The private equity industry has shifted a big focus to technology. An article from the Wall Street Journal says, “So far this year, tech companies accounted for 46% of all U.S. buyouts.” And TechCrunch muses that tech buyouts may be “the new IPO.”
For software companies and their investors, private equity firms are manna from heaven. They widen the path toward the ultimate goal of liquidity. After all, the acquisition marks the apex of what many software companies set out to accomplish. But when a PE firm makes an acquisition, it's really the first chapter in the story for both the acquirer and acquiree.
Lifecycle of Private Equity Firms Acquisitions
This struck me between the eyes when I was on a panel recently with Bob Morse, founder and CEO of Strattam Capital. He described the lifecycle of a private equity acquisition. Essentially, PE firms need to think beyond the acquisition; the next step is to maintain the value of the assets they’ve acquired. Ultimately, the PE firm needs to make sure there are no issues when it’s time to divest.
For these kinds of deals, one of the biggest areas of focus for PE firms before final acquisition papers are passed is the tech due diligence process. This includes ensuring the quality, integrity and security of the intellectual property they’re buying.
It’s why many turn to Black Duck for open source software audits and risk assessments. The audits and assessments help outline the potential license and security risks facing the target company so PE firms understand any potential issues and can build in a plan to correct them.
Do IP & Security Concerns End?
But concern about IP protection and security doesn’t stop at the due diligence phase. With the ultimate goal of building value in the software company they just bought (to secure a bigger exit down the road), firms must continually ensure that the technology they bought is not at risk. Thus, many of our PE firm customers have a simple recommendation for companies they bring into their portfolio: put processes and tools (like those supplied by Black Duck) in place to manage open source in their development processes.
Considering an Exit?
In general, we are seeing more companies perform a proactive open source audit to avoid any possible surprises during an acquisition. So it’s no surprise that PE investors are steering their portfolio companies in that direction as divestment time approaches.
PE firms really need to look at their technology investments as a lifecycle. The first chapter in that story is to scrutinize the quality of IP coming in the door. Then they need to make sure they maintain it along the way, and, for good measure, give it a final check before another picky buyer comes along.