2. Information Technology
McGladrey Quarterly Private Equity Deal Flow Profile
RSM McGladrey announces the Q4 2011 Private Equity Deal Flow Profile
The RSM McGladrey team is proud to present the Q4 Quarterly Private Equity Deal Flow Profile for the information technology (IT)
industry. Powered by PitchBook, the Deal Flow Profile 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
flow was down in the third quarter, serving as a reminder that âthe economy has yet to fully recover, financing can still be a challenge to
obtain and there is still a small supply of quality deals,â 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 firms 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 firms, 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
firms, according to Kartik Sundar Raj, director, Transaction Advisory Services for RSM McGladrey, is that âthese are companies with
momentum, proven revenue and the ability to explode or even partially explode upwards.â
Dedicated to serving the middle market, the primary area of private equity investment, the McGladrey team meets the needs of private
equity firms 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 profiles 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 Kartik Sundar Raj
National Executive Director, Private Equity Services Director, Transaction Advisory Services
RSM McGladrey, Inc. RSM Mc.Gladrey, Inc.
212.372.1235 703.336.6400
don.lipari@mcgladrey.com kartik.sundarraj@mcgladrey.com
David Van Wert
Director, Transaction Advisory Services
RSM McGladrey, Inc.
415.848.5338
david.vanwert@mcgladrey.com
www.mcgladrey.com [2] www.pitchbook.com
3. Information Technology
McGladrey Quarterly Private Equity Deal Flow Profile
IT private equity deal flow
IT Private Equity Deal Flow by Year After 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 $4.22 billion of invested
capital are equivalent to only about half of 2Qâs totals, and from a
deal flow perspective, it was the third slowest quarter for IT since
2005. Sundar Raj believes this might have been a bit of a one
quarter anomaly, since âthings felt better. There is a lot of activity,
but it appears to just not have translated into closed PE deals as of
yet.â Lending support to this is the fact that 2011 as a whole is still
on track to be the best year since the financial crises in terms of
private equity deal flow and capital investment.
Source: PitchBook
Private equity investment preferences in the IT industry have
been shifting in 2011. Some of those changes started several years ago, while others are more recent developments. Examples include a shift
towards software-related companies and an increasing willingness to make growth investments instead of buyouts. IT may be a relatively young
industry for private equity, but its attractive investment prospects have propelled it to be the third most active industry in terms of PE deal flow.
This will likely continue according to David Van Wert, director, Transaction Advisory Services, who believes, â4Q, on a micro level, has already
started strong, and there will likely be an uptick in activity before year-end.â
IT Private Equity Deal Flow by Quarter
Source: PitchBook
*Through 3Q 2011
www.mcgladrey.com [3] www.pitchbook.com
4. Information Technology
McGladrey Quarterly Private Equity Deal Flow Profile
Deal Activity by Sector Median Deal Size ($M)
Source: PitchBook
Source: PitchBook
Deal flow details Capital invested details
The software sector has slowly but surely taken over private The median deal size in the IT industry has skyrocketed this
equity investment in the IT industry. The sector has seen 88 deals year to almost $200 million, the result of both larger
totaling $9.2 billion so far in 2011 and is well on pace to top last companies being acquired and higher valuation multiples. In
yearâs total of 105 deals, which represented $4.4 billion of invested general, PE firms have been displaying a bigger appetite for
capital. Within software, Sunda Raj sees ânew applications, cloud larger companies and a renewed ability to finance these
computing, education and government related software larger deals. The $200 million also shows that the primary
companies driving the growth.â interest for private equity has been moving away from
younger and smaller IT companies and towards more
The amount of private equity capital flowing to software established middle-market ones. Additionally, the IT industry
companies is currently at its highest since 2007, and the software has seen significant competition for deals from both strategic
sector is on track to eclipse communications and networking as acquirers and other PE investors. As Van Wert notes,
the top IT sector for only the second time. In the IT services sector, âStrategics are having little trouble throwing money at deals
deal flow has not slowed down with 30 completed deals in 2011 right now, which is basically requiring PE firms to up the ante
to date despite a drop in investment to just over $1 billion, to even stay in the bidding.â This competition has led to
indicating that PE investors have switched their preference to higher multiples for an industry that already had higher
smaller companies and growth investments. multiples than most.
