the business, industrials, energy, healthcare, technology and tele-communications sectors. Ridgemont has raised more than $4 billion across five funds since the firm was founded in 2010.

“Our limited partners have been pleased with our ability to drive attractive returns by being the partner of choice for management teams building leading and distinctive compa-nies in their respective industries,” says Ridgemont partner Walker Poole.

“The confidence and continued support from our inves-tor base are gratifying as we look forward to the opportuni-ties and challenges of today’s market.” PE fundraising in the middle market is robust. Audax Group recently raised $3.5 billion, Center Rock Capital raised $580 million and JMI Eq-uity raised $1.2 billion. Credit Suisse Securities and Proskauer Rose advised Ridgemont. M&A

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Feeling confident

By Mary Kathleen Flynn

Buoyed by a great 2018, most middle-market companies say they are optimistic the M&A activity will continue in 2019

Private Equity Perspective

Most companies in the U.S. middle market say they are optimistic about M&A in 2019. The confidence comes following a record year for private equity-backed transactions.

Sixty-eight percent of the 350 U.S. middle market companies surveyed by TD Bank say they plan to engage in M&A activity within the next six to 24 months, and 85 percent said there are no barriers to M&A activity. The survey included companies generating between $50 million and $500 million in an-nual revenues.

Weighing in on macro-economic issues, 71 percent of respondents said tax reform will have a positive impact on their business,

while 46 percent said interest rate hikes will have a negative impact. The challenges to business operations most frequently cited include: domestic competition, interest rate increases, global competition and trade policies.

“Middle market executives are also keenly watching the tight labor market,” says TD Bank’s Chris Giamo. “Although companies now have capital for expansion and want to grow staff, they are having trouble filling both skilled and unskilled positions, due to a persistently low unemployment rate.”

M&A thrived in 2018, with the aggregate value of announced global mergers and acquisitions reaching the highest level since

2015, according to informa-tion collected by Bureau van Dijk, a Moody’s Analyt-ics company. Deal value increased 10 percent over the previous year, although volume declined 7 percent, according to the company’s report. For transactions backed by private equity and venture capital, the volume and value of an-nounced deals increased year over year, with total deal value representing the second-best result on record, surpassed only by 2007, according to Bureau van Dijk.

The year yielded a bum-per crop for private equity buyout deals, found Preqin. The research house reported that 5,106 PE deals were announced in 2018, making it the most active year the industry has ever recorded, as measured by deal volume. The activity built from the previous record of 4,829 deals announced in 2017. The total value of these deals rose to $456 billion – close to the $460 billion seen in 2015 – based on preliminary data. Preqin expects these figures to rise by up to 5 percent, as more information becomes available. Nonetheless, 2018 remains some way off the all-time record in deal value seen in 2007 , immediately prior to the global financial crisis, when 3,877 PE deals valued at $700 billion were recorded. M&A

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Founded in 1954, ACG is a global organization with 59 chapters and over 14,500 members. Doing business is at the heart of the ACG membership experience. Chapters in the U.S., Canada, Europe and Asia bring dealmakers together to help them achieve their business and professional goals. To learn more or become a member visit: www.acg.org/DFW

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017_MAJ0219 17 1/8/2019 10:18:28 AM


The Buyside

Streamlining construction

By Demitri Diakantonis

The construction data industry is fragmented, and there is a growing demand for technology that will help contractors

Autodesk Inc. (Nasdaq: ADSK) bought PlanGrid, a provider of construction productivity software, for $875 million. PlanGrid’s software allows

contractors to access in real-time project plans, punch lists, project tasks, progress photos and daily field reports. “There is a huge opportunity to streamline all aspects of construction through digitiza-tion and automation,” says Autodesk CEO Andrew Anagnost.

“At PlanGrid, we have a relentless focus on empowering construction work-ers to build as productively as possible,” adds PlanGrid CEO Tracy Young. “One of the first steps to improving construction productivity is the adoption of digital workflows with centralized data. Plan-Grid has excelled at building beautiful, simple field collaboration software, while Autodesk has focused on connecting design to construction.”

Autodesk and PlanGrid have comple-mentary construction software. Au-todesk’s BIM 360 construction manage-ment program connects people, data and workflows on construction projects. PlanGrid’s technology lets general contractors, subcontractors and owners in the commercial and civil industries

benefit from real-time access to project plans, punch lists, project tasks, progress photos, daily field reports and submit-tals.

Autodesk also has a deal to buy BuildingConnected for $275 million. BuildingConnected has a network of more than 700,000 construction profes-sionals, helping real estate owners and general contractors find contractors for their projects. BuildingConnected’s customers include Turner Construction, McCarthy, Mortenson, StructureTone, Skanska, Clark Construction, Ryan Companies and Aecom. “Bid manage-ment is a critical step in preconstruction, since bidding is the genesis of construc-tion projects,” says BuildingConnected CEO Dustin Devan. “We are investing in digitizing and automating construction workflows,” adds Anagnost.

Along with bid management,

BuildingConnected offers TradeTapp, a subcontractor risk analysis software program, and Bid Board Pro, which helps subcontractors manage and win more bids. BuildingConnected claims that it is the only bid-management platform that provides general contractors and owners with project-specific risk mitigation rec-ommendations based on subcontractor qualification data. This helps contractors efficiently vet and make more informed decisions when selecting subcontractors.

Digital transformationAutodesk is not the only company

seeking acquisitions in the construction data sector. In 2018, Trimble (Nasdaq: TRMB) bought construction software company Viewpoint from Bain Capital for $1.2 billion. Viewpoint’s technology helps contractors with finances and project management. Trimble says the acquisition complements the company’s e-builder business. “The construction industry is embarking on a major digital transformation, and together with Trim-ble we will further accelerate technology innovation and adoption to deliver even more value to our customers,” says View-point CEO Manolis Kotzabasakis. M&A

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What are 2019’s big opportunities in technology? We asked 10 of the most active PE firms investing in the sector for their perspectives and investment plans

By Keith Button and Mary Kathleen Flynn

020_MAJ0219 20 1/9/2019 10:04:33 AM

What are 2019’s big opportunities in technology? We asked 10 of the most active PE firms investing in the sector for their perspectives and investment plans

By Keith Button and Mary Kathleen Flynn

021_MAJ0219 21 1/9/2019 10:04:34 AM


Cover Story

Technology permeates many of today’s private equity deals, and PE firms are hot on the trail of innova-tions that will drive sustainable value to customers and make companies more efficient, more effective and less expen-sive to run. Among the developments appealing to PE investors are: artifi-cial intelligence, data management, data virtualization, digital marketing, healthcare IT, industrial automation, the Internet of Things, machine-to-machine learning, payment processing and Software-as-a-Service.

