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Why technology buyouts offer a ray of light in M&A

In a year marred by rising interest rates, rocketing inflation and next to no initial public offerings, bankers looking to cover their bases may owe their gratitude to one corner of the market in particular: take-privates.

Not since 2007 have private equity fat-cats spent more on eating up public companies than in this dingy yet auspicious moment where technology companies aren’t just the plat du jour.

Their reputation precedes them. At USD 157.8bn, Dealogic data shows the value of US-targeted take-private deals announced by buyout groups this year-to-date has already eclipsed last year’s total of USD 120.8bn by a margin of 30% – with a quarter plus one month to spare. Of the almost USD 160bn spent, two-thirds, or roughly USD 104bn, has been used to gorge on a technology-rich banquet for the ages.

The fact is that the pandemic has made private equity’s appetite for technology companies – particularly those with a software-as-a-service bent – all the more insatiable. High-growth platforms like Anaplan [NYSE:PLAN] and Zendesk [NYSE:ZEN], which both reported full-year revenue growth of 30% or more for FY21 and which have both been subject to circa USD 10bn take-private offers this year, still speak to the same earnings potential and resilience even during the sort of sell-offs that have bruised markets in recent months.

While it is enterprise-oriented companies that have so far dominated the US take-private landscape, a renewed push for consolidation in the financial software and information sector is bringing some of the industry’s biggest players into view.

For instance, investment management software provider Enfusion [NYSE:ENFN] has attracted renewed buyout interest from financial sponsors, according to four sources familiar with the matter. The Chicago-based company, which completed its IPO in October 2021, has seen its share price decline 46% since the beginning of the year and last week announced the resignation of CEO Thomas Kim.

Buyout groups consider Enfusion’s technology backbone to be further along the development curve than other capital market software providers such as Denmark’s SimCorp [CPH:SIM], which itself has piqued the attention of private equity firms, two of the sources said. Buyside-focused Enfusion competes with SS&C Technologies [NASDAQ:SSNC], State Street­ [NYSE:STT]-owned Charles River Development and Francisco Partners-backed TS Imagine, they added.

Given its financial profile, reporting USD 22.9m EBITDA on USD 111.7m revenue for FY21, a buyout of Enfusion could appeal to a player with existing capabilities in buyside and sellside software such as Thoma Bravo, two of the sources said. Thoma Bravo acquired peer Calypso Technologies from Bridgepoint [LON:BPT] and Summit Partners for USD 3.75bn, or 37.5x FY20 EBITDA, in March 2021.

Representatives for Enfusion did not respond to requests for comment.

Any sponsor considering a buyout of a player like Enfusion or SimCorp arguably has momentum on their side. Dealmaking activity among privately-held companies is booming: Cathay Capital and Bpifrance are exploring a sale of French buyside and sellside software firm NeoXam, while eyes also remain on the future of closely-held Murex, this news service has reported. Genstar Capital agreed just yesterday to acquire Numerix, a provider of risk management and derivative pricing solutions, for an undisclosed sum.

Even in choppier credit markets that have tested the ability of banks to underwrite the riskier debt, investors are still looking to put capital to use through other means. Earlier this month, Blue Owl Capital led a group of private lenders in underwriting a USD 2.5bn jumbo unitranche facility to finance Vista Equity Partners’ USD 8.4bn acquisition of tax compliance software developer Avalara [NYSE:AVLR]. The facility was said to be structured as a recurring revenue loan – a hallmark of the pandemic financing playbook.

Few signs point to a slowdown between courses in this near-festal year for technology and private equity.