Thoma Bravo’s $ 12.3bn buyout of email cybersecurity business Proofpoint [NASDAQ:PFPT], announced on Monday, 26 April, is the biggest take-private in nearly two years.
The deal, the latest in a string of recent buyouts of public software companies, signals that take-private activity is on track to see its best year since private equity’s Golden Age before the 2008 Financial Crisis.
Just a third of the way into 2021, PE firms already have taken 18 public companies private for a combined $ 48.1bn. That’s on pace to beat 2019 (34 deals totaling $ 91.4bn), which was the best year since the mega buyouts last seen in 2007 (68 take-privates totaling $ 263.9bn).
What’s driving increased activity now?
As the US economy inches toward a post-pandemic recovery, investors seeking floating rate-assets are moving out of high yield bonds into leveraged loans. Lenders have ample liquidity to put to work but lending opportunities have at times struggled to keep pace with appetite. Consequently, recent take-privates are doing well in syndication.
What’s the PE playbook?
Thoma Bravo’s take-private of Proofpoint could point to an emerging gameplan: offering a large premium to nix the chances of a superior offer emerging in the go-shop period and to ensure shareholder support. For Proofpoint, Thoma Bravo offered a 33.6% premium to the previous trading day’s close, while its previous take-privates of data management company Talend [NYSE:TLND] and property management software company RealPage [NASDAQ:RP] came with 28.7% and 30.8% premiums, respectively.
What’s the investment hypothesis?
PE firms are drawn to software companies primarily for one reason: the cloud. Over the last few years, they have focused on remaking legacy on-premise software companies into all-cloud software companies, drawn to the recurring revenues of the cloud’s as-a-service business model. Many listed companies have been attempting the same transition themselves in the full glare of the public markets. When such efforts hit the buffers, PE firms are ready to pounce.
Who's next?
According to Mergermarket, Pure Storage [NYSE:PSTG] and Nutanix [NASDAQ:NTNX] could be among the next targets if they struggle with their own transitions to a cloud-first world away from their roots as hardware companies. Another hypothesis is that PE firms will target undervalued cloud software companies. One place to look for clues is the Bessemer Ventures Emerging Cloud Index, which tracks 58 public companies that primarily provide cloud software. When the index dips – as it currently has – the likelihood of index companies such as RealPage, Talend and Proofpoint going private increases.
Names to watch are those with low growth rates and trading at low revenue multiples relative to the index’s median. They include Box [NYSE:BOX], Dropbox [NASDAQ:DBX], New Relic [NYSE:NEW], Zuora [NYSE:ZUO], Yext [NYSE:YEXT] and Mimecast [NASDAQ:MIME].
