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CapCon Panel Explores Trends in Growth Equity

FINANCE: PE and VC Investments ‘Not On Hold Forever’

ACG San Diego, the San Diego chapter of the Association for Corporate Growth, held its annual Capital Conference this year at the Omni Hotel in downtown in late February (Feb. 22-23). The event drew hundreds of investors and business professionals from across the country for networking and panel discussions on the state of and strategies for raising capital in the current economic climate.

In CapCon 2023’s final session, a panel of San Diego investment professional discussed “Trends in Growth Equity and the Capital Markets.”

The discussion kicked off with a presentation on the state of capital investing by Joel Weinstein, managing director of RA Capital Advisors.

“Things are getting a little more stable, but, definitely, it’s changed,” he said.

For example, Weinstein pointed to M&A activity in the U.S., which he described as “crazy” in 2021 and more normal in 2022 with transactions looking similar to pre-COVID levels, with a lot of them happening on the “private equity side.” The second half of 2022 slowed down, he added, as financing for larger deals of $5 billion and over “dried up.”

Although private equity activity is “here to stay” Weinstein said, it will be at a slower pace and consist of more deals taking companies off the public markets.

“Private equity, the big firms who have a lot of capital, are taking public companies private and that’s kind of the opportunities right now,” he said, adding that one of the reasons this strategy is attractive to private equity firms is because “public company investments, especially large software firms like Salesforce, are a good value trading at 5x revenue and are less risky than startups.”

For smaller companies, private equity has mostly looked to consolidating with existing portfolios, Weinstein said, with add-ons making up 78% of all PE transactions last year.

Looking to the year ahead, Weinstein said exit activity for startups is expected to start picking up after being “shut down” last year.

“So even when the market stops here, the market can’t stop forever. Last year everyone was on hold but it’s not going to be on hold forever,” he said.” People want to do deals. They want to invest in the cycle, but they have to be smart about it and the cost of debt has doubled so that’s a problem.”

Because of tighter lending, Weinstein said private equity and venture capital investors are going to “highly scrutinize” investments with extensive due diligence.

Investors Looking for Liquidity, Opportunity

After the presentation, moderator Brent Glova, managing partner and San Diego office leader at Stout, kicked off the panel discussion on current trends and changes in equity investing markets.

Andrew Albert, managing partner at Channel Equity Partners, said he sees more investors looking for liquidity in the year ahead, “whether through full buyout or majority recap.”

“There’s a lot of pressure on CEOs in the software growth world to find liquidity for investors who have put up lots of money for the last decade,” he said. “They did their job; they’ve been in for a while and they’re looking for some type of payback, so that is one of the changes.”

Kirk Michie, managing partner at Candor Advisors, spoke on the adjustments in company valuations, which he said were coming down “certainly by rhetoric.”

“I think if I’m borrowing money to do a deal, if I’m a private equity sponsor, valuations have to come down for me to get my return targets,” he said, adding that “A-tier businesses” will still get “premium multiples, however companies that have not hit certain growth targets might need to wait until markets are “more generous” and continue working on building their businesses.

“But there’s still plenty of really fruitful transactions out there,” he said, and advised investors to “look hard” for companies with a good business model, even if they are not producing high revenue yet, to find the best investment deals with the least competition. “If there’s fewer people at the table, that’s when you get that opportunity.”

San Diego Scene

In a discussion on the local investment landscape in, HCAP Partners Principal Nicolas Lopez pointed out that San Diego is “not a strong VC community” and that venture capital comes to the region in “waves.”

“Most of the venture capitalists who do deals here fly in and fly out,” he said.

Lopez also pointed out how those waves affect the demographics of what companies are looking to be bought out.

“Thirty years ago, if you were wealthy in San Diego, you built wealth somewhere else and you moved here,” he said. “Now, a lot of the businesses that did get started when there was a venture capital community, when there was a more thriving startup community, those businesses are starting to exit – mostly because of the age of the founder.”

Albert pointed out that San Diego has seen a decline in large “mothership” software companies since the 90s dotcom era, which has had an impact on the local tech startup scene.

“You need the developers to leave the mothership, take the risk and know that if they fail they can go right back to their multi-six-figure job and do that over and over again,” he said, adding that despite the “dearth” of software activity, there are still investable companies in San Diego like “Seismic and some others,” but not like other parts of country.

“But I think that’s changing for the first time because of the presence of companies like Apple, Google and Amazon that have now put thousands of people here that can possibly now go innovate themselves,” he said.

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