“Technology, in and of itself, is invading every end market, and it is driving companies to be more com-

petitive than their peers,” points out Richard Lawson, CEO of tech-focused PE firm HGGC. “PE firms will continue to look to invest in companies involved in updating end markets that are still steeped in outdated technology, such as retail stores, car dealerships, market research, insurance providers and the legal/patent market.”

As PE firms consider the tech landscape, they are watching Amazon.com Inc. (Nasdaq: AMZN) closely. “We are always thinking about how we can help companies that are going to get dislocated and disintermedi-ated by Amazon,” says Lawson. “End markets everywhere are being changed

by Amazon. As Amazon scales, it will challenge all kinds of industries and it will have a cascading effect across all sectors. You are already seeing more companies trying to connect their brands with consumers in new ways.”

To gain more insights into what kinds of tech deals will dominate the field in 2019, Mergers & Acquisitions reached out to 10 private equity firms that are active investors in technology. These include a mix of generalist and specialist firms. Here are profiles of the firms, outlining their strategies and investments in tech.

Founded in 1999 and headquartered in San Francisco, the firm manages $12.3 billion.

Leadership: Dipanjan “DJ” Deb, co-founder and CEO; Ezra Perlman and Deep Shah, co-presidents; David Golob, chief investment officer; Tom Ludwig, chief operations officer; and Mike Kohlsdorf, president, Francisco

Partners Consulting.

Investment thesis: “Complexity Arbi-trage.” The firm buys “complexity at discount and sells clarity at premium.” Accomplishes this by partnering with management teams to unlock growth potential, simplify operational com-plexity and clarify strategic positioning. Opportunities extend from backing dis-

ruptive growth technology companies to helping operationally intensive situa-tions. Invests across technology sector, including communications, edtech, fintech, healthcare IT, Internet, security, software and semiconductors.

Deals: GoodRx, a healthcare consumer app that gathers real-time pricing and coupon information from U.S. pharma-cies. Recently sold a portion of the firm’s stake to Silver Lake in a com-pany recapitalization. Sold Paymetric, which automates business-to-business payment workflows, for $550 million to Vantiv in 2017, after acquiring the com-pany for approximately $90 million in 2013. Acquired Dell Software group as a division carveout for approximately $2.5 billion in 2016. The firm later sepa-rated it into two operating companies: Sonicwall (security) and Quest (infra-structure software).

Technologies: Excited by technolo-gies that drive sustainable value for a customer base, make companies or industries more efficient and help save time or money.

Founded in 2007 and headquartered in Palo Alto, California, the firm has $4.3 billion in cumulative capital com-mitments.

Leadership: Rich Lawson, co-founder and CEO; Steve Young, co-founder and

Founded in 1988 and headquartered in San Francisco, the firm manages about $10 billion.

Leadership: Jean-Pierre Conte, chairman and managing director;

Ryan Clark, president and managing director; Rob Rutledge, managing director; Tony Salewski, managing director; and Eli Weiss, managing director.

Investment thesis: The firm invests in vertically-oriented soft-ware businesses considered market leaders that often can serve as consolidation platforms.

Deals: Recently acquired DrillingInfo, a Software-as-a-Service data provider for the energy industry, from Insight Venture Partners. Acquired Bullhorn, a SaaS provider to the staffing industry, in partnership with Insight, from Vista Equity Partners, in 2017. Bought a stake in PDI, a provider of software for convenience stores, from TA Associates, in 2017.

Technologies: Excited about businesses that provide a com-bination of software and data or payment processing.

Francisco Partners

Genstar Capital

HGGC

022_MAJ0219 22 1/9/2019 10:04:39 AM


by Amazon. As Amazon scales, it will challenge all kinds of industries and it will have a cascading effect across all sectors. You are already seeing more companies trying to connect their brands with consumers in new ways.”

To gain more insights into what kinds of tech deals will dominate the field in 2019, Mergers & Acquisitions reached out to 10 private equity firms that are active investors in technology. These include a mix of generalist and specialist firms. Here are profiles of the firms, outlining their strategies and investments in tech.

ruptive growth technology companies to helping operationally intensive situa-tions. Invests across technology sector, including communications, edtech, fintech, healthcare IT, Internet, security, software and semiconductors.

Deals: GoodRx, a healthcare consumer app that gathers real-time pricing and coupon information from U.S. pharma-cies. Recently sold a portion of the firm’s stake to Silver Lake in a com-pany recapitalization. Sold Paymetric, which automates business-to-business payment workflows, for $550 million to Vantiv in 2017, after acquiring the com-pany for approximately $90 million in 2013. Acquired Dell Software group as a division carveout for approximately $2.5 billion in 2016. The firm later sepa-rated it into two operating companies: Sonicwall (security) and Quest (infra-structure software).

Technologies: Excited by technolo-gies that drive sustainable value for a customer base, make companies or industries more efficient and help save time or money.

Founded in 2007 and headquartered in Palo Alto, California, the firm has $4.3 billion in cumulative capital com-mitments.

Leadership: Rich Lawson, co-founder and CEO; Steve Young, co-founder and

managing partner (former quarterback for the San Francisco 49ers).

Investment thesis: “Advantaged Invest-ing.” The firm partners with founder-owners, management teams and spon-sors early in the value creation lifecycle to build differentiated middle-market businesses.

Recent Deals: Paid RPX Corp. share-holders about $555 million in cash to take private the patent acquirer and patent risk manager. Invested in Mi9 Retail, which provides software for

retailers’ operations from inventory management to payment systems, and merged it with portfolio company My-WebGrocer. Bought a controlling stake in HelpSystems, a global provider of IT operations management, security and analytics, for an undisclosed amount.

Technologies: Invests in companies that are using technology to trans-form traditional industries. The firm is excited about data virtualization, or technology that integrates data from disparate sources, locations and formats to create a single “virtual” data layer, resulting in faster data access, less replication, lower costs and greater agility for change.

Founded in 1988 and headquartered in San Francisco, the firm manages about $10 billion.

Leadership: Jean-Pierre Conte, chairman and managing director;

Ryan Clark, president and managing director; Rob Rutledge, managing director; Tony Salewski, managing director; and Eli Weiss, managing director.