PE Transactions (Total $ Amount) by Sector % PE Transactions (Count) by Deal Type %
Source: PitchBook Source: PitchBook
*Through 3Q 2011
www.mcgladrey.com [4] www.pitchbook.com
5. Information Technology
McGladrey Quarterly Private Equity Deal Flow Profile
Percentage of Deals by New Investors
Number of Investors
Source: PitchBook
*Through 3Q 2011
Deals by new investors in the IT industry
This chart shows the number of private equity firms investing in the information technology industry each year, as well as the
portion of those investors that were making their first investment in the industry. Despite the drop in deal flow during the third
quarter, there is clearly still widespread interest in the industry, since almost 190 private equity firms have made investments in
it so far this year. The decline in percentage of new investors is explained by Van Wert: âIn the current uncertain economic times,
it is not the best time for an investor to move into an industry they donât have experience in.â
Selected IT Q3 2011 PE transactions
Company Name Investor(s) Sector Amount ($M)
Lawson Software Golden Gate Capital, Infor Global Solutions Software $2,000
Smart Modular Technologies Silver Lake Partners Hardware $645
Wall Street Systems ION Trading, Kairos Partners, TA Associates Software $500
BankServ GTCR Golder Rauner Software $300
LightSquared Harbinger Capital Partners Communications & Networking $265
TelePaciïŹc Communications Investcorp Communications & Networking $125
Plimus Great Hill Partners Software $115
BigMachines JMI Equity, Vista Equity Partners Software $106
Opera Solutions Accel-KKR, Invus Group, Jge Capital Management, Software $84
Silver Lake Partners, Tola Capital
Education2020 Kohlberg Kravis Roberts, Weld North Software $50
Thought Equity Motion Shamrock Capital Advisors Software $25
www.mcgladrey.com [5] www.pitchbook.com
6. Information Technology
McGladrey Quarterly Private Equity Deal Flow Profile
IT PE Exits (Count) by Exit Type
Source: PitchBook
Private equity exit activity
There were eleven private equity exits in the information technology industry during the third quarter, bringing this yearâs total to 44. Exit flow
is up from the past couple of years, but a large difference 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 five years old. Consequently, a number of IT companies backed by PE firms will likely be on the block in the next year or two.
The exit strategies for private equity firms in the IT industry are mainly concentrated on sales to strategics (corporate acquisitions) and other
PE firms (secondary buyouts). Corporate acquisitions have historically accounted for the majority of the exits, and 2011 is no different 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 significant growth is IT secondary buyouts. If PE deal
flow 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
Source: PitchBook
*Through 3Q 2011
www.mcgladrey.com [6] www.pitchbook.com
7. Information Technology
McGladrey Quarterly Private Equity Deal Flow Profile
The following list shows a detailed breakdown of the PitchBook industry codes for the information technology industry.
6. Information Technology
6.1 Communications and Networking 6.4 Services
6.1.1 Cable Service Providers 6.4.1 Consulting and Outsourcing
6.1.2 Connectivity Products 6.4.2 Systems and Information Management
6.1.3 Fiberoptic Equipment 6.4.3 Other IT Services
6.1.4 Internet Service Providers 6.5 Software
6.1.5 Telecommunications Service Providers 6.5.1 Application Software
6.1.6 Wireless Communications Equipment 6.5.2 Automation/Workflow Software
6.1.7 Wireless Service Providers 6.5.3 Communication Software
6.1.8 Other Communications and Networking 6.5.4 Database Software
6.2 Hardware 6.5.5 Educational Software
6.2.1 Computers, Parts and Peripherals 6.5.6 Internet Software
6.2.2 Electronic Components 6.5.7 Multimedia and Design Software
6.2.3 Electronic Equipment and Instruments 6.5.8 Network Management Software
6.2.4 Office Electronics 6.5.9 Operating Systems Software
6.2.5 Storage 6.5.10 Software Development Applications
6.2.6 Other Hardware 6.5.11 Vertical Market Software
6.3 Semiconductors 6.5.12 Other Software
6.3.1 Application Specific 6.6 Other Information Technology
6.3.2 General Purpose 6.6.1 Other Information Technology
6.3.3 Production
6.3.4 Other Semiconductors
www.mcgladrey.com [7] www.pitchbook.com
![Information Technology
McGladrey Quarterly Private Equity Deal Flow Profile
RSM McGladrey announces the Q4 2011 Private Equity Deal Flow Profile
The RSM McGladrey team is proud to present the Q4 Quarterly Private Equity Deal Flow Profile for the information technology (IT)
industry. Powered by PitchBook, the Deal Flow Profile 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
flow was down in the third quarter, serving as a reminder that âthe economy has yet to fully recover, financing can still be a challenge to
obtain and there is still a small supply of quality deals,â 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 firms 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 firms, 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
firms, according to Kartik Sundar Raj, director, Transaction Advisory Services for RSM McGladrey, is that âthese are companies with
momentum, proven revenue and the ability to explode or even partially explode upwards.â
Dedicated to serving the middle market, the primary area of private equity investment, the McGladrey team meets the needs of private
equity firms 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 profiles 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 Kartik Sundar Raj
National Executive Director, Private Equity Services Director, Transaction Advisory Services
RSM McGladrey, Inc. RSM Mc.Gladrey, Inc.
212.372.1235 703.336.6400
don.lipari@mcgladrey.com kartik.sundarraj@mcgladrey.com
David Van Wert
Director, Transaction Advisory Services
RSM McGladrey, Inc.
415.848.5338
david.vanwert@mcgladrey.com
www.mcgladrey.com [2] www.pitchbook.com](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)