Hedge fund giant Elliott is looking more like a buyout shop as it brings in a BlueMountain exec to head up a new group tasked with running portfolio companies
Hedge fund giant Elliott Management is creating a position to oversee operations of its portfolio companies, according to people familiar with the matter. It's the latest move that's positioned the activist investor to look more like a buyout shop, as the firm has sprouted a private-equity arm and one source familiar with the matter said it has more "control-type situations" in private equity, public equity, and credit. Elliott is bringing onboard Jon Weber, Carl Icahn's former chief operating and finance executive who most recently served as head of portfolio operations at BlueMountain Capital. Click here for more BI Prime stories.
Hedge fund giant Elliott Management is creating a position to oversee operations of its portfolio companies, in the latest move that's positioned the firm to look more like a buyout shop than a shorter-term investor, according to people familiar with the matter. Elliott is bringing onboard Jon Weber, Carl Icahn's former chief operating and finance executive who most recently served as head of portfolio operations at BlueMountain Capital. The hire highlights an evolution at Elliott, from an activist investor known for its aggressive tactics to one that also works collaboratively with management, sometimes for investment periods longer than is typical of the hedge-fund industry. Details are still being hammered out as Weber settles into his second week at Elliott, sources said, but his responsibilities will entail overseeing a newly formed portfolio operations group, which will organize Elliott's operating partners under one umbrella. The number of executives who will work in this group is still undetermined, but Elliott has contracted with operating executives in the past, though that has not before been part of an internally organized group. Generally speaking, operating executives work with portfolio companies to improve efficiencies and create value. Responsibilities can entail finding executive talent, including CEOs and CFOs. One source estimated that Elliott had at least a half dozen operating executives already, and that while the new group wouldn't be deploying the same number of executives as a traditional firm like KKR — which staffs more than 70 full-time operating execs — it would be "targeted" in its deployment of team members. In 2015, Elliott launched Evergreen Coast Capital, a private equity arm that can buy companies outright instead of taking public stakes, with investments including software provider LogMeIn and healthcare technology firm, Athenahealth. At the same time, the firm has more capital to deploy. The Wall Street Journal reported in November that it had raised $2 billion for private-equity style buyouts, citing unnamed sources familiar with the matter. Overall, it has more than $34 billion in assets under management, up from $22 billion seven years ago. One of the sources familiar with Weber's hire said Elliott now has more "control-type situations" in private equity, public equity, and credit situations, where the firm is "seeking to be an agent of change." In the past, Elliott has taken stakes and mounted campaigns to push for changes at public companies such as Hess and AT&T. Most recently, it made news when it mounted a $2.5 billion stake in investment firm SoftBank, which has backed technology companies including WeWork. Weber is the latest departure to hit BlueMountain, which over the past year has seen turbulence as it comes under a new corporate owner, Assured Guaranty. In October, the firm wound down its 16-year-old flagship fund, the $2.5 billion BlueMountain Credit Alternatives, to focus on its collateralized loan obligations business and it was announced that co-founder Stephen Siderow would leave the firm. Reached on Tuesday, a BlueMountain Capital spokesperson declined to comment on Weber's departure. Some of Weber's work at BlueMountain entailed helping portfolio companies run searches for CEOs and board members, and also oversee executive compensation and annual performance reviews, according to materials Weber posted on his LinkedIn profile. Before his time at BlueMountain, Weber worked as an operating partner at investment advisor Anchorage Capital Group between 2010 and 2017. Before that, he was a managing director at Goldman Sachs between 2007 and 2010. According to his LinkedIn bio, Weber headed a team within Goldman's special situations group to "drive operational value enhancement" where the firm was an investor in companies in the Americas and EMEA. His bio said that he oversaw pre-investment assessment and value creation planning, post-investment operational oversight and review, as well as company-specific value enhancement initiatives. Between 2003 and 2007, Weber was president and head of portfolio operations at Carl Icahn's Icahn Enterprises. In that role, Weber reported to Icahn in overseeing companies in which Icahn had influence. Weber served as CEO of metal recovery and industrial services company, Philip Services Corporation, as well as Viskase Companies, a supplier to the food service industry.SEE ALSO: Private equity giants like Blackstone and KKR are loading up on industry specialists to help squeeze out returns, and that's creating a new power dynamic inside the firms Join the conversation about this story » NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.
