It was the reporting of two occurrences this week that, taken together, took the honor of ‘the week’s most interesting’. In an unusual move – explained more below – San Francisco-based fund HMI Capital Management issued a press release consisting of a copy of a letter it sent to the board of directors of spend management platform Coupa Software (NASDAQ: COUP), of which HMI owns 4.8% of the outstanding shares. The letter stated, in no uncertain terms, its displeasure with having been made aware of private equity behemoth Vista Equity’s approach of Coupa with interest in taking it private. In a second and ostensibly unrelated news story, another titan of private equity, software and technology-focused buyout firm Thoma Bravo announced it had raised the “largest tech-focused buyout fund” ever – Thoma Bravo Fund XV – at $23.3 billion. Taken together, the ‘collision’ of these two ‘market forces’ instantiates the evolving buyer-seller dynamic between private equity buyout firms and publicly traded technology companies within the context of take-private transactions.
On my conference tour this fall, one of the common themes among private equity speakers representing traditional buyout firms, and representatives of the private credit funds that provide the leverage for their deals, was the value they saw in public market assets given the precipitous decline in equities throughout 2022. In Wellesley Hills’ coverage areas – payments, fintech, and software – dozens of companies were brought to market during the Fed’s pandemic-long money-printing spree whose share prices are now down 50-80% from the S&P peak in December 2021. And it’s not just recently-gone-publics either. Sector drag and macro headwinds have pulled down equity prices of mature technology companies too. Growth intensive technology equities with their inherent sensitivity to rising interest rates – 375 bps so far this year with one more hike likely this month – simply have no place to hide from the unrelenting pressure of higher capital costs.
Evidence to support this notion began showing up earlier this year. Per the Wall Street Journal in September:
“Private-equity firms globally spent a record $220.83 billion on take-private deals in the first half of 2022, up from $162.81 billion in the comparable period last year, according to data provider Dealogic. In the U.S. alone, private-equity firms spent $130.23 billion on take-private deals between January and June, nearly double the year-earlier amount.”
And this continues to be the case. With no better example than Thoma Bravo’s announcement of its monster-size raise this week, putatively to target the same take-private strategy.
But that’s just one side of the market…
The letter that HMI Capital publicized in its press release this week reflects a changing dynamic that contextualizes what’s happening on the other side of the trade – capturing the sentiment of investors staked in those publicly traded tech companies and how they perceive these newfound advances from private equity.
As I alluded to above, the HMI Capital letter is unusual, especially because it was blasted into the public sphere through a press release. There were no kid gloves or punches pulled from HMI Capital with this move – they wanted to be heard, and they leveraged the press release to take their case to other Coupa shareholders. Their reasoning for rebuffing Vista’s advance was elegantly argued, including a thorough explanation of what they believe Coupa’s valuation should be, and a detailed explanation as to why. The letter was a blatant shot across Coupa’s board of directors’ bow, saying ‘we get why Visat Equity wants to take us private, but there’s no way we’re going to vote to approve a deal at the price we’re trading at now, or even a relative premium to it’.
That these two market forces collided this week – the souped-up raise of Thoma Bravo’s buy-out fund and the lashing of a board of directors of a publicly traded tech target by a major investor – made me think of those really cool images that come out of the CERN particle collider where the collisions reveal new, unseen particles. In this case, market forces collided to reveal a new market dynamic.
Most of us are familiar with the valuation proverb ‘an asset is worth what a buyer is willing to pay for it’. But this week’s events are putting a new spin on that. In light of the obvious – cheap tech equities represent attractive buying opportunities for private equity – HMI Capital’s letter effectively asserts a new dynamic relating to take-private technology deals. Within the context of the buyer-seller dynamic without price discovery – or alternatively, where the clearing price hasn’t been set – the new market dynamic appears to be that ‘an asset is worth what a seller is willing to sell it for’.