Watch the changes accelerate for the incumbents, they're just as we have pointed to over the last 2 years. Aivars Lode avantce
Shift to Mobile Devices, Cloud Services Slows Pioneers’ Growth
By Don Clark
October 6, 2014
Vista to plow big equity check into Tibco Software
By Luisa Beltran
November 7, 2014
Vista Equity Partners isn’t skimping on its buy of Tibco Software.
The technology-focused PE firm is investing $1.6 billion equity into its takeover of Tibco, according to a report from Moody’s Investors Service. The $1.6 billion equity comes to about 38 percent of the transaction’s $4.2 billion value. This is higher than the typical PE equity investment, which ranges from 28 to 30 percent.
Tibco, however, will be highly leveraged. The company’s initial debt is “very high” at about 11x total debt to EBITDA, Moody’s said. That will likely drop about 7x once cost savings, which are expected to be “meaningful,” are included, said Raj Joshi, a Moody’s analyst.
Moody’s also gave Tibco a ‘B3’ corporate family rating because of its “weak financial profile and significant execution risk in achieving planned cost savings over the next 12 to 18 months,” the report said.
“B” ratings are considered speculative and are subject to high credit risk, Moody’s said. B2 is more speculative than B1, while B3 is the most speculative, Moody’s has said.
Regulatory pressure likely spurred Vista to invest 38 percent equity, one private equity executive said. Tibco’s 11x is higher than the 6x leverage ceiling called for in guidelines issued by regulators last year. “Regulators are scolding banks for high leverage multiples, so I’m sure Vista wanted to put in more equity to make it less of an issue,” the source said.
Joshi said Tibco’s 38 percent equity may be a response to the deal’s high purchase price multiples, which are about 17x EBITDA before cost savings. But once cost savings are added, the purchase multiples decline significantly, Joshi said.
Vista Equity announced its buy of Tibco Software in September. The Palo Alto, Calif.-based company provides infrastructure and business intelligence software. Tibco reported $1.08 billion in revenues for the 12 months ended Aug. 31, 2015, Moody’s said.
Vista’s investment is coming from its fifth fund, according to an FTC regulatory filing. However, the private equity firm will likely use another fund in addition to Fund V to back its investment in Tibco, a different source said. Vista Equity Partners Fund V closed last month on about $5.8 billion and is Vista’s largest PE fund to date. Fund V is bigger than its fourth flagship fund, which collected $3.5 billon in 2012. The firm’s third pool raised $1.3 billion in 2008.
Performance data for Fund IV, a young pool, was not available. Vista’s third fund was producing a 31.6 percent IRR and 2.46x total value multiple as of June 30, according to the Oregon Public Employees Retirement Fund.
Tibco declined comment. Vista could not be reached comment.
Vista Equity takes unusual risks with private equity fund
By Greg Roumeliotis
Tue Nov 11, 2014 1:00am EST
Vista Equity Partners has worked in an unusual clause in its contracts with private equity fund investors that gives it more financing flexibility and a leg up in leveraged buyouts, but also carries more risks for it and its investors, according to people familiar with the matter.
The agreement allows Vista to temporarily finance large corporate buyouts just with the cash from its $5.8 billion fund, as against using both debt and equity to buy companies. Under the right circumstances, this flexibility allows Vista to be nimble in auctions and secure the best possible debt financing after it has clinched a deal.
Two months ago, Vista used the clause in one of the largest private equity deals of the year, committing to fund the $4.2 billion takeover of TIBCO Software Inc with equity. One day later, it secured debt commitments from JPMorgan Chase & Co and Jefferies LLC for the deal, reducing its equity exposure to $1.6 billion.
The maneuver helped it not only outbid rival Thoma Bravo LLC in the TIBCO auction, but also use JPMorgan and Jefferies, which where were originally backing Thoma Bravo during the auction and were offering better financing terms, the sources said.
Investors in the Vista fund, known as limited partners, include some of the largest U.S. public pension funds, including the New Jersey State Investment Council and the Oregon Public Employees Retirement Fund. These funds do not disclose to their members and retirees all the risks they undertake, because the agreements with Vista and other private equity firms are confidential. The revelations highlight how important aspects of the investment of public money in private equity are shrouded in secrecy.
Representatives for these pension funds declined to comment.
Public pension funds have invested more money in buyout funds in recent years in a search for yield amid persistently low interest rates. Private equity accounts for 9.4 percent of total public pension fund investments and has delivered a 12.3 percent annualized return to the median public pension over the last 10 years, more than any other asset class, according to the Private Equity Growth Capital Council, the industry’s lobby group.
Several pension fund investors, private equity placement agents and lawyers interviewed by Reuters said Vista’s terms are highly atypical and not widely known even within the private equity industry. Most firms have caps – usually around 15 to 20 percent of the fund – on how much equity they can commit to a particular deal. Private equity funds also rarely make all-equity commitments for such deals, preferring to tie up debt financing ahead of time. When they do make such all-equity commitments, the equity checks tend to be much smaller.
The reason is that doing so poses the risk that investors see their entire capital tied up in one investment, potentially hurting returns and denying them the benefits of diversification, these industry sources said.
Such a situation can arise, for example, if the debt market conditions were to suddenly sour, as it happened in the summer of 2007 before the financial crisis. In the TIBCO deal, Vista’s financial liabilities are capped at $275.8 million. But if the banks walk away before the deal closes, TIBCO can try to force Vista to close on the deal with its fund.
“It’s a bit like walking on a wire without a net,” said Alan Klein, a partner at law firm Simpson Thacher & Bartlett LLP.