Private equity firms are increasingly staking a claim in network performance monitoring (NPM) and application performance monitoring (APM) firms as these companies gain traction in the market.
Although exact numbers aren’t available, 451 Research Analyst Eric Hanselman said that “a significant fraction of the [performance monitoring] market” is owned by private equity firms. For example, private equity firms Thoma Bravo, Insight Venture Partners, Francisco Partners, Texas Pacific, Silverlake, and Bain Capital all have investments in monitoring companies.
Last year was a big year for private equity acquisitions. In 2016, global private equity M&A activity in technology increased to 15 percent compared to years prior, which had typically been around the 10 percent range, Hanselman said.
But the market hasn’t seen many of the larger legacy vendors making acquisitions in the performance monitoring space, other than Cisco’s intent to acquire AppDynamics for $3.7 billion, said Steve Shalita, VP at Pluribus and a former APM strategy advisor. This deal gave AppDynamics a valuation of at least three time its market value, he explained.
Performance monitoring is one of many markets that private equity firms have a stake in because it’s a market that has largely been undervalued but still has a lot of potential, Hanselman said.
“The whole point of a private equity transaction is to find a company that could be doing a lot more or one that might be undervalued,” Hanselman said. “Private equity firms hope they can make a difference in helping the company — whether it be greater operational efficiency or cash infusions to expand.”
Once private equity firms pick up a company a particular space, they learn a lot about the technology and the market, said Nik Koutsoukos, VP of product marketing and product management at Riverbed.
“Once you get with one company in a specific tech domain, you want to learn about it and leverage that knowledge in the area as opposed to developing expertise in a broader set of technologies,” he said. “Not to mention, performance monitoring companies are high-growth companies.”
Thoma Bravo’s Stronghold
While there’s a number of private equity firms that own a handful of performance monitoring companies, Thoma Bravo has made the most acquisition and consolidation moves across the board in this space, Shalita said. The firm has helped companies through acquisitions, spin-offs, financial backing, digital transformations, and other areas where a company might be lacking.
For example, in 2014 Thoma Bravo bought a legacy mainframe performance management company Compuware and spun Dynatrace off later that year. Thoma Bravo gave Dynatrace the financial backing it needed to undergo its own digital transformation as well as spend more in research and development, said Dave Anderson, VP of marketing at Dynatrace.
Similarly, when Thoma Bravo and Silver Lake bought Solarwinds in February of last year, the private equity firm helped grow the performance monitoring company’s product portfolio and got it products to market faster, said Joe Kim, CTO at Solarwinds. “Another area where [Thoma Bravo] has helped is with acquisitions because they are able to look at this sector and make assessments a lot faster than we normally could,” Kim said.
Additionally, when Thoma Bravo acquired Riverbed in 2014, the goal was to help the company create a product portfolio that would encourage future growth and invest more in R&D, said Koutsoukos. The private equity firm also helped diversify Riverbed’s product portfolio through various acquisitions.
Private equity firms often build a portfolio of companies in a particular area and then consolidate these companies and create synergies and bolster areas they might be lacking. This also includes guiding theses companies in acquisitions.
“You have to figure out how much compatibility there is between the technologies and product lines,” Hanselman explained.
For example, in 2013 Thoma Bravo acquired software monitoring and testing company Keynote Systems, which was later folded into Dynatrace to help strengthen its portfolio. “The Keynote acquisition made a lot of sense because they had complementary product offerings,” Anderson said.
Similarly, under Thoma Bravo’s ownership, Riverbed acquired Aternity, which was focused on end-user experience and monitoring endpoints. This helped fill the gaps in the company’s APM portfolio, Shalita said. Riverbed also bought software-defined wide area networking (SD-WAN) company Ocedo in January 2016, which extended the performance monitoring company’s portfolio into that space as well.
Since traditional M&A activity has started to slow down, there has been an increase in secondary deals among private equity firms, Hanselman said. Secondary deals are when a private equity firm, for example, buys a company for the sole purpose of beefing it up — either to sell to a corporate buyer or launch an initial public offering (IPO).
Riverbed was publicly traded prior to its purchase by Thoma Bravo. Last year the performance monitoring company’s CEO told The Register that it’s gearing up for a second IPO.
Koutsoukos said that is still a consideration. “Our ultimate goal is to move forward and eventually go public again…The private ownership today allows us to do the right level of restructuring and changes to go public again and do an IPO.”