private equity dealflow q4

Q4 2011

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Information Technology: McGladrey® Quarterly Private Equity Deal Flow Pro�le

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Information Technology

McGladrey Quarterly Private Equity Deal Flow Pro�le

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RSM McGladrey announces the Q4 2011 Private Equity Deal Flow Pro�le

The RSM McGladrey team is proud to present the Q4 Quarterly Private Equity Deal Flow Pro�le for the information technology (IT)

industry. Powered by PitchBook, the Deal Flow Pro�le provides a representation of U.S. private equity deal activity, performance and

trends for the industry. Year to date, the IT industry has seen 169 completed U.S. deals, totaling $20.27 billion of invested capital. IT deal

�ow was down in the third quarter, serving as a reminder that “the economy has yet to fully recover, �nancing can still be a challenge to

obtain and there is still a small supply of quality deals,” according to Donald Lipari, national executive director of Private Equity Services

for RSM McGladrey.

The nature of the industry is very dynamic with new companies and major trends appearing almost out of thin air. These present private

equity �rms with a number of challenges and opportunities alike, forcing them to adapt and change their investment strategies. Recent

examples include a shift in preferences away from smaller companies and towards better established middle-market companies, as well

as a willingness to acquire companies in the software sector at higher multiples because of their ability to serve as good platforms for

acquisitions of additional software and technology companies.

Private equity �rms, though, are beginning to catch on, and the information technology industry has grown over the last couple of years

to become the third most active industry for private equity investment. The reason IT companies have attracted so much interest from PE

�rms, according to Kartik Sundar Raj, director, Transaction Advisory Services for RSM McGladrey, is that “these are companies with

momentum, proven revenue and the ability to explode or even partially explode upwards.”

Dedicated to serving the middle market, the primary area of private equity investment, the McGladrey team meets the needs of private

equity �rms and their portfolio companies with integrated transaction advisory, tax, audit, consulting and investment banking services.

With more than 300 clients in the information technology industry, we have a large team of professionals who work almost exclusively

with emerging and technology-based organizations. In the past two years, we have completed more than 50 due diligence engagements

in the software/technology industry. The rest of this report pro�les investment trends and activity to give you a better understanding of

the current private equity environment in the U.S. IT industry.

Donald A. Lipari

National Executive Director, Private Equity Services

RSM McGladrey, Inc.

212.372.1235

[email protected]

Kartik Sundar Raj

Director, Transaction Advisory Services

RSM Mc.Gladrey, Inc.

703.336.6400

[email protected]

David Van Wert

Director, Transaction Advisory Services

RSM McGladrey, Inc.

415.848.5338

[email protected]




IT Private Equity Deal Flow by Year

IT private equity deal �owAfter a strong start to the year, U.S. private equity activity in the IT

industry experienced a fairly dramatic slowdown during the third

quarter. The 39 completed deals and $4.22 billion of invested

capital are equivalent to only about half of 2Q’s totals, and from a

deal �ow perspective, it was the third slowest quarter for IT since

2005. Sundar Raj believes this might have been a bit of a one

quarter anomaly, since “things felt better. There is a lot of activity,

but it appears to just not have translated into closed PE deals as of

yet.” Lending support to this is the fact that 2011 as a whole is still

on track to be the best year since the �nancial crises in terms of

private equity deal �ow and capital investment.

Private equity investment preferences in the IT industry have

been shifting in 2011. Some of those changes started several years ago, while others are more recent developments. Examples include a shift

towards software-related companies and an increasing willingness to make growth investments instead of buyouts. IT may be a relatively young

industry for private equity, but its attractive investment prospects have propelled it to be the third most active industry in terms of PE deal �ow.

This will likely continue according to David Van Wert, director, Transaction Advisory Services, who believes, “4Q, on a micro level, has already

started strong, and there will likely be an uptick in activity before year-end.”

IT Private Equity Deal Flow by Quarter

*Through 3Q 2011

Source: PitchBook

Source: PitchBook



Capital invested detailsThe median deal size in the IT industry has skyrocketed this year to almost $200 million, the result of both larger companies being acquired and higher valuation multiples. In general, PE �rms have been displaying a bigger appetite for larger companies and a renewed ability to �nance these larger deals. The $200 million also shows that the primary interest for private equity has been moving away from younger and smaller IT companies and towards more established middle-market ones. Additionally, the IT industry has seen signi�cant competition for deals from both strategic acquirers and other PE investors. As Van Wert notes, “Strategics are having little trouble throwing money at deals right now, which is basically requiring PE �rms to up the ante to even stay in the bidding.” This competition has led to higher multiples for an industry that already had higher multiples than most.

Deal �ow detailsThe software sector has slowly but surely taken over private equity investment in the IT industry. The sector has seen 88 deals totaling $9.2 billion so far in 2011 and is well on pace to top last year’s total of 105 deals, which represented $4.4 billion of invested capital. Within software, Sunda Raj sees “new applications, cloud computing, education and government related software companies driving the growth.”

The amount of private equity capital �owing to software companies is currently at its highest since 2007, and the software sector is on track to eclipse communications and networking as the top IT sector for only the second time. In the IT services sector, deal �ow has not slowed down with 30 completed deals in 2011 to date despite a drop in investment to just over $1 billion, indicating that PE investors have switched their preference to smaller companies and growth investments.


