Garrett Black November 12, 2015
Chris Hastings is a managing director at Signal Hill. He leads the firm's equity private placement group, focusing on growth-stage companies across the technology, healthcare and business services sectors. He recently took some time to chat with us about the firm's new private placement group, current trends in the industries mentioned above, prospects for the next few quarters and more.
How has business been this year so far?
Capital raising for growth companies is at record levels. Each quarter in 2015 has seen capital investment in private companies reach levels not seen since the early 2000s. The third quarter year-to-date volume of $60 billion is on track to break the post-crisis high of $66 billion set last year. The number of deals has declined in 2015, but we believe that decline is largely in the earlier stage rounds where we typically don’t play. Late-stage financings are holding steady in transaction count and dollar volume.
What trends have you seen in private placements over the past few quarters that you anticipate as being your primary focus going forward in your new role?
Companies are raising larger amounts of capital at higher valuations. About half of all early-stage rounds in 2015 have been in deals of $25 million or more, and 80% of all late-stage deals are in amounts greater than $25 million. As these larger capital raises continue, it is critical to reach a wide enough investor base to fully syndicate a deal. In cases that result in a single or narrow investor group, canvassing a broad investor base ensures the most competitive deal for the company. We plan to focus on clients who are undertaking larger capital raises and who also recognize that we can help them reach a diverse and large investor base. We have established relationships with new investors that have been entering the market, including family offices, select hedge funds and pension funds, foreign investors and private equity sponsors. Several buyout firms, including KKR, recently announced plans to raise growth equity funds or expand into the space by hiring teams to focus on technology companies. Expanding these relationships enables us to better serve our clients.
What are the primary concerns of investors in deals you have been involved in recently?
Concerns include valuation levels and the health of the IPO markets. Many potential investors have recently raised new funds and have substantial amounts of capital they need to deploy over the next two years. There is a natural tension that exists between deploying capital while at the same time maintaining the discipline to invest at levels that investors believe will result in acceptable returns. The recent volatility in the public markets and slowdown in the IPO market has caught the attention of private investors, but it has not yet translated into lower valuations. A recent article that ran in The Wall Street Journal on Oct. 19 detailed the trend of the public market assigning technology company valuations that are lower than their latest private funding rounds—which we’ve seen recently with a few of the “unicorns”—and if this trend continues, we expect valuations to soften.
After you raise capital for companies, what do you find is the typical use of the proceeds?
Software companies are raising capital for expansion of sales and marketing, software development, and acquisitions. The explosive growth of SaaS has created new companies and the need for capital as corporate users transition to cloud computing and benefit from the advantages hosted infrastructure can offer. One major new trend is that across all sectors, we are finding that a portion of proceeds can be used as a distribution or purchase of equity from management and insiders. This is a significant change from a few years ago, when it was uncommon for proceeds to be used to pay dividends or purchase stock.
How is your group going to supplement Signal Hill’s investment banking lines?
The private placement group will enable the firm to offer an additional product to our clients and to have a deeper discussion with our clients regarding strategic alternatives. The firm has a robust M&A business, particularly with growth-stage technology companies. We plan on achieving similar results as a private placement advisor. Adding private placement capabilities will enable our clients to raise capital as an interim step as they ultimately consider exit alternatives.
Looking at Signal Hill’s sectors—internet & digital media, internet infrastructure, services and software—which types of companies are raising the most, and why is that?
The companies in our sectors are at the forefront of the software and digital revolutions. Their business models are changing rapidly and there are significant opportunities for growth. Services and software companies continue to raise the most amount of growth capital as their business models continue to benefit from large end-user markets decreasing delivery costs. Internet infrastructure will see a smaller amount of deals, but the dollar volume may be as high as software due to the large amount of capital needed to build new and improve existing infrastructure. And due to the continuing transition of traditional media, consumer, and other companies to the online space, internet and digital media companies remain a fertile ground for growth capital financings.
In which sector do you anticipate the most activity, looking ahead to 4Q and into 2016?
Our pipeline is healthy across all sectors and we’re discussing private financings with companies in each vertical. Together we have completed over 600 M&A and advisory and financing transactions and are in constant dialogue with companies contemplating exits or financings. We are in a unique place to benefit from the convergence of different technologies. We are finding increasing cross-pollination between our sectors, enabling us to serve clients with teams that have depth of experience and track records of success across multiple sectors.
Signal Hill has a presence in India as well. How do you see your group adding to what the India team offers its clients? What trends have you seen in the Indian market?
Our Indian affiliate, Signal Hill Capital Advisory India Private Limited, has offices in Bangalore and Mumbai, and is one of the most active advisors in technology M&A and private placements in India. Recent transactions involve marquee start-up names like Flipkart and Naspers, as well as leading investors Carlyle, Temasek, TA Associates, Sequoia, NVP, Mayfield, SAIF, Intel, Fidelity and IDG. Our longer-term goal is to bring to other U.S. investors the opportunity to consider investing in growing Indian companies, and in January, I’ll be visiting India to begin that process.