Private equity has become a well-established path to liquidity for VC-backed startups, but a rebound in IPO activity and the rise of SPACs could mean more competition for deals.

PE buyouts have gone from representing 9.7% of global VC exits in 2010 to 16.4% in 2020, according to PitchBook data, making them the fastest-growing exit type compared with strategic acquisitions and IPOs. These deals—many of which are tech-focused—have continued into this year. Notable examples include Platinum Equity-backed Cision's $450 million purchase of Brandwatch from investors including Highland Europe and Nauta Capital, and Vista Equity Partners' reported $1.1 billion deal for Gainsight, backed by Battery Ventures and Lightspeed.
 
At the same time, 2021 is expected to be another blockbuster year for VC-backed listings, with several high-profile names including Instacart and Robinhood considering going public. More and more SPACs are also looking for tech targets—potentially a bigger concern for private equity.

"PE [firms] might lose out to the public markets for a few IPOs, but the big brand-name [listings] were probably going to happen anyway. The real threat is SPACs," said Dan Malven, managing director of VC firm 4490 Ventures. "[A blank-check company] is almost like a single-purpose private equity firm. They're targeting the same tier of companies, and they may end up taking over a lot of [PE's] territory."

SPACs have taken off in the US over the past year as an easier alternative to traditional listings. Some 232 blank check companies raised nearly $75 billion so far this year, according to data from SPACInsider. And investors in other countries, like the UK, are looking to follow suit.

Many of these vehicles are setting their sights on the venture ecosystem. Among the recent deals announced is auto insurance company Metromile's reverse merger with Insu Acquisition Corp. II. Even in Europe's relatively nascent SPAC market, VC-backed companies are looking to this exit route as a preferred source of liquidity. Online car platform Cazoo, for example, is said to be in discussions with Ajax I, a SPAC set up by hedge fund manager Daniel Och, despite earlier reports that the company was leaning toward an IPO.

Current market conditions are pushing more venture-backed companies to float rather than stay private, according to Bain & Company partner Brian Kmet. Public company multiples have reached an all-time high, and SPACs are providing a lower cost and more convenient process to listing. With an unprecedented level of blank-check companies on the hunt for deals, PE firms could feel pressure in the long-term.

"We're seeing significant growth in the PE market, and it's not impacting many investors' pipeline so far," he said. "But if the deal markets settle down at some point and SPACs continue at the level that they're at, then we're likely to see more of a critical situation where you've got more dilution to the asset pool that private equity markets can hunt in."

The emergence of SPACs also represents an opportunity for PE firms wanting to capitalize on the boom. Apollo Global Management launched Spartan Energy Acquisition Corp. last year and went on to merge it with VC-backed electric vehicle maker Fisker. In January, Learn Capital-backed online learning startup Nerdy agreed to go public through a merger with TPG Pace Tech Opportunities.

"I think the emergence of private equity in SPACs is in some ways a reaction to the competitive aspect, but it's also simply an opportunistic play," Kmet said. "Those [blank-check companies] that are being sponsored by PE funds are taking a more growth-oriented mindset than maybe that PE fund would do in its traditional buyout business, helping them expand their mandate to some extent."

For those not tapping into the SPAC craze, Malven thinks that there will be more PE activity with early-stage startups—but not in the sense of a traditional buyout. He says that PE firms are likely to back more mature companies and use them to buy younger startups to create platforms offering better growth or market prospects. This was the case for digital healthcare startup 6over6, which was bought last year by AEA Investors-owned 1-800 Contacts; its last fundraising round before the sale was an $11 million Series A.

"There's a much broader understanding of the software nowadays and early players like Vista and Thoma Bravo have shown you can be very successful investing in [the industry]," he said. "[PE firms] will need to evolve some aspects of the way they operate, but they have become such a necessary part of [VC's] exit ecosystem that I think this trend will continue."

Featured image by Bloomberg Creative/Getty Images

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