Investment thesis: The firm invests in vertically-oriented soft-ware businesses considered market leaders that often can serve as consolidation platforms.

Deals: Recently acquired DrillingInfo, a Software-as-a-Service data provider for the energy industry, from Insight Venture Partners. Acquired Bullhorn, a SaaS provider to the staffing industry, in partnership with Insight, from Vista Equity Partners, in 2017. Bought a stake in PDI, a provider of software for convenience stores, from TA Associates, in 2017.

Technologies: Excited about businesses that provide a com-bination of software and data or payment processing.

Founded in 1998 and headquartered in Bos-ton, the firm manages $3.92 billion.

Leadership: Christo-pher Gaffney, co-founder and manag-ing partner; Michael

Kumin, Matthew Vettel and Mark Taber, managing partners.

Investment thesis: The firm deploys a middle-market growth buyout strategy based on rigorous sector research, proactive origination, value-added company-building tactics, con-servative use of leverage and an emphasis on exits to large, strategic buyers. Deals: Sold Ascenty, a provider of data center services in Brazil, to Digital Realty for $1.8 billion. Invested in a majority recapitalization of Vatica Health, a provider of software to health plans. Invested $65 million in Paytronix Systems Inc., a provider of customer engagement software for restaurants.

Technologies: Excited about innovations that reduce health-care costs, enable payments and move companies into the public cloud.

Genstar Capital

HGGC

Great Hill Partners

023_MAJ0219 23 1/9/2019 10:04:42 AM


Founded in 2000 and headquartered in Austin, Texas, the firm currently has more than $46 billion in cumulative capital commitments.

Leadership: Robert F. Smith, founder, chairman and CEO; Brian Sheth, co-

Founded in 1988 and headquartered in New York and Cleveland, the firm manages about $8.4 billion.

Leadership: Béla Szigethy and Stewart Kohl, co-CEOs.

Investment thesis: The firm is focused exclusively on the smaller end of the middle market, and makes control and non-control investments in grow-ing businesses valued at up to $400 million. For 30 years, and more than 560 investments, Riverside has honed its approach to sourcing and growing “little leading” companies.

Deals: Invested an undisclosed amount in Destiny Solutions, which makes software that helps higher education institutions manage continuing educa-

tion and non-degree programs more effectively and efficiently. Invested in Spirion, a provider of IT security and data privacy software. Sold Grace Hill, a provider of online training, creden-tialing and performance assessment tools for managers of multifamily prop-erties, for an undisclosed price to Stone Point Capital, after more than doubling Grace Hill’s sales since it acquired the target in 2014.

Technologies: Excited about analytical software; Software-as-a-Service; and enterprise systems that offer mission-critical tools, data aggregation and business intelligence.

Founded in 1999 and headquartered in Menlo Park, California, and New York, the firm manages about $45.5 billion.

Leadership: Mike Bingle, Egon Durban,

Ken Hao and Greg Mondre, managing partners/managing directors.

Investment thesis: The firm invests in what it considers to be the world’s leading technology companies and tech-enabled businesses. Seeks to cultivate proprietary or specialized investment opportunities not typically available to generalist investors and to partner with “premier” management teams.

Deals: Acquired a majority stake in ServiceMax, a provider of cloud-based productivity tools for field service technicians, from GE Digital. Acquired ZPG Plc, which develops property listing websites, for about $2.8 billion. Bought a stake in GoodRx, which gathers real-time pricing and coupon infor-mation from U.S. pharmacies, from Francisco Partners.

Technologies: Invests strategically and selectively across the broad value chain of the technology industry.

Founded in 1995 and headquartered in New York, the firm manages more than $20 billion.

Leadership: Jeff Hor-ing, co-founder and managing director;

Deven Parekh, managing director.Investment thesis: With an approach the firm describes as “straightforward and results-driven,” it deploys “core pillars” of scale, focus, and experience to help software companies capture value and generate long-term business success.

Recent deals: Acquired Episerver, a provider of digital content, commerce and marketing cloud software, for $1.16 billion from Accel-KKR. Led a $165 million Series D funding round in JFrog, which offers a software release platform for continual updates.

Technologies: Excited about artificial intelligence and ma-chine learning, healthcare technologies and cybersecurity.

Founded in 1999 and headquartered in Philadelphia, the firm has more than $3.5 billion in cumulative capital commitments.

Leadership: Mitchell Hollin, Scott Perricelli,

David Reuter, Jack Slye and David Stienes, partners.

Investment thesis: The firm makes minority and majority in-vestments in growing companies with minimum revenues of $10 million and equity capital requirements of $20 million to $100 million in education, healthcare, fintech, industrial tech, security (cyber/physical) and software industries.

Deals: Partnered with Kevin Jones to form Celero Commerce, an e-commerce software provider, and made an investment in UMS Banking, Made a growth capital investment in Edlio, a provider of software for K-12 schools. Invested in Edmunds & Assoc., a software provider for government agencies.

Technologies: Excited about technologies in the test and measurement, electronic components and Internet of Things/machine-to-machine sectors, as well as payments, wealth management, lending and hospitality technologies.

Cover Story

Insight Venture Partners Silver LakeLLR Partners

The Riverside Co. Vista Equity Partners

024_MAJ0219 24 1/9/2019 10:04:53 AM


Founded in 2000 and headquartered in Austin, Texas, the firm currently has more than $46 billion in cumulative capital commitments.

Leadership: Robert F. Smith, founder, chairman and CEO; Brian Sheth, co-

founder and president.

Investment thesis: The firm invests exclusively in software, data and technology-enabled organizations led by management teams the firm considers “world-class.” Vista takes a value-added investment approach with a long-term perspective that leverages the firm’s deep operational expertise to help companies realize their full potential.

Recent deals: Sold marketing soft-ware developer Marketo to Adobe for

$4.75 billion, after having bought the target for $1.8 billion in 2016. Acquired Dispatch, a field service and customer experience logistics provider, for undis-closed terms.

Technologies: Invested in artificial intelligence and machine learning technologies across its portfolio and-developing blockchain technologies in strategic areas to add value to its com-panies and their products. Vista says it is committed to investing in technolo-gies that leverage data in a responsible and secure way that produces insights and unlocks value for Vista companies and their customers. M&A

tion and non-degree programs more effectively and efficiently. Invested in Spirion, a provider of IT security and data privacy software. Sold Grace Hill, a provider of online training, creden-tialing and performance assessment tools for managers of multifamily prop-erties, for an undisclosed price to Stone Point Capital, after more than doubling Grace Hill’s sales since it acquired the target in 2014.

