Tech-focused investors shine in ranking of best-performing private equity firms

The technology-focused buyout group Thoma Bravo shows that sector specialism pays off

Thoma Bravo has once again shown that sector specialism pays off, as the technology-focused buyout group outperformed its rivals for the third year in a row, according to a new study.

The US buyout group, which recently bought Sophos, the British cybersecurity company, for $2.8bn, claimed the top spot in the annual ranking of the best-performing private equity firms in Europe and the US by HEC Business School in Paris, which was provided to FN’s sister-publication Private Equity News.

The HEC-Dow Jones ranking, created by professor Oliver Gottschalg, analysed the performance of buyout funds raised between 2006 and 2016, drawing on data provided by Preqin and directly from companies. It calculates the aggregate performance of a private equity firm, taking into account different vintage years, considering both relative and absolute returns. In total, data from 497 private equity firms and 891 funds were analysed with an aggregate equity volume of $1.4tn.

Thoma Bravo had an overall performance score of 2.04. The firm has done more than 200 software deals worth over $50bn since it was set up in 2003. It closed its Fund XIII at $12.6bn and raised $2.4bn for its second Discover Fund, which invests in lower mid-market businesses.

In a report released earlier this year, Cambridge Associates found sector-focused private equity funds outperform generalist strategies by 4.7%. The Boston-based investment firm found strategies that focused on a single sector had an internal rate of return of 22.6%, while investments made by generalist funds had an IRR of 17.9%.

Two private equity groups bucked the trend: US giant Clayton, Dubilier & Rice and mid-market firm Genstar Capital, which took second and third place, respectively, with scores of 1.56 and 1.43.

CD&R, which recently announced a leadership transition, is one of the world’s oldest private equity firms and raised $10bn for its 10th fund in 2017. The fund is about 50% deployed, according to a previous report by WSJ Pro Private Equity.

In May, it said Nathan Sleeper would become chief executive, while David Novak and Rick Schnall would become co-presidents at the start of next year. In third place is Genstar Capital, a $17bn firm based in San Francisco. Genstar has been particularly busy with add-on acquisitions this year.

Alera Group, an insurance company in its portfolio, completed 10 deals in 2019, while Mercer Advisors, has sealed around six add-ons.

Earlier this year, Genstar closed its latest vehicle on approximately $7bn, a significant step up from a $4bn predecessor.

Technology remains a key area of interest for the top performers. There are several other specialists in the ranking focusing on the sector, including Vista Equity Partners in sixth place, Veritas Capital in seventh place and Silver Lake in 11th place.

In the wider industry, the sector continues to be popular as well. Private equity has paid $84.2bn for 987 deals in the technology sector globally this year, according to Preqin. That compares with $76.1bn spent on 1,241 transactions in 2018.

According to a recent PitchBook report, tech-focused private equity funds are rising in prominence, accounting for over 20% of capital raised across North America and Europe in the year to November. Thoma Bravo is expected to launch another flagship vehicle in mid-2020 with a target of $15bn, PitchBook noted.

“Going forward, we expect to see tech-focused PE fundraising further proliferate, and additional growth in the number of [venture capital]-backed companies will only expand the pool of investments for tech-focused [general partners],” the analysts at the data provider noted.

“It seems clear that [limited partners] want a private-market investment option that lets them tap into the growth of the digital economy led by proven managers that can create value and outperformance.”

Source: Financial News

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