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Whatever you think about it, public pensions are dependent on private equity investments for returns, and...Whatever you think about it, public pensions are dependent on private equity investments for returns, and their portfolio companies employ millions.
Tech startups have a new 'exit' strategy. Why private equity firms have started plowing billions into acquiring startups.
Among startups that don't fail, most are acquired instead of going public. Although most startups that...Among startups that don't fail, most are acquired instead of going public. Although most startups that are acquired are still purchased by other independent companies, a growing number and proportion are being snatched up by private equity firms. In the past, private equity firms were largely considered bottom feeders, buying up companies on the cheap for their cash flow, but increasingly, they're buying companies with the intent to help them grow or to combine them with other startups to reach a larger scale — and they're more willing to pay up for them, industry experts say. The trend is being driven by a surge of cash into private equity firms and the growing number of companies that are avoiding the public markets, they say. Click here for more BI Prime stories. It used to be that the goal of every startup founder was to take their company public. That may still be the goal for most, but in the last several decades, a much more realistic option for startups that managed to stay afloat was to be acquired by another company in the same sector. In recent years, though, a third option has emerged for startups — being purchased by a private equity fund or by a company owned by one. Those kinds of buyouts now far outnumber IPOs and account for one out of every five so-called exits for venture capital-backed companies in the US, according to data PitchBook compiled for Business Insider. The growing influence of private equity on the startup market has "really reshaped the industry," said Wylie Fernyhough, a senior private equity analyst at PitchBook. The kinds of startups being targeted by private-equity firms likely would have gone public 20 years ago, industry experts told Business Insider. But today, they're generally considered too small or don't have bright enough prospects to hit the public markets. For such companies, private equity has become "an attractive exit opportunity," said Pete Flint, a managing partner at venture capital firm NFX. The vast majority of startups that don't fail are acquired Venture capitalists back startups with the intent of cashing out those investments at some point in the future, either by being able to sell their shares to public investors when or after the companies go public or by selling the startups to other companies. While initial public offerings get lots of attention, they've become relatively rare. In part that's because many startups never make it to the exit stage at all, because they go out of business first. But also it's because the vast majority of startups that don't go out of business are acquired instead of going public. Last year, for example, of the 934 startups that had some kind of exit event, 853 — about 91% — were acquired either by another company or as part of a private equity-related deal, according to PitchBook. That rate has been relatively steady over the last 18 years. "The vast majority of exits that all of us are thinking about are things that are not the public markets," said Sean Foote, a member of the professional faculty at the Haas School of Business at the University of California, Berkeley. Acquisitions, he continued, are "the major way in which companies find their home." While such deals have long been important, what's changed over the last 20 years is the growing influence of private equity. In that time period, private equity firms have gone from bit players in the startup ecosystem to major actors in it. In 2003, just 17 startups were acquired by private equity firms or companies owned by them, according to PitchBook's data. That amounted to just 5% of total exits that year. By 2012, 88 startups were snatched up in private equity-related deals, accounting for 10% of all exits. Last year, 186 were acquired in private-equity deals, amounting to 20% of all exits. Private equity firms are big players in the acquisition market In 2004, IPOs outnumbered private-equity buyouts by a ratio of 3-to-1, according to PitchBook. But private equity acquisitions have outnumbered IPOs every year since 2008, and for the last three years, there have been more than twice as many of those kinds of deals as public offerings. What's more, even as startup acquisitions of all kinds have skyrocketed — jumping from 279 in 2002 to 853 last year — private equity-related ones have accounted for a growing portion. They accounted for 22% of all startup acquisitions last year after making up less than 7% in 2002, according to PitchBook. "I think it's a trend that's going to keep growing," said Lanham Napier, the cofounder of startup investment firm BuildGroup. The amount of money startups are seeing from selling to private equity firms is still a small portion