The Pipeline Explorer is a column discussing likely financial sponsor exit transactions based on Mergermarket’s Likely to Exit (LTE) predictive algorithm. Based on a number of criteria, the algorithm assigns a score to each exit opportunity, with a higher score corresponding to a higher likelihood for a transaction in the next 12 to 24 months. Find out more about LTE scores here.

Of the 6,824 US-based sponsor-backed companies that Mergermarket has given a Likely-to-Exit score, 776 reside deep in the heart of Texas.

Opportunities for sponsors, platforms, LPs and the broader dealmaking community will be in focus in the Texas state capital at the Mergermarket Private Equity Forum Austin on 4 October. Exit transactions have slowed significantly across the US in 2023, though sponsors are still finding plenty of worthy entry deals.

The largest number of Texas companies with an LTE score are in the sectors of technology (171), energy and natural resources (166) and industrials (142).

The private equity market dynamics in Texas have shifted since the pandemic, according to Daniel Hosler, managing partner and founder of DuneGlass Capital, a growth-oriented private equity investment firm that partners with healthcare founders. 

The ability to screen opportunities and participate in firm activities remotely has propelled New York- and California-based investors to move or open satellite locations in Texas and Florida, Hosler explained. Population growth in these lower-tax states is also creating new pockets of platform growth based on geography, representing another change in market dynamics.

However, geographic location neither helps nor hurts companies in terms of rapid acceleration of interest rate hikes and capital structure impacts as companies across the US face these same hurdles, he said. 

“We are nervous that a soft spot could be hitting the economy in 2024,” said Hosler. Though consumer activity remains strong, inflation remains high, leaving investors uncertain about how the Federal Reserve will react and how forcefully, he noted.

Optimism on a macro level isn’t scarce, however, Jeffrey Diehl, managing partner and head of investments at Adams Street, said PE exits are expected to accelerate over the next 12-24 months.

"Bid-ask spreads are narrowing as buyers and sellers adjust to higher interest rates and lower leverage levels. We expect technology-enabled businesses across a variety of industry sectors will lead the way,” he added.

While Texas-based targets and platforms are not immune to these headwinds, they may fare slightly better than peers in other markets due to the increased demand that comes from population growth, Hosler noted. The labor market has always been favorable in Texas given the number of schools that matriculate great cohorts of employees throughout the state.

“In healthcare, we still see quite a lot of demand coming out of the pandemic as patients are focusing on near-term services that continue to have long wait times or are focused on chronic conditions that have not gotten better during the last three years,” Hosler said. “In the fields of industrials, there is a push for green technology growth and the maintenance services that will be required to keep them highly available.”

Texas-based companies with the highest LTE scores*

*Scores as of 3 October, out of 761 Texas-based sponsor-backed companies with an LTE score

The following is a collection of proprietary intelligence on Texas-based companies with LTE scores, selected by Mergermarket editors.

UpCurve Energy — LTE score 60, backed by Post Oak Energy Capital

The encouraging score for the Houston-based oil and gas company is fueled by frequent interest from buyers, however, it expects to remain focused on increasing its acreage in the western Permian Basin, President and co-founder Zach Fenton told this news service. The company has seen inbound interest from strategics looking to acquire the whole company, the executive noted. “We've been getting [calls from potential buyers] for a good couple of years now; the pace of them has increased,” he said. 

Onit — LTE score 54, backed by K1 Capital

The Houston-based provider of AI-powered legal workflow solutions anticipates a potential exit in the second half of this year, CEO Eric Elfman told this news service. The meeting of its financial objectives in the first two quarters should trigger a sale process, Elfman said. There is no formal mandate currently in place, but Onit has a relationship with William Blair and “has every reason to believe they will be hired,” he noted. Onit generated annual recurring revenue (ARR) of USD 95m in 2022, with continued organic growth of 20% expected this year, according to Elfman. The company expects an EBITDA margin of around 20% by the end of 2023, he added. Sponsor appetite for exits in Onit’s sector, which has seen positive momentum despite an otherwise challenging market, also factors into its LTE score. 

Symplr — LTE score of 38, backed by Clearlake Capital and Charlesbank Capital Partners

The Houston-based healthcare software company is in another sector that has seen elevated sponsor activity in the past six months. The group is looking to consolidate the fragmented market via M&A, CEO BJ Schaknowski told this news service. The company, with annual recurring revenue in the USD 500m range and 48% EBITDA margins, has roughly 180 targets on its radar, he said on the sidelines of the JP Morgan Healthcare Conference in January. It maintains relationships with around half those targets, he added. Symplr is averaging about one buy every four months and has closed on seven deals since Schaknowski took the helm in 2021, he said. Symplr is angling for targets that would expand its workforce management, data analytics, and CFO suite software offerings, said the CEO. Symplyr's M&A experience affects its Mergermarket’s LTE score with 546 deals on the acquisition side, far more than the typical LTE score exit benchmark of 11. 

Ryan — LTE score 33, backed by Ares Management and Onex

The Dallas-based global tax consultancy is working towards being IPO-ready and will consider a listing when equity markets recover, Chairman and CEO G. Brint Ryan told this news service. He expects to acquire about 20 companies during the next two years to grow market share and geographical reach, Ryan said. “We want to be enterprise-grade across the business,” Ryan said, a milestone he expects to reach within a year and a half. While Ryan attracts both strategic and private equity inquiries, the CEO said an IPO is the best way to capitalize on an addressable market of USD 60bn annually, excluding software services.  Ryan has been owned for 121% of its sponsors' average hold time, longer than the exit benchmark of 103%, which is an input in the LTE score. 

Simpli.fi — LTE score of 31, backed by GTCR and Blackstone

The Fort Worth, Texas-based advertising technology company is in discussions with potential acquisition targets in North America, including Mexico, CEO and co-founder Frost Prioleau told this news service. Ideal targets for the company would broaden its capability for helping agencies and advertisers automate media buying processes that they now handle manually, he explained. He noted that roughly 90% of Simplifi’s operations are in the US. Founded in 2010 by Prioleau and CTO Paul Harrison, Simplifi has acquired four companies to date, each with 100-150 employees, but the CEO said it would now consider targets with up to 1,200 employees. Simplifi has around 600 staff, he added. GTCR bought into Simplifi in 2017, alongside co-founders, while Blackstone invested in the company in 2021.

Eagle Eye Networks — LTE score 31, backed by MSD Capital

The Austin-based provider of cloud-based video surveillance products is in active conversations and could make acquisitions again to enhance its products or technology, Dean Drako, the CEO and founder, told Mergermarket. The Austin, Texas-based company recently received USD 100m in a strategic investment from Tokyo-based security services company Secom [TYO:9735]. Eagle Eye was “pretty close” to profitable when it took the Secom funding, Drako said, declining to disclose financials. According to Mergermarket's LTE data, Eagle Eye has been owned for 198% of its sponsors' average hold time, versus an exit benchmark of 103%. 

By Rebecca Wenzel and Lucinda Guthrie, with data compiled by Josh Armstrong