In 2021 – despite the lingering economic turmoil caused partly by the COVID-19 pandemic – the tech industry seemingly could do no wrong.
The Nasdaq Composite had doubled since the early days of the pandemic. Rivian had a record IPO that capped a historic year for new issues. Hiring at tech companies across the board was booming as tech workers enjoyed huge salaries and high values in their stock options.
Fast forward three years, and we’re seeing a much different story as the industry is seeing widespread layoffs—over 42,000 in the first two months of 2024 alone— a slowdown in deals, and a shift toward artificial intelligence that has some of the industry’s biggest names playing catch up.
The shift is not just being felt in Silicon Valley but by the private equity firms whose fates ride or die with the tech industry. The halcyon days when firms could do no wrong and saw huge returns by investing in tech over the last decade are over, and many are wondering who will emerge from the fray in one piece.
From early research, it appears that those firms that invested aggressively and had little backup plan or differentiated strategies are the ones fairing worst in 2024.
The Chicago-based Thoma Bravo, for example, was the top PE acquirer of tech companies in 2021, with 25 announced deals valued at $58.2 billion, including buying security giant Proofpoint for $12.3 billion. Despite early warning signs – such as the firm’s questionable sale of software company SolarWinds shortly before a major hack – Thoma Bravo earned praise from investment analysts.
Yet now, Thoma Bravo’s fund XV, which completed fundraising at $24.3 billion in 2022, is posting a negative 1.6% IRR and 0.99x investment multiple as of September 30, according to Fortune.
There’s also Bain Capital, which is arguably the most well-known private equity firm that isn’t public. As with Thoma Bravo, Bain had a big 2021 – securing 15 announced tech deals globally at a value of about $20.4 billion.
While their funds are still young, and some of the data is a little old, Bain’s Fund XIII posted a 0.99 PME, just shy of 1, and an SI IRR of negative 3.32% as of March 31, per New Mexico’s Retirement Board.
The private equity firms that have weathered the fallout hitting the tech industry best are the ones that took a more cautious approach to investing during the 2021 rush and looked to diversify their portfolios instead of playing all their cards on one hand.
Vista Equity Partners, the firm headed by philanthropist Robert F. Smith that focuses on software, data, and technology-enabled businesses, had a much quieter 2021 compared to its competitors – deploying around $11.9 billion yet returning over $7.4 billion to investors.
The firm ended 2021 with around $93 billion in assets under management, which shot up to over $100 billion last year. Last year, as the tech world was experiencing seismic disruptions, Vista announced it had hit over $100 billion in assets under management and had sold Seattle-based Apptio to IBM for $4.6 billion – marking a return of 142% on the $1.9 billion investment.
While $11.9 billion invested in 2021 is not chump change, it is far less than the nearly $60 billion spent by many PE firms. Certainly, it shows that the firm was taking a more measured approach during the boom times of that year. That strategic approach is paying dividends now as other firms wonder what to do with the investments made three years ago that are struggling to remain above water.
Investors can learn from two age-old adages amid the current quagmire engulfing tech investing: one is that if something seems too good to be true, it normally is, and the other is to not put all your eggs in the same basket.