of the total value of all exits, varying from less than 1% to about 8% annually over the last 10 years. But it's grown significantly, going from just $690 million in 2012 to $6.3 billion last year. And some individual deals have become quite large. In 2017, for example, private equity-backed PetSmart bought online pet supply retailer Chewy for $3.35 billion. And last year, PE firm Thomas Bravo acquired ConnectWise, a maker of mobile device management software, for $1.5 billion. Generally, the private-equity firms are snatching up more mature startups. On average, the companies they're acquiring are around 10 years old, according to PitchBook's Fernyhough. By contrast, startups that went public were about 9 years old at the time of their IPO and those that were acquired by other companies were about 7 years old, he said. But increasingly, private equity firms are backing more mature companies and using them to buy younger startups, creating larger companies or "platforms" that potentially offer better growth or market prospects, the industry experts said. "You can sell early stage companies to PE-backed platforms," said Dan Malven, a managing director at 4490 Ventures. "I think we're going to see more and more of that." Fewer companies are going public Part of what's driven the surge of private-equity buyouts — and acquisitions overall — is that fewer and fewer venture-backed companies are going public. That's a trend that dates back to the 1990s and one that's linked to the growing dominance of small numbers of firms over large sectors of the tech industry, according to research by Jay Ritter, a professor of finance at the University of Florida who has been studying the public offering market since the 1980s. But that trend has arguably been accelerated over the last 20 years by regulations that added to the costs and burdens of being a public company and, conversely, made it much easier for companies to remain private for far longer periods. "The public market has evolved to a point where it's not that you couldn't have these companies go public, but there are significant regulatory costs that you can avoid if you stay private," said Robert Hendershott, an associate finance professor at Santa Clara University's Leavey School of Business. "Private equity is a natural way to give someone an exit." The kinds of startups generally favored by the public markets these days are those that are growing quickly, operate in a large market, and are either profitable or have a clear path to profits, NFX's Flint said. Unfortunately, there are lots of good companies that don't meet all three of those criteria. But they can be a good fit for private equity firms, because such firms can invest in their long-term growth or combine them with other startups to give them the scale they need to be more attractive to public investors, he said. "They are perfect opportunities for private equity rollup or acquisition," Flint said. Private equity firms are swimming in cash The surge in private equity buyouts has also been stoked by a huge gust of money into the industry, particularly in the last 10 years. In 2010, US-based private equity firms raised $59.2 billion, according to PitchBook. Last year, that amount had swelled to $301.3 billion. While only a portion of those amounts are going to tech-focused funds, that portion has been growing. Tech-focused private equity funds based in North America and Europe raised just $3.7 billion in 2010, according to PitchBook. By last year, that amount was up to $68.3 billion. By contrast, the US venture capital industry raised $46.3 billion in new funds last year, according to PitchBook. Private equity funds have access to "a staggering amount of capital," said Mike Smerklo, a managing director at Next Coast Ventures. But another reason why private-equity acquisitions have become increasingly popular for startups and their venture backers is because the deals can be more attractive than either going public or being acquired by another operating company, industry experts said. It used to be that private equity firms acted kind of like bottom feeders in the startup market, paying relatively small amounts for firms that had few other options and focusing on the cash flow those companies could generate for them. But that's no longer the case. Private equity firms — particularly the tech-focused ones — are increasingly looking at companies that can offer revenue growth and they're often willing to pay top dollar for them, the experts said. Startups used to see the biggest exits by going public or by being acquired by an operating company, said BuildGroup's Napier. Now, though, "some of these private equity firms have gotten so good at [buying startups], some of their valuations are just as big as those other things," he said. PE firms can move quickly and offer fewer restrictions Private equity firms also tend to be far less bureaucratic than corporate merger-and-acquisition departments, they said. Such firms also can often throw far more resources to bear on analyzing potential deals than corporations can. And the deals they strike typically don't have to go through the kinds of shareholder votes or board approvals that