Private Equity Firms Take Data to the Next Level

Private equity firms covet data and analytics businesses that combine elements of providing data, analytics for that data, and software to incorporate the analysis for their clients, says Trent Hickman, managing director of VSS, a New York-based lower-middle-market private equity firm.

“It’s not just having a ton of raw data,” he says. “It’s being able to use that data and easily pull out insights that are actionable. An ideal business would incorporate all three elements, and when you can do that you will become mission-critical for your customers.”

PE firms like the fact that the revenues for companies in the sector are frequently mission-critical and subscription-based, Hickman says.

“It is a hot market; valuations are very high.”

Companies with the data-analytics-software combination are also attractive to PE investors because they can target nearly any business problem—marketing, revenue, human capital, or engineering problems, for example—and present their clients with a clear return on investment for solving the problem, says Vikrant Raina, CEO and managing partner of BV Investment Partners, a Boston-based middle-market PE firm. That broad application makes the companies more resilient to competition.

“Those businesses are a lot less risky to invest in because they’re not as prone to the risk of disruption from two people in a garage coming up with a better software package,” Raina says. “If you’re a solutions business, and some technology changes, you just incorporate the new technology into your solution.”

PE firms also like the fact that data and analytics firms typically have high profit margins and economies of scale. “In many cases, these are negative working capital businesses because it’s a subscription business and the client pays up front,” Raina says. “Your customers to a large degree finance your growth, so these are good businesses. And that’s why, not surprisingly, they have attracted more and more attention over the years.”

Mortgage banking is a sector where businesses that show traits of data and analytics companies are valued more highly by investors than the businesses that don’t have those traits, says Kimberly Browne, president of Chrysalis Holdings, a Fulton, Maryland-based investment company focused on financial services, technology and business analytics. Rocket Mortgage, for example, was one of the first companies in the sector known and valued primarily for its technology platform rather than its origination business, Browne says.

Covid as Accelerant
The digitization of the economy was a major trend before Covid-19, and the pandemic only accelerated the trend, boosting data and analytics businesses.

“Covid highlighted the need for remote workforce; that you could at the drop of a dime not have all your people able to come into a facility, and you would still need to get all your widgets out the door,” says Daphne Dufresne, managing partner at New York-based GenNx360 Capital Partners, a middle-market PE firm, and one of Mergers & Acquisitions’ 2021 Top 25 Most Influential Women in Mid-Market M&A. “So how do you optimize efficiency? How do you optimize productivity?”

The pandemic accelerated trends for software and data companies reporting “absolutely record numbers,” Raina says. “That stands in contrast to other companies reporting massive declines. That’s a near-term trend that the outperformance of these companies has become clearer and clearer and the resilience of these companies has become clearer and clearer in the last year or so.”

Capitalizing on Data
Data and analytics companies can also capitalize on the massive amounts of data that companies are creating every day, Dufresne says. “How do you actually mine that data to make it relevant? I think that’s still a big area for opportunity for many companies.”

Companies are helping to embed AI and machine learning software into manufacturing companies, and then the new data that is extracted can be sold back to the manufacturer along with recommendations for improvement, Dufresne says. Another area of opportunity is in helping companies get access to data. “You may have a machine that you bought 25 or 50 years ago that’s still functioning quite well, and there’s no need to completely replace the machine, but maybe you add a few sensors” to track key performance indicators and other metrics, she says.

As the Internet of Things sensors proliferate, so will opportunities for data and analytics companies to track and analyze data, and to apply AI and machine learning to the data to help companies optimize industrial processes.

5G networks could present another play for PE investors. “Some people are going to play it from a device perspective; the IOT side of things and sensors and actuators. But there’s also many people that are going to look at it from the network side and look to play 5G as that becomes more of a reality,” Dufresne says. 5G will deliver more bandwidth for data and analytics solutions to reach locations where they would otherwise be cost-prohibitive.

As PE investors are well-attuned to the growth potential in the data and analytics space, the attention is driving prices up. “As you think about how you can leverage the data from those IOT sensors, those businesses are now driving up valuations which would have been seen as somewhat attractive valuations five or six years ago,” Dufresne says. “People see the bigger opportunity of how to leverage the information that’s coming off of these widgets or gadgets or in terms of the data that they’re collecting.”