Technologies: Excited about analytical software; Software-as-a-Service; and enterprise systems that offer mission-critical tools, data aggregation and business intelligence.

Founded in 1999 and headquartered in Menlo Park, California, and New York, the firm manages about $45.5 billion.

Leadership: Mike Bingle, Egon Durban,

Ken Hao and Greg Mondre, managing partners/managing directors.

Investment thesis: The firm invests in what it considers to be the world’s leading technology companies and tech-enabled businesses. Seeks to cultivate proprietary or specialized investment opportunities not typically available to generalist investors and to partner with “premier” management teams.

Deals: Acquired a majority stake in ServiceMax, a provider of cloud-based productivity tools for field service technicians, from GE Digital. Acquired ZPG Plc, which develops property listing websites, for about $2.8 billion. Bought a stake in GoodRx, which gathers real-time pricing and coupon infor-mation from U.S. pharmacies, from Francisco Partners.

Technologies: Invests strategically and selectively across the broad value chain of the technology industry.

Founded in 1968 and headquartered in Bos-ton, the firm manages about $13 billion.

Leadership: Brian Conway, chairman and managing partner; Ajit

Nedungadi, managing partner.

Investment thesis: The firm invests in profitable, high-growth companies with high-quality business models. Aims to help management accelerate organic growth by identifying accretive acquisition opportunities and accelerate perfor-mance with consulting and operating experience.

Recent deals: Invested in Datix, a provider of healthcare software. Invested in Flexera, a provider of software as-set management solutions. Acquired Insightsoftware.com International, an enterprise software provier, from Thompson Street Capital Partners.

Technologies: Excited about vertical market software ap-plications, healthcare information technology and financial technology products that serve the capital markets, pay-ment and buyside sectors.

Founded in 1999 and headquartered in Philadelphia, the firm has more than $3.5 billion in cumulative capital commitments.

Leadership: Mitchell Hollin, Scott Perricelli,

David Reuter, Jack Slye and David Stienes, partners.

Investment thesis: The firm makes minority and majority in-vestments in growing companies with minimum revenues of $10 million and equity capital requirements of $20 million to $100 million in education, healthcare, fintech, industrial tech, security (cyber/physical) and software industries.

Deals: Partnered with Kevin Jones to form Celero Commerce, an e-commerce software provider, and made an investment in UMS Banking, Made a growth capital investment in Edlio, a provider of software for K-12 schools. Invested in Edmunds & Assoc., a software provider for government agencies.

Technologies: Excited about technologies in the test and measurement, electronic components and Internet of Things/machine-to-machine sectors, as well as payments, wealth management, lending and hospitality technologies.

TA AssociatesSilver LakeLLR Partners

Vista Equity Partners

025_MAJ0219 25 1/9/2019 10:04:56 AM

We are pleased to announce, that SBIA and the Alliance of Merger & Acquisition Advisors (AM&AA) are joining forces and combining SBIA’s Southern Private Equity Conference and AM&AA’s Winter Conference to create a new conference, the SBIA and AM&AA Deal Summit. This joint event will be the singularly best event for senior-level M&A advisors and lower middle market funds in the country. Scheduled for Wednesday, February 20 – Friday, February 22, 2019 at The Doral in Miami, the SBIA and AM&AA Deal Summit off ers the perfect opportunity to kick-off the New Year with incomparable networking, compelling content, and captivating speakers all at a fi rst-class venue. SBIA and AM&AA Deal Summitwww.eiseverywhere.com/2019dealsummitFebruary 20-22, 2019The Doral | Miami, FL

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026_MAJ0219 26 1/8/2019 10:18:29 AM

We are pleased to announce, that SBIA and the Alliance of Merger & Acquisition Advisors (AM&AA) are joining forces and combining SBIA’s Southern Private Equity Conference and AM&AA’s Winter Conference to create a new conference, the SBIA and AM&AA Deal Summit. This joint event will be the singularly best event for senior-level M&A advisors and lower middle market funds in the country. Scheduled for Wednesday, February 20 – Friday, February 22, 2019 at The Doral in Miami, the SBIA and AM&AA Deal Summit off ers the perfect opportunity to kick-off the New Year with incomparable networking, compelling content, and captivating speakers all at a fi rst-class venue. SBIA and AM&AA Deal Summitwww.eiseverywhere.com/2019dealsummitFebruary 20-22, 2019The Doral | Miami, FL

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027_MAJ0219 27 1/8/2019 10:18:29 AM


nance in online mapping.

Faced with this new environment, how should we rethink our valuation methodology?

We have identified five critical at-tributes, which form the foundation of a new approach to value creation. Aug-mented Infrastructure assets should be:

Intelligent: capable of monitoring their operational performance and ca-pacity in real time and maximizing their efficiency of the best level of service they can deliver. Our portfolio company Ascendi, a motorway operator, created SustIMS, a system developed with two Portuguese universities, to monitor the condition of its assets, schedule inspec-tions, assess risks and model deteriora-tion and maintenance costs.

Open: forming part of an ecosystem that is open to other players and can support additional services. Amster-dam’s Schiphol Airport has opened its API platform to give external develop-ers access to its business data, enabling them to create services that will benefit their customers as well as airport users generally.

Prolific: able to support a growing range of services and provide oppor-tunities to monetize them. 5G mobile services have the potential to become “the platform of platforms”, providing the basic infrastructure that will enable connectivity for everything, everywhere. It will have 10 times the capacity of 4G, one tenth of the latency and consume 100 times less power per unit of data transferred.

Resilient: able to absorb shocks and adapt to a changing environment. In 2017, our portfolio company Indigo converted 1600sqm of car parking in the Paris district of La Défense into co-working, events and exhibition

Stefano Mion and Mark Voccola co-lead Ardian’s U.S. infrastructure activities, where they evaluate potential investment opportunities.

Guest article

Augmented infrastructure

By Stefano Mion and Mark Voccola

Investors can’t afford to think about only glass and steel. Digitalization is transforming the role played by physical assets

Guest Article

As the co-leads of the U.S. infrastructure activity at Ardian, a world leading private investment house with $82 billion in assets under management and headquartered in Paris, our work gives us a unique vantage point into the shifting global infrastructure landscape. Our firm has infrastructure invest-ments across the globe, and we have seen that the days when infrastructure investors could afford to think only about concrete, glass and steel are over. Digitalization is spreading in all directions, transforming the role that these physical assets play in our lives.

