PE and VC Software Solutions
Predictable recurring revenue streams, sticky products, a growing industry… in addition to the valuable services they provide, private capital software and data vendors also represent a compelling investment opportunity. Given their visibility and the fact that private equity and venture capital firms are uniquely well-positioned to assess and understand products, it is no surprise that this sector has attracted significant attention from the community it services.
In addition to the information we maintain on products, services and sample clients for the vendors in our database, we also track ownership status and other key metrics to help inform our advisory work for private equity, venture capital and strategic buyers in the space. The chart below attempts to show ownership and funding for products that we track. We do this a little differently to traditional classification to highlight the motivation behind some of the deal activity we have seen.
Private Companies
Just under half of the 150 vendors we track in this space are private companies with no known external strategic or financial investors.
The list of privately owned companies mostly includes smaller firms, some of which are boutique providers by design, many more we anticipate will be seeking VC capital as they gain traction and seek to accelerate their expansion. However, a significant 50% of firms in this category were founded more than ten years ago and include some of the industry’s best-known names such as Preqin (founded in 2003) and Navatar (founded in 2004). There are some desirable assets within this group which are sure to be prime targets for both strategic investors seeking to increase their exposure to alternative assets and financial investors attracted to the prevailing trends of AUM growth and increasing demand for data and software products.
Strategic Acquisitions
One of the more interesting recent trends in this sector has been public companies moving to acquire private capital focused data and technology firms to build or extend their exposure to alternative assets. Examples here include Morningstar’s acquisition of Pitchbook, Nasdaq’s acquisition of eVestment and Solovis, IHS Markit’s 2018 acquisition of Ipreo and Blackrock’s acquisition of eFront.
Although Intapp, which acquired DealCloud, is private equity-backed, we would still include this deal as part of a wider trend which has seen major financial data and software providers seeking to acquire assets which provide exposure to a private capital industry which has grown enormously in importance. MSCI’s minority investment in Burgiss appears to have been undertaken for similar reasons.
Venture Capital and Private Equity
Venture Capital is a common source of funding, with around a quarter of products in our space currently in the VC-backed phase. Firms which have taken VC capital include fast-growing, innovative products like Affinity, BipSync, Canoe, Chronograph, Mercatus and udu.
Buoyed by strong returns from investments such as eFront and Ipreo, private equity firms are also active in the sector. In recent years we have seen Francisco Partners make a majority investment in Dynamo, Bridgepoint’s investment in Private Equity International and Vista Equity acquiring and merging AltaReturn and Black Mountain to form Allvue.
In addition to initial investments, we have seen both venture capital and private equity backers utilize add-ons to accelerate growth and expand product offerings. Examples here include Dynamo’s acquisition of Preqin’s middle office ‘Solutions’ product (formerly known as Baxon) and Affinity’s acquisition of Nudge.ai. It is also interesting to note strategic activity in recent venture rounds such as SimCorp contributing to Alkymi’s recent $5mn seed round.
What’s the Appeal?
We will leave a more in-depth review of the dynamics of product usage in the private capital markets for a future piece, but there are some clear drivers behind the appetite for these assets. The industry has improved markedly in its use of technology to drive more efficient and powerful operations, but the flurry of registrations for our Vendor Profiles database in the wake of COVID-19 suggest there is some way still to go and plenty of white space to be filled.
As both organic developments and add-on acquisitions show, there is plenty of scope for providers to grow through providing additional services to existing users in an industry where it is still very common to see multiple vendors servicing different functions – even though many of these providers do now offer complete suites.
Furthermore, there are emerging product areas such as RMS, relationship intelligence, next-generation database providers, diligence, and strategy platforms which are poised to substantially increase their penetration in the market.
With record dry powder likely to drive intense competition for new assets once activity picks up, plus increasing demands for responsive, in-depth reporting coming from LPs, we expect to see increasing budgets for data and technology driving growth in the sector and maintaining the enthusiasm shown by investors of all shapes and sizes for the foreseeable future.