PE Transactions (Total $ Amount) by Sector % PE Transactions (Count) by Deal Type %

Deal Activity by Sector Median Deal Size ($M)

*Through 3Q 2011

Source: PitchBookSource: PitchBook

Source: PitchBook Source: PitchBook



Percentage of Deals by New Investors

Deals by new investors in the IT industryThis chart shows the number of private equity �rms investing in the information technology industry each year, as well as the portion of those investors that were making their �rst investment in the industry. Despite the drop in deal �ow during the third quarter, there is clearly still widespread interest in the industry, since almost 190 private equity �rms have made investments in it so far this year. The decline in percentage of new investors is explained by Van Wert: “In the current uncertain economic times, it is not the best time for an investor to move into an industry they don’t have experience in.”

Num

ber o

f Inv

esto

rs

Selected IT Q3 2011 PE transactions

Company Name

Lawson Software

Smart Modular Technologies

Wall Street Systems

BankServ

LightSquared

TelePacific Communications

Plimus

BigMachines

Opera Solutions

Education2020

Thought Equity Motion

Amount ($M)

$2,000

$645

$500

$300

$265

$125

$115

$106

$84

$50

$25

Investor(s)

Golden Gate Capital, Infor Global Solutions

Silver Lake Partners

ION Trading, Kairos Partners, TA Associates

GTCR Golder Rauner

Harbinger Capital Partners

Investcorp

Great Hill Partners

JMI Equity, Vista Equity Partners

Accel-KKR, Invus Group, Jge Capital Management, Silver Lake Partners, Tola CapitalKohlberg Kravis Roberts, Weld North

Shamrock Capital Advisors

Sector

Software

Hardware

Software

Software

Communications & Networking

Communications & Networking

Software

Software

Software

Software

Software


Source: PitchBook

*Through 3Q 2011



IT PE Exits (Count) by Exit Type

Private equity exit activityThere were eleven private equity exits in the information technology industry during the third quarter, bringing this year’s total to 44. Exit �ow is up from the past couple of years, but a large di�erence between new investments and exits still exists in the industry. The number of private equity backed-IT companies rose to 586 by the end of the third quarter. 414 of those companies are over three years old, including 243 that are more than �ve years old. Consequently, a number of IT companies backed by PE �rms will likely be on the block in the next year or two.

The exit strategies for private equity �rms in the IT industry are mainly concentrated on sales to strategics (corporate acquisitions) and other PE �rms (secondary buyouts). Corporate acquisitions have historically accounted for the majority of the exits, and 2011 is no di�erent with 30 such exits. On the other hand, the IPO market has continued to be rough for PE-backed companies. Freescale Semiconductor is the only PE-backed IT company to go public so far in 2011. One area of exit activity that is seeing signi�cant growth is IT secondary buyouts. If PE deal �ow turns around, this exit type could become an even bigger source of both deals and exits for private equity investors.

IT PE Exits (Count) by Exit Type % IT PE Exits by Sector


Source: PitchBook

*Through 3Q 2011

Source: PitchBook

Source: PitchBook




6.1 Communications and Networking

6.1.1 Cable Service Providers

6.1.2 Connectivity Products

6.1.3 Fiberoptic Equipment

6.1.4 Internet Service Providers

6.1.5 Telecommunications Service Providers

6.1.6 Wireless Communications Equipment

6.1.7 Wireless Service Providers

6.1.8 Other Communications and Networking

6.2 Hardware

6.2.1 Computers, Parts and Peripherals

6.2.2 Electronic Components

6.2.3 Electronic Equipment and Instruments

6.2.4 O�ce Electronics

6.2.5 Storage

6.2.6 Other Hardware

6.3 Semiconductors

6.3.1 Application Speci�c

6.3.2 General Purpose

6.3.3 Production

6.3.4 Other Semiconductors

6.4 Services

6.4.1 Consulting and Outsourcing

6.4.2 Systems and Information Management

6.4.3 Other IT Services

6.5 Software

6.5.1 Application Software

6.5.2 Automation/Work�ow Software

6.5.3 Communication Software

6.5.4 Database Software

6.5.5 Educational Software

6.5.6 Internet Software

6.5.7 Multimedia and Design Software

6.5.8 Network Management Software

6.5.9 Operating Systems Software

6.5.10 Software Development Applications

6.5.11 Vertical Market Software

6.5.12 Other Software

6.6 Other Information Technology

6.6.1 Other Information Technology

The following list shows a detailed breakdown of the PitchBook industry codes for the information technology industry.

6. Information Technology

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McGladrey meets the needs of private equity firms and their portfolio companies with integrated transaction advisory, tax, audit, consulting and investment banking services. Clients benefit from a single-point-of-contact service model and teams that operate as strategic partners throughout the private equity life cycle. Our transac-tion advisory services emphasize responsiveness and drive appropriate purchase price and optimal exit price. We offer scalable audit and tax services to meet the business needs of our fund and portfolio company clients, and continually monitor tax and regulatory changes to inform clients of relevant issues. Our investment banking practice provides carefully tailored acquisition opportunities or divestiture services.

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