As a global leader in infrastructure invest-ment, we have been analyzing digital disrup-tion in our industry for several years and recently published Augmented Infrastructure, a comprehensive study we undertook with French digital consultancy Fabernovel. Our research shows how blending digital services

with real assets can create new revenue streams, generating huge flows of real-time data that can benefit owners and users alike. But as the infrastructure markets evolve, stakeholders need to understand what it takes to succeed in that digitalized future.

One of our major goals with Augmented Infrastructure was to set out a new frame-work for assessing the impact of digitaliza-tion on infrastructure assets. This is criti-cal because the competitive landscape is changing quickly: infrastructure owners and digital service providers are both trying to own the relationship with the end-user, and this is disrupting up the infrastructure value chain.

We’ve seen clear examples of this conver-gence between infrastructure owners and digital service providers in Netflix’s evolving relationship with Verizon and Comcast. In 2014, Netflix’s user growth put heavy pressure

on the U.S. networks’ capac-ity, and initially publicly criticized Verizon, accusing of reducing the bandwidth allowed to its users. Eventu-ally the two agreed on a partnership to secure faster speeds from its major car-riers.

Other digital services, however, are becom-ing infrastructure own-ers themselves, investing heavily in cloud comput-ing and renewable energy capacity. Google now owns 8.5% of the world’s subma-rine cables, signaling the emergence of a vertically integrated business that claims to be able to support a quarter of global inter-net traffic. Questions over whether services like this should be unbundled, as the European Union has done with its energy market, have huge potential importance for the future value of these infrastructure assets.

Similarly, our report high-lights developing competi-tion issues with the emer-gence of potential digital infrastructure monopolies, such as Google Maps. In July 2018, Google Maps reviewed the platform’s tariff policy to increase its cost per request by 1400% - i.e the cost paid by a service using the API each time a new user executes a request based on it. This opened a new revenue opportunity for Google thanks to its domi-

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nance in online mapping.

Faced with this new environment, how should we rethink our valuation methodology?

We have identified five critical at-tributes, which form the foundation of a new approach to value creation. Aug-mented Infrastructure assets should be:

Intelligent: capable of monitoring their operational performance and ca-pacity in real time and maximizing their efficiency of the best level of service they can deliver. Our portfolio company Ascendi, a motorway operator, created SustIMS, a system developed with two Portuguese universities, to monitor the condition of its assets, schedule inspec-tions, assess risks and model deteriora-tion and maintenance costs.

Open: forming part of an ecosystem that is open to other players and can support additional services. Amster-dam’s Schiphol Airport has opened its API platform to give external develop-ers access to its business data, enabling them to create services that will benefit their customers as well as airport users generally.

Prolific: able to support a growing range of services and provide oppor-tunities to monetize them. 5G mobile services have the potential to become “the platform of platforms”, providing the basic infrastructure that will enable connectivity for everything, everywhere. It will have 10 times the capacity of 4G, one tenth of the latency and consume 100 times less power per unit of data transferred.

Resilient: able to absorb shocks and adapt to a changing environment. In 2017, our portfolio company Indigo converted 1600sqm of car parking in the Paris district of La Défense into co-working, events and exhibition

space. This met local demand for new facilities, adjusted to reduced demand for parking space and protected the asset’s long-term cash flows.

Impactful: aiming to have a positive impact on society, and as a minimum working to reduce negative externali-ties. Our renewable energy platform in Italy, 3New, has multiplied its gen-eration capacity ten-fold since 2007, creating sustainable jobs and providing clean energy to thousands of custom-ers. Its growth reinforces the ESG principles that are central to Ardian’s investment strategy.

Ardian Infrastructure now uses the Augmented Infrastructure scoring sys-tem for digital due diligence in all our investment memos. We intend to review our existing portfolio annually using this model. The goal is to score every asset or prospective transaction under each of the five headings to assess what the company is doing and benchmark it against its peers to identify opportuni-ties and best practices. The scores give us a map of the market opportunity under each criterion, indicating where the major value creation opportunities and obstacles lie.

These attributes apply to differ-ing degrees depending on the asset involved: an airport is likely to be far more prolific than a windfarm, for instance. But using the Augmented Infrastructure framework should allow all stakeholders – from infrastructure owners and operators, to digital service providers, public authorities and private investors – to gain a better understand-ing of how their assets are likely to perform in the future.

We firmly believe that using our framework to assess and value infra-structure assets will open up new value creation opportunities. Equally, we

think it will have defensive benefits, by helping infrastructure owners to anticipate disruption that could reduce the visibility of the asset’s long-term earnings potential.

Inevitably, in an economically critical sector such as infrastructure, regulation remains a central concern. This is partly because the digital service providers that are now becoming infrastructure players come from a much more loose-ly regulated world – technology – than the asset owners and operators whose markets they are moving into.

To meet this challenge, infrastructure owners and operators must innovate and update their assets, and they need to be able earn a return on these investments. But here again, regulation gets in the way. Current concession agreements most often put greater rewards on physical capex that will expand the capacity of an asset, rather than on digital innovations that could improve its flexibility – even though these could lead to end-users receiving a better service.

The industry is therefore going to require innovative thinking from public authorities and governments to frame new contracts that incentivize a wider range of investment. However, we believe infrastructure investors cannot afford to wait for that shift to happen. The cost of standing still and failing to invest in digital innovation is rising.

We are convinced that investors that are not actively working on the sustainable transformation of their infrastructure assets could be destroy-ing value without realizing it because the risk of obsolescence is increasing. The GPs that emerge as leaders in Aug-mented Infrastructure will create more value than their peers and enjoy a true competitive advantage. M&A

Stefano Mion and Mark Voccola co-lead Ardian’s U.S. infrastructure activities, where they evaluate potential investment opportunities.

Guest articleGuest Article

on the U.S. networks’ capac-ity, and initially publicly criticized Verizon, accusing of reducing the bandwidth allowed to its users. Eventu-ally the two agreed on a partnership to secure faster speeds from its major car-riers.

Other digital services, however, are becom-ing infrastructure own-ers themselves, investing heavily in cloud comput-ing and renewable energy capacity. Google now owns 8.5% of the world’s subma-rine cables, signaling the emergence of a vertically integrated business that claims to be able to support a quarter of global inter-net traffic. Questions over whether services like this should be unbundled, as the European Union has done with its energy market, have huge potential importance for the future value of these infrastructure assets.