Competition is Fierce
The competition among investors for data and analytics companies has increased over the last 10 years, but the number of targets in the space has increased even more, Raina says. PE funds focused on the segment have basically doubled, growing about 8 percent per year, while the number of companies has quadrupled, or more, depending on the subsector of data and analytics companies.

For example, Raina says: He used to follow five to 10 companies in insurance data technology in 2009; now he follows about 100 companies in the space. He used to track 50 to 100 companies in the health care data and analytics space; now he tracks 500 to 1,000 companies.
Cheaper and faster computing power, vast data storage capabilities, and advanced AI and machine learning have been the driving forces behind data and analytics businesses, and the same forces have made it easy to spin up businesses.

“Essentially what was a fixed-cost startup model has just been exploded to essentially a de-aggregated model,” Raina says. “Everything is variable: You’re sipping whatever you need on HR function; you’re sipping whatever you need on computers; you’re sipping whatever you need on real estate. That means businesses can get started a lot earlier and they can scale a lot more.”

The explosion of the number of companies in the space means that investors need to do deeper analyses of the targets, Raina says: whether their competitive advantage is sustainable; how easy it is for others to enter the market; whether their profit pool can be attacked easily; how long should an investor hold on to a company.

Middle-market private equity firms are looking to both PE firms at the next level and strategic investors for exit opportunities from data and analytics companies, such as G.E. (NYSE: GE), Siemens and AT&T (NYSE: T) in the industry technology space.

Raina says his firm looks to invest in businesses that will be part of a consolidation in three to five years, and typically strategic buyers account for two-thirds to three-quarters of the exits. Now, because of the current zero interest rate environment, the split is more 50-50. “We’re professionalizing these businesses, we’re helping them scale, and then we can run a competition between the larger private equity firms and the strategics.”

Raina’s firm made five investments in 2020 and 2021, all data and analytics -related: majority investments in SupportNinja, a provider of scalable customer and technical support and back-office solutions, and Talent Inc., provider of tech-enabled career services; and investments in Becklar, provider of personal emergency response solutions for businesses in the PERS industry; in PixelMEDIA, a digital commerce services firm; and in StraighterLine, provider of scalable education technology.

Says Raina: “It’s the golden age: Every industry, every activity, every value chain has the potential to get digitized, and that is what’s really driving this growth in data and analytics.”

Data and Analytics Deals Abound
There’s a lot to like about companies that provide data and analytics software and services, which helps explain the torrent of recent M&A activity in the space by private equity firms and strategic buyers. In just the first two weeks of February alone, the list of M&A deals in the data and analytics space included:
● PE firm BV Investment Partners is making a majority investment in SupportNinja, provider of scalable customer and technical support and back-office solutions.
● PE firms Clearlake Capital and Siris Capital are investing $400 million in Constant Contact Inc., a cloud-based data-driven digital marketing company spinning off from Endurance International Group.
● Datadog Inc. (Nasdaq: DDOG), a monitoring and security platform for cloud applications, is acquiring Timber Technologies, provider of data collection and enrichment software.
● Credit scorer Equifax Inc. (NYSE: EFX) is acquiring AccountScore Holdings Limited, a transaction data analytics company.
● Lusha, a crowdsourced data provider for business-to-business sales, is raising $40 million in series A venture capital from PSG, a growth equity firm.
● Moody’s Corp. (NYSE: MCO), the business and financial services company, is acquiring Cortera, provider of North American credit data, analytics and workflow solutions.
● Proagrica, a subsidiary of RELX (NYSE: RELX) and a provider of network, workflow and analytics solutions to agriculture, is acquiring CDMS, provider of compliance data and solutions.
● Industrial technology company Sensata Technologies (NYSE: ST) is buying Xirgo Technologies Intermediate Holdings, a telematics and data insight provider, for $400 million.
● PE firm Thomas H. Lee Partners is investing in Ashling Partners, provider of robotic process automation, artificial intelligence and other automation technologies.
● TSG, owned by the Advent PE firm and a provider of business management and payments software, is acquiring Adaptive Analytics, provider of data analytics and visualization tools for health and fitness businesses.
● Valtech, a consulting agency, is acquiring eCapacity, a data-driven digital strategies advisor.

For more from the March issue of Mergers & Acquisitions, see the Digital Edition.