If ever we needed more proof that the technology industry is mature, we need look no further than today's announcement that HgCapital has sold two of its software companies for £500m in a secondary recap transaction. When Hg acquired accounting software vendor Iris in 2004 in a head-turning £102m MBO, most observers thought they had overpaid. Just a few weeks ago (!), Iris announced the acquisition of publicly-listed diversified software group CSG for £100m and its merger with Iris.
We don't have enough publicly available data to disaggregate Hg's financial returns in this deal, but we can speculate (what are blogs for? :-)). Following the respective investments, Hg owned 62% of Iris and 86.5% of CSG. Assuming a debt-equity ratio of 2:1, they would have used about £50m of equity to buy their positions and perhaps another £20-40m of equity to invest for growth. From the sale price of £500m they would repay their debt (say, £100m), leaving £400m to the equity holders. As a result Hg might have taken £280m for its investment of between £70m+, making a return of as much as 4x their capital. And a very high IRR. Not too bad.
On the buyside, Hellman & Friedman are clearly on a tear in technology, following their gutsy and highly successful flip of Doubleclick to Google, which I wrote about before. What is interesting is that H&F are not only making bets on high-growth markets like Internet advertising, but also on consolidation in the more mundane parts of the software market (eg, accounting, legal and ERP software).
This maturing of the industry and the wide availability of debt financing for tech buyouts significantly broadens the scope of investment opportunities in technology beyond the traditional VC market. It creates a large market for growth equity and buyout capital. And it adds increasing depth to the exit markets for both venture and growth equity investors. Both are positive developments for technology entrepreneurs and investors.