corporate deals often require. "They're able to move a lot more quickly," said PitchBook's Fernyhough. What's more, venture investors and founders often confront more obstacles to accessing their promised returns when they sell to corporations or take their companies public than when they sell to private equity firms. Typically in an IPO, there's a lock-up period of up to six months during which early investors are barred from selling the company's stock. Meanwhile, in corporate acquisitions, there often are conditions put in place that allow founders or early investors to see the full value of the buyout only if the startup hits certain financial or performance targets after the acquisition. "When I sell a company to a private equity firm, it's clean," said Foote, who in addition to his role at Berkeley is a managing director at venture capital firm Transform Capital. "There's often very few strings attached." It's not unusual for acquirers, whether they are large, independent enterprises, other startups or private equity-backed conglomerates, to pay for their purchases with shares of their own stock. But the private equity-backed roll-ups often are perceived to have greater prospects for growth than big, established corporations, potentially making their shares more desirable. "We try and analyze that growth potential," said 4490's Malven. They try to figure out if "we want to ride on their equity." The fast pace can also cut against startup founders and VCs To be sure, the growing influence of private equity does have some drawbacks for venture capitalists and startups. The fast pace of those firms and their large research teams can go against founders and their backers, Malven said. The private equity firms can have their teams analyzing multiple companies and potential deals at once, he said. If a startup doesn't act on an offer quickly, the firm can threaten to move on to doing a deal with a rival company, he said. "They can put you in a squeeze," said Malven. And the firms can have their shortcomings when it comes to evaluating startups, industry experts said. Because they're typically focused on analyzing the financial health of companies, they can be very good at evaluating companies that already have established a market for their products and have a revenue stream, they said. But they're not as good at sizing up companies based on the potential of their technology or their intellectual property or their unproven ideas, they said. "They're much at better looking in the rear-view mirror than they are in through the windshield," Malven said. Still, by and large the venture capitalists and other industry experts said the venture ecosystem has benefitted from private equity firms providing more exit options for startups. Venture capitalists are often looking for home runs with their investments — companies that have the potential to deliver huge returns on their investments. That remains the primary focus of firms like his, said NFX's Flint. But not every startup is going to be a home-run investment, and having the ability to get a modest return on those kinds of companies is a good thing, he said. "More options for more capital is great for the ecosystem," Flint said. "It's great for founders, it's great for early stage VCs, it's great for customers." Got a tip about the venture-capital industry or startups? Contact this reporter via email at email@example.com, message him on Twitter @troywolv, or send him a secure message through Signal at 415.515.5594. You can also contact Business Insider securely via SecureDrop. Read more about the venture-capital industry and startups: SoftBank's $100 billion Vision Fund had a no good, very bad year in 2019, but was still in the black overall. Here's why experts are still struggling to make sense of it. Here's why Casper's disappointing IPO could spell disaster for other unicorns This LA founder just raised $40 million for his startup. Here's his unconventional advice to founders on putting together a pitch deck. Stunned venture capital investors say the government's move to kill the $1.4 billion acquisition of shaving upstart Harry's is a 'wakeup call' that could leave some types of startups unviable SEE ALSO: Here are the top 10 best performing venture funds that launched at the turn of the decade, which posted returns as high as 50% Join the conversation about this story » NOW WATCH: Watch Google reveal the new Nest Mini, which is an updated Home Mini
Private-equity firms are focusing more on running companies than financial engineering — and that could help their PR problem
