The party is over. The days are getting shorter, the air is getting crisper and department stores here in New York are stocking sweaters. In other words, it’s time to get back to work.
The good news for the private equity community is that, unlike last year, there are plenty of deals to keep them busy. The bad news, perhaps, is that the field of buyers may be getting even more crowded. Indeed, there are so many companies looking for buyers right now that some venture capitalists are starting to dip their toes into the LBO waters. Battery Ventures, for example, recently bought enterprise software developer Made2Manage Systems Inc., while Austin Ventures gobbled up Staktek Corp., a memory solutions provider for OEMs.
This essentially is the extreme case of a VC industry trend away from early-stage investing. According to Thomson Venture Economics (publisher of Buyouts), the percentage of early-stage investments as part of the venture pie dropped roughly 20% between 2001 and 2002, while expansion- and later-stage buying increased by 20% over the same period. This isn’t to say that Kleiner Perkins or Sequoia Capital is about to jump into Vivendi or U.S. Filter auctions, but it’s an indication that buyout industry insiders aren’t alone in their quest for the next acquisition.
It’s understandable that venture capitalists would invest in buyouts, especially considering that, in many cases, they have as much cash as their LBO brethren. And from a pure risk perspective it makes perfect sense: Why put money into a startup that is going to take years to make a return when valuations are low enough to do a buyout of a company that’s already profitable?
The obvious question, however, is whether VCs should be veering off course to get involved in buyout transactions. History offers a cautionary tale: It was just a couple of years ago that buyout shops went gaga over venture deals, with some going so far as to raise Internet-focused side funds. Remember TH Lee Putnam Internet Partners? The fund has since been renamed without the Internet part and is home to defunct companies like wine.com. How about Wand Partners, which in early 2000 diversified its traditional buyout strategy by including early-stage lays like buyingedge.com and trailbreaker.com? Even H.I.G. Capital raised a $250 million early-stage telecom fund in 2000, while KKR teamed up with venture veterans Accel Partners. Needless to say, few of these efforts panned out, although that hasn’t convinced today’s VCs that the grass isn’t greener in the buyout industry’s lawn.
So should buyout players be concerned by VC enthusiasm? Not yet, but it’s worth watching.