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The Smart PE Money Knows When to Pay Up: Avetta Gets New Ownership

03/21/2018 By

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To say private equity firms have been ogling over procurement technology and solution firms of late is an understatement. The floodgates have been unleashed.

Case in point: PE firm Welsh, Carson, Anderson & Stowe announced earlier Wednesday it will acquire a majority interest in Avetta, a supplier compliance and risk management firm, in a deal that likely broke multiple (double meaning intended) records in the procurement solutions market. Another firm, TCV, will also acquire a minority stake.

The transaction is significant for the procurement technology space for a number of reasons. But perhaps most interesting, it highlights the differing approaches PE firms are taking to buying, operating and selling solution providers, as well as the kinds of business models that have become attractive (and lucrative) to these firms.

PE in the Procurement Sector: Background

On the advisory side, I’ve spent more time in the past six months working with PE folks in the weeds on due diligence than with procurement organizations, consultants and tech firms — which for me is crazy.

One thing I’ve observed first hand is that there is no common model or one-size-fits-all PE approach to investing in the procurement sector.

Still, two operating models tend to stand out. First, there’s the slash-and-burn, roll-up model centered on driving operating efficiency across entities. Second, there’s the patient — yet opportunistic — model that combines organic, operationally efficient investments and cost management, sometimes with targeted acquisitions (both tuck-ins and consolidation plays).

But there’s also a third model for procurement solutions, the one that Madison Dearborn originally grasped with Fieldglass (now SAP Fieldglass). And that’s to pay more in a highly competitive, high-stakes bidding process than anyone else by identifying something exceptionally “clean” that benefits from not just a classic cloud growth model but also consistent cash flow growth. Here, the technology is secondary. It’s about exceptional, proven business models reflected in EBITDA growth that can keep snowballing.

It’s this latter case in which the valuations tend to break records. But on some levels, they’re also the least risky plays of all.

I should back up for a minute and explain my biases and perspective here.

I’ve never been in private equity. Well, that’s not entirely true. In college and graduate school I interned for one of my dad’s friends on the transactions side, but also spent time running models and issuing completely uninformed opinions about opportunities on buyouts and convertible deals.

But since then, I have spent most of my career somehow involved on the strategy, technical and due diligence side of procurement transactions, almost always as an advisor on buyouts rather than venture deals. I also spent a few years as a corporate development grunt, among other responsibilities, at FreeMarkets. I’ve seen the other side, too, albeit less often, assisting in the sale of a few smaller things, lending an ear to friends and business partners who do that for a living.

Avetta Acquisition

It’s from this lens that brings me to Avetta, which I’m guessing broke new multiple records for a PE deal in the procurement solutions market.

The press release doesn’t say much or even begin to hint at the enthusiasm surrounding this deal. But Avetta — as well as its peers Browz and ISNetworld — has an incredibly elegant business model that benefits from scale economics. These providers all stand in contrast to other procurement and finance software vendors that have not yet put network business models at the core of their businesses, versus selling applications enabled by networks.

Yeah, there’s grumbling by some members of these communities on the customer side. The “on-boarding” and annual maintenance “tax” that suppliers must pay ain’t cheap. But that’s defrayed by the cost of having to submit detailed health, safety, CSR, insurance and other audit requirements without any standardization across a handful or even dozens of customers.

Avetta positions itself to buyers as almost a “pre-sourcing” or “pre-qualification” tool. But in my own view, it’s really not that. Rather, it’s a community-based supplier compliance and risk intermediary in which the economic benefits for all participants more than justify what generates cash flow in disproportion to classic “cloud” software companies.

The irony? Avetta’s technology is not the secret. Nor is it differentiated in the least. We dug into the platform a little while ago. (See “Related Articles” below.)

The secret is figuring out a networked business model that benefits buyers and suppliers alike — OK, with both carrots and sticks for vendors — which is precisely what Avetta did.

My hat goes off to WCAS and TCV for winning the deal and rolling some big dice on this market (albeit with a craps table that’s tilted in their favor from a great business model.) Avetta is an exceptional firm that, I’m guessing, will mirror the success that Fieldglass had in its time with Madison Dearborn before SAP purchased it, where it has continued to realize strong growth (I suspect on both the revenue and cash flow side).

The final idea I’ll leave you with is that Achilles should have owned this market. But like my old employer, FreeMarkets, first mover advantage meant little in the end.

Fascinating times!

I’ll dissect Avetta and the supplier compliance and risk market on a granular level for our subscribers on Spend Matters PRO next week. We also have some upcoming PRO research coverage planned on SAP Ariba’s new supplier risk offering, which sits in a completely different segment of the supplier and supply chain risk and compliance market.

If you’re keen to dig more into this market, drop a line.