Similarly, our report high-lights developing competi-tion issues with the emer-gence of potential digital infrastructure monopolies, such as Google Maps. In July 2018, Google Maps reviewed the platform’s tariff policy to increase its cost per request by 1400% - i.e the cost paid by a service using the API each time a new user executes a request based on it. This opened a new revenue opportunity for Google thanks to its domi-

029_MAJ0219 29 1/9/2019 10:01:15 AM


Giving back to b-school

By Mary Kathleen Flynn

“Investing in an education program, especially through scholarship, is the very best ROI investment you can make philanthropically,” says GTCR’s Phil Canfield.

Q&A

GTCR managing director Phil Canfield learned the fundamentals of private equity investing at the Business Honors Program at The University of Texas at Austin. Now he and his wife Mary Beth are giving back to UT’s McCombs School of Business. In recognition of the gift, the program has been renamed the Canfield Business Honors Program.

Canfield joined Chicago’s GTCR in 1992 and is currently a managing director of the firm. He serves as the co-head of the technology, media and telecommunications group and has been focused on building this area for GTCR since 1996. Canfield currently

serves as director of Cision, Inteliquent, Lytx and Mega Broadband Investments. He has played a leadership role in a number of past investments including AppNet, CellNet, Digi-talNet, Rural Broadband Investments, Solera, Sorenson Communications, Transaction Net-work Services and Zayo. Previously, Canfield worked in the corporate finance department of Kidder, Peabody & Co. He holds an MBA from the University of Chicago and a BBA in finance with high honors from the Business Honors Program at the University of Texas.

He is a member of the council at the Uni-versity of Chicago Booth School of Business and serves on the Polsky Center PE Council

for the University of Chi-cago. In addition, Canfield is a member of the board of trustees for Rush University Medical Center and a mem-ber of the board of gov-ernors for Rush University. He is also a member of the United States Olympic and Paralympic Foundation’s Trustee Council.

Mergers & Acquisitions asked Canfield about his donation to UT.

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As more and more of our M&A readers seek new and efficient ways to consume their news and information, the Mergers & Acquisitions video page

is the premier destination for interactive, in-depth commentary and analysis in this rapidly growing market.

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How did your experience at UT prepare you to be a private equity investor?

At the Business Honors Program at The University of Texas, I learned the fundamentals of investing and private equity: accounting, finance, and integrated financial modeling with scenario analysis. I learned these fundamentals in a setting that was rigorous, but also collaborative - differ-ent ideas or perspectives were debated in the classroom and in study groups. That’s exactly how it works in private equity, including at GTCR - you use the business fundamentals to analyze and assess and then you overlay with a qualitative discussion about differ-ent potential outcomes and scenarios. So, the Business Honors Program at UT was the perfect place to learn how to be a private equity investor.

What do investing in this program and investing in private equity deals have in common?

Private equity investors are wired to look for opportunities to get the very best returns for their investment. In our business, our job is to maximize ROI.

Investing in an education program, especially through scholarship, is the very best ROI investment you can make philanthropically. If you help someone attain a world-class education through scholarship, that investment will com-pound over that person’s entire lifetime. It’s just like a private equity investment, except you’re investing in people, not deals.

How will the gift be used?Overall, it is a $20 million gift. The

gift is divided into three components. $10 million of the gift supports the Canfield Business Honors Program at the general and programmatic level. That money can be used for anything from hiring a professor, to developing a student program for getting Business Honors students in front of employers in a specific geographic area like New York or Los Angeles, or a specific in-dustry like, technology, energy, private equity, etc. $7 million of the gift is for scholarship. This gift is paired with a $7 million campaign that the school is running to match my $7 million (they’ve raised over half of that already). Once complete, this scholarship fund in com-

bination with prior scholarship funds will allow the Canfield Business Honors Program to offer scholarship to every single student in the program. Finally, the last $3 million is available for im-mediate use for branding, marketing, student outreach, etc.

What do you hope will be the legacy of the Canfield Business Honors Program?

I think the Business Honors Pro-gram at UT is the best undergraduate business program in the country. If you talk to potential students in and around Texas, it has that perception. However, when you look at it from a national reputation perspective, it is less well known. There are many high school students in places like New York, Chicago, Denver and Los Angeles that don’t know much about it. I am hope-ful that by attracting more students from across the nation, we’ll be able to elevate the national status of and reputation of the program. I’d like the Canfield Business Honors Program to be recognized across the U.S. as the best undergraduate business program in the country. M&A

Q&A

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Mitigating data risks

By Neil Coulson and Cynthia Cole

With the rising number of cyberattacks, conducting due diligence on data is more important than ever in dealmaking

Guest Article

Data has changed the world and the promise of the fruits of large-scale data manipulation have changed the way companies do business. The transformative power of data has left very few areas of modern life untouched. But with promise comes risk, which is increasingly significant.

Barely a day passes without news of a corporate data breach or cybersecurity incident. From individuals, Fortune 500 companies to the smallest mom and pop enterprises, mitigating the risks in handling often very sensitive data, is now a daily challenge from which few are excused.

This proliferation of data is being matched by a marked increase in regulatory scrutiny. Whether it be a local state authority getting to grips with the

challenges of data risk, to new legislation such as the European Union’s flagship General Data Protection Regulation (GDPR) oversight of data and the rules that govern its use are getting tougher.

The penalties for badly managing or handling data are increasingly pernicious. Businesses failing to comply with GDPR, for example, face the threat of fines of up to four per cent of their annual turnover.

GDPR is a game-changer affecting the vast majority of cross-border corporate transactions that take place around the world. Conceived in Europe, GDPR has global implications, while it has also loosened the traditional reticence local and U.S. regulators have displayed with regard to data

Newly emboldened watchdogs are going after data transgressors. Aggressive regulatory censure on data issues is now a fact of life in most jurisdictions.

Rethinking the due diligence process

It is against this backdrop that many companies looking to buy or sell assets through M&A have to rethink their approach to data. Data is fundamentally changing the way deal making works.

Companies now need to take the deepest of dives into the data security credentials of any company they target.

Depending on deal structure, an acquirer assumes the liabilities of the target and these liabilities are often difficult to unearth, particularly when it comes to data. Such risks may be lying dormant in a subsidiary business or regional division. The true extent of any risks associated with data may simply not have been found or spoken about openly.