Private-equity firms are facing a deal environment that, while challenging in their pursuit of returns, might...Private-equity firms are facing a deal environment that, while challenging in their pursuit of returns, might just help stave off scrutiny of the industry. PE has been blasted with criticism from celebrities like Taylor Swift and Democratic presidential candidate Elizabeth Warren. 2019 marked the year private equity became a punching bag on late-night talk show shows and the Twitter feeds of some politicians who said the industry profits from US businesses at the expense of laid-off workers. Firms have said they can add value to companies. But a report from PitchBook indicates PE firms will likely have to change their ways regardless in light of a tougher deal market. Visit BI Prime for more stories Private-equity firms are facing a deal environment that, while challenging in their pursuit of returns, might just help stave off scrutiny of how they make money. The industry has attracted criticism from celebrities including Taylor Swift as well as Democratic presidential candidate Elizabeth Warren. 2019 marked the year private equity became a punching bag on late-night talk show shows and the Twitter feeds of some politicians who said the industry profits from US businesses at the expense of laid-off workers. PE firms have said they can add value to companies. But a new report from PitchBook indicates they will likely have to change their ways regardless in light of a tougher deal market. PE firms are looking to improve operations The report says PE firms have had to get creative with how they deploy capital, as investors increasingly pour money into the private markets in a search for yield after years of ultra-low interest rates. Opportunities are difficult to find and prices are rising for the best investments as multiple PE firms bid for companies. This has meant that PE firms are, in many cases, engaging in investments that eschew the traditional private-equity takeover: instead of buying a whole company with a large debt load, they are settling for minority stakes and trying to improve operations. "Improving IT, marketing, the supply chain and more has allowed operations, rather than financial engineering, to drive a mounting portion of PE returns," said the PitchBook report. "Not only do these strategies help PE firms propel returns ... they also address persistent public and political criticism." Read more: Private equity giants like Blackstone and KKR are loading up on industry specialists to help squeeze out returns, and that's creating a new power dynamic inside the firms Public relations battle heats up With the 2020 presidential race heating up in the coming months, private equity is expected to remain under the crosshairs of politicians, with candidate Elizabeth Warren calling out private equity as a vivid illustration of how she says Wall Street needs reform. Specifically, Warren has criticized the management fees private-equity firms charge their portfolio companies, likening them to vampires that suck the life out of companies. Adding fuel to the fire, country music star Taylor Swift has railed on private equity's influence in the music business after talent manager Scooter Braun bought the rights to her music in a deal supported by private equity firm The Carlyle Group. In a speech at the Billboard Women in Music event this month, Swift called PE "a potentially harmful force" to musicians and said firms were "buying up our music as if it is real estate." Private equity, meanwhile, has commissioned their own lobbyists and public relations specialists in Washington to pull up research that illustrates how PE has actually helped the American economy. Read more: Elizabeth Warren's attack on private equity could have a surprising group of backers: Investors in private equity The PitchBook report pointed to a third-quarter earnings call in which Blackstone CEO Stephen Schwarzman went so far as addressing some of the public criticism of the PE industry. He said that Blackstone's portfolio companies have added more than 100,000 net jobs during its ownership over the past fifteen years. "We are incredibly proud of what we do at Blackstone and the vital role we play in society," Schwarzman said on the call. "For example, the very strong returns we generate, particularly in the current low interest-rate environment, enable teachers, police officers, firemen, and other public and corporate sector employees to retire with sufficient savings and secure pensions." Blackstone, which has more than half a trillion dollars of assets under management, announced on Friday that it would hold its fourth quarter and full-year investor conference call on Jan. 30. Some firms modify investment approach The PitchBook report held up KKR as an example of one PE firm that has modified their investing approach in a way that focuses on operational improvements within a portfolio company. KKR and some other firms have done this by structuring a PE deal in such a way that provides employees with ownership stakes in the company — as well as bonuses tied to performance, the report noted. In the past, these incentives were reserved exclusively for senior leadership. PitchBook said that it sees the PE industry continuing to evolve its investment approach, especially as the public criticism of the industry ramps up in 2020. "Continued scrutiny and backlash surrounding a lack of transparency, the fees charged to portfolio companies, ruthless tactics and asymmetric outcomes when PE firms succeed while portfolio companies fail will likely push the industry to change in some ways going forward," the report said. Join the conversation about this story » NOW WATCH: WeWork went from a $47 billion valuation to a failed IPO. Here's how the company makes money.