But ignorance is not a plea that absolves an organization of wrongdoing. Whereas in the past, data risk was largely a secondary consideration in deal due diligence, it is now a question, or series of questions, that should be posed early on in

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negotiations. Robust buyer scrutiny should ascertain the extent of poor processes, legacy or historical issues, laying deep within an organizational structure.

Previously, many data risks were never unearthed. Warranties were viewed as the medicine to cure any data disorder. Acquirers simply factored in the cost of a data warranty as a cost of doing a deal. But the cost of warranties has recently increased exponentially, while the cover associated with those same warranties is now typically capped at levels much lower than the potential risks and costs. This leaves the full risk firmly in the hands of an acquiring company. But risk is complicated to assess.

How to tackle the data due diligence conundrum

One of the biggest challenges facing acquirers is what to do when there is an absence of detail around data management, handling and mitigation. This essentially leaves an

acquirer with three options:1. A buyer can walk away. 2. A buyer can push for the target to

take on a much greater liability risk if anything is uncovered after a purchase has been made.

3. The target company can try to secure a lower purchase price.

None of these options are palatable for the parties involved in a deal making process. Targets will rarely willfully withhold information pertaining to data risk, rather, they simply won’t know.

While the onus typically falls on the shoulders of an acquirer to assess the data risks inherent in a target firm, there is an increasing demand for sellers to show their understanding

of any potential issues within their business:

· As part of any pre-sale process, a seller should have a comprehensive understanding of its entire data handling abilities and the extent of any shortfalls. A seller should identify

what the issues are and how they can be fixed.

Sellers need to be open and transparent with an acquirer around data. This not only helps with data issues but securing wider trust and ultimately the final sale.

· Data is now everywhere but it’s alarming to note that some industries still do not believe it impacts them. Cries of, “We aren’t a social media company, so that’s not us,” can still be heard in boardrooms around the world.

Every company is now a data company, with most firms buying, selling or bartering personal information in one form or another. The problem remains a lack of awareness, so it is incumbent on corporate leadership to drive a culture of understanding around data into every single part of the organizations they run.

Be you a buyer or seller, failure to undertake comprehensive assessments of your data ultimately leads to issues in the dealmaking process. Data management is a dynamic process that should be undertaken by both buyers and sellers: promoting internal disclosure, risk assessment and practical application of changing rules and regulations. The task is not insurmountable but the prospect of deal failure, early in the process or later when a latent breach is discovered, is real and has a discernable, measurable impact beyond the parties involved in the transaction.

The investment in your company’s data assets, and the processes and procedures around those assets is key to a healthy company and healthy M&A. M&A

Neil Coulson is a partner and department chair of the intellectual property practice at Baker Botts. Cynthia Cole is special counsel in the corporate practice at Baker Botts.

Guest article

Neil Coulson Cynthia Cole

036_MAJ0219 36 1/9/2019 10:03:03 AM

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(the long-term nature of private equity investments in general are unlike the timeframes some new investors will be used to).

Many operational questions also arise – who will be responsible for what, where will the team be? Who will do the reporting? Not everything will be obvious – for instance if investors have different sets of tax implications, how will this be handled? Expectation management becomes that much more important and difficult in any group collaboration, especially in cases where the investment hits stumbling blocks.

The concern is these particular operational and governance challenges are far bigger and complex now than they were during the previous era of club deals (and they caused enough problems then), back when private eq-uity was still a relatively informal niche in the financial landscape. Current high share prices aside, there are some deeper structural forces at play that are likely to drive an increase in club deals going forward. More and more institutions with little to no prior experi-ence with the asset class, from the big pension funds down to the new wave of family offices, are looking to increase allocations. Combine this with skepti-cism over traditional fund fee structures and performance, and a growing desire to “cut out the middle man,” and it seems inevitable that we will see more collaborations of various types going forward.

But this also means more diverse aims and interests, among less ex-perienced participants, making the already-thorny challenge of expec-tation management even trickier. To compound the challenge further, increased regulation alongside the desire for transparency on the part of

Hugh Stacey is the managing director of the America’s and head of Augentius investor solutions.

Guest article

Teaming up

By Hugh Stacey

The Blackstone-led purchase of Thomson Reuters suggests a return to private equity club deals and collaborations

Guest Article

The success of the Blackstone-led con-sortium’s bid for Thomson Reuters Corp. has gotten people talking about a potential re-turn to club deals and collaborations, which were popoular in the pre-crisis era.

Reuters’ price tag of $20 billion, making it the largest leveraged buyout since the crash, suggests an obvious reason why – inflated share prices are simply putting many good opportunities beyond the reasonable reach of even the largest firms. Combine with this the paucity of yield elsewhere and the abundance of cheap credit, and the idea of teaming up for private deals suddenly looks very attractive. The boom-levels build up of dry powder can only go on so long and col-laboration provides an obvious outlet.

That this is only starting to happen now amid such favorable economic circumstanc-

es is testament to the mixed reputation club deals acquired in the years since their golden age. While firms and investors are well aware of the theoretical financial risk-spreading benefits involved, a number of high profile and messy bankruptcies, including the recent Toys R Us, have created a tainted associa-tion, a perception that collaborations are more likely to result in financial failure. In light of this, many feel that the challenges and risks from a governance perspective simply aren’t worth it.

Nonetheless a recent research note from Pitchbook suggests that this reputation is largely unfair, at least from the bankruptcy point of view. Collaborations in general are far less likely to go under than their sole-sponsor brethren, to the tune of 50pc.

This doesn’t quite mean firms and

investors, disabused of this wrongheaded notion, should just steam ahead. As the evidence shows the commercial side of club deals has never really been the issue. What the worst examples do show (along with many others that ex-perienced problems without going bankrupt) is that the governance and logistics of collaboration pose real and unique challenges that, handled badly, can cause disastrous fallout.

As Blackstone’s own CIO said earlier this year, “gover-nance is very difficult when you have six sponsors”. Many of the high profile fallouts can be traced back not so much to financial fun-damentals, but to a lack of communication and control, with peers often falling out and some unfortunate cases of recriminatory lawsuits. Private equity firms and their investors are very used to doing things their own way, with sole control. Work-ing together immediately adds a layer of complexity and decision-making that most will be unfamiliar with.

Being on the same page from the start is critical: different parties are likely to have different aims, interests and expectations and this needs to be as transparent as possible. There will be a lack of standard structures to overcome, and time horizons are likely to vary

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(the long-term nature of private equity investments in general are unlike the timeframes some new investors will be used to).

Many operational questions also arise – who will be responsible for what, where will the team be? Who will do the reporting? Not everything will be obvious – for instance if investors have different sets of tax implications, how will this be handled? Expectation management becomes that much more important and difficult in any group collaboration, especially in cases where the investment hits stumbling blocks.

The concern is these particular operational and governance challenges are far bigger and complex now than they were during the previous era of club deals (and they caused enough problems then), back when private eq-uity was still a relatively informal niche in the financial landscape. Current high share prices aside, there are some deeper structural forces at play that are likely to drive an increase in club deals going forward. More and more institutions with little to no prior experi-ence with the asset class, from the big pension funds down to the new wave of family offices, are looking to increase allocations. Combine this with skepti-cism over traditional fund fee structures and performance, and a growing desire to “cut out the middle man,” and it seems inevitable that we will see more collaborations of various types going forward.

But this also means more diverse aims and interests, among less ex-perienced participants, making the already-thorny challenge of expec-tation management even trickier. To compound the challenge further, increased regulation alongside the desire for transparency on the part of

investors has significantly increased the reporting burden. Investors now both want and need granular and regular in-formation on their investments, tailored to their own needs and profiles. Club deals, by their very nature, multiply this challenge. The ability to provide timely and relevant information is key to expectation management, which is that much more crucial in a group venture.

All of these problems are quite solvable, and for those firms that can solve them collaborations can work very well indeed. But the problems require significant thought, planning and – especially on the reporting side – adequate technological infrastructure. Any group collaboration that relies on ‘old style’ private equity communication such as the occasional PDF is asking for trouble in the modern environment, especially where non-traditional play-ers are involved.

This is less of an issue for the big fund houses like Blackstone, which have adapted well to the digital era and have their own in-house software designed specifically for tracking pri-vate equity investments. But investors are far less likely to have these tools, and building them in-house for the purposes of individual collaborations would be commercially prohibitive and counterproductive time-wise.

Service-based third-party inves-tor portals may well come into their own here, being far cheaper and also particularly suited to the club deal world in so far as they are designed for easy tailoring across users, and can readily be amalgamated with a parties’ other investments for the bigger picture perspective. For those running the club deal on the operational side, it also makes the critical job of expectation management that much simpler. In

fact, outsourcing some of the opera-tional functions of the deal in general to third parties, such as administrators and platform-providers, rather than having one of the involved parties run the show, can be a good basis for ensuring good governance and rela-tions. Having an impartial third party as an operational partner can provide confidence, especially during difficult periods when parties’ interests are at stake.

A return to club deals could well be here. Given the long-term trajectory of the industry this was possibly inevi-table. And there’s no reason why this type of investment shouldn’t be able to flourish. But only if firms go in with eyes open to the nature, scale and the challenges involved. Unless governance lessons are learned, and unless partici-pants make full use of the tools at their disposal to ensure operational excel-lence, the grim headlines could also make a comeback. M&A

Hugh Stacey is the managing director of the America’s and head of Augentius investor solutions.

Guest articleGuest Article

investors, disabused of this wrongheaded notion, should just steam ahead. As the evidence shows the commercial side of club deals has never really been the issue. What the worst examples do show (along with many others that ex-perienced problems without going bankrupt) is that the governance and logistics of collaboration pose real and unique challenges that, handled badly, can cause disastrous fallout.

As Blackstone’s own CIO said earlier this year, “gover-nance is very difficult when you have six sponsors”. Many of the high profile fallouts can be traced back not so much to financial fun-damentals, but to a lack of communication and control, with peers often falling out and some unfortunate cases of recriminatory lawsuits. Private equity firms and their investors are very used to doing things their own way, with sole control. Work-ing together immediately adds a layer of complexity and decision-making that most will be unfamiliar with.

Being on the same page from the start is critical: different parties are likely to have different aims, interests and expectations and this needs to be as transparent as possible. There will be a lack of standard structures to overcome, and time horizons are likely to vary

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M&A Insights

Where is the middle market heading in 2019?Leading dealmakers weigh in on a range of topics, from the current exit climate to the state of interest rates

Why now is a great timeto sell

Ramsey GoodrichCarter Morse & Goodrich

Bharat RamprasadStifel Nicolaus

Mark EmrichMurray Devine

“There will be no shortage of de-mand, there’s no question about that,” says Ramsey Goodrich of Carter Morse & Goodrich in a video interview. “I think we will still be in a great dealmaking environment.”

Mergers & Acquisitions conducted a series of video conversations with dealmakers about their outlooks for 2019 at ACG Philadelphia’s M&A East. “We’re still saying it’s a great time to sell. I hope we’re not the Boy Who Cried Wolf. I think this is a different market. It doesn’t feel like where we were in 2006-2007.”

“This is one where we may not expand as fast as we have been, but I don’t think we’re going to contract off a cliff either. We might contract a little bit. We said that a couple of years ago as well in our annual letter to our cli-ents. 2018 was deja vu all over again.” M&A

Keep an eye on interest rates

“I think you’re going to see increas-ing fundraising activity and robust deal activity,” says Mark Emrich of Murray Devine.

“I think you’ve got to keep an eye on different sectors that might be subject to some of the regulatory changes that might be forthcoming.Sectors like healthcare where you have a lot of banter since 2016 about replacing repeal. That will subside. So what does that mean for sectors like healthcare? The insurers, rural hospitals, that sort of thing?”

“Then you also have rising inter-est rates, which we all know has been going on for quite some time now. We think that’s going to continue.”

“What type of volatility does that introduce into the private equity markets? Those are the types of things on the margin that I think that private equity managers have to keep an eye on within their portfolios.” M&A

Excess capital willfuel M&A

“You’ve got a lot of corporations that are sitting on cash struggling for growth and trying to use M&A as an accelerated means to fuel growth,” says Stifel Nicolaus’ Bharat Ramprasad. “I don’t necessarily see that chang-ing, even if there is weakness in the economy.”

“I think ultimately what’s been driv-ing the strength of this market has been an imbalance between supply and demand. You’ve got a lot of private equity funds out there with a lot of capital that are looking to deploy it to buy good companies.”

“Certainly, the weakness in the equi-ties markets recently is worth watching.There are a lot of economists predict-ing that we may be in for a correction of some sort of the broader economy, but I don’t know that all of that runs perfectly in correlation with the lower middle market in terms of M&A.” M&A

Visit www.TheMiddleMarket.com to watch the video interviews

040_MAJ0219 40 1/9/2019 10:06:40 AM

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