Thriving on complexity and staying on the right side of disruption

By Permira’s Co-heads of Technology, Brian Ruder and Richard Sanders

Our job is to identify quality companies with high-growth potential in areas that others have overlooked. To do this, we spend a lot of time working up theses and pulling them apart.

Permira started life as a venture capital firm and today we retain that commitment to growth as the primary driver of value creation. We were the first European buyout house that established a presence in Silicon Valley and on top of that we have a network of senior technology specialists in all of the world's major markets. We have velocity; the funds have invested more than €8 billion in almost 40 technology companies globally and have deep relationships with many multiples of that. These attributes really help throughout the life of an investment, but even more so when we’re testing a thesis and need critical people to interrogate and develop it.

When we are convinced as a group that the thesis is sound, we scour the globe for the companies that best meet the funds’ investment criteria. We then approach management to share our thoughts on how we can help them unlock the potential in their business.

Take Teraco (P5, 2015), a leading South African data centre company. Our team had been probing the data centre space for some time, and built a robust thesis around the particularly attractive 'carrier neutral' sub-segment. Our next step was to contact CEOs of leading companies in that segment. The CEO of Teraco appreciated that we weren’t asking for anything from him other than a chat around our genuine and researched interest in this disruptive industry. As there wasn’t an investment opportunity there to start with, the focus was solely on building a relationship based on mutual interest. A mere three months later, Teraco agreed to partner with Permira, despite heavy interest from strategic buyers, and since then, the funds have supported two-fold growth. Teraco is now the biggest data centre company on the African continent.

When we decide to back a company, we do so with high conviction. Valuations in the sector can be high, but we recognise that high growth and the best business quality command higher prices. Oftentimes the most mispriced assets are the highest quality ones – just because a multiple is low doesn't mean the value is good – we have found great value time and time again by paying what looked like a high price at the time but often looks incredibly attractive as the business grows.

Thriving on complexity

We specialise in unearthing difficult-to-evaluate, often quirky businesses with complex ownership systems and we aim to make life simple for management, supporting them to get on with the job of growing their business. It has never been our intention to win the volume game in private equity and we are very happy not to spend time on situations where we don’t feel the underlying business fits our market views or quality bar. Instead, we aim to be a niche, high-quality growth partner looking for the gems that others have overlooked.

Take Magento (P5, 2015), an omnichannel commerce solutions provider. Our team had been building a relationship with eBay for some time and tracked the ownership of Magento for years. We knew we wanted to back Magento – it was a wonderful software business with a massive customer base and leading positions in Europe and the US. But eBay was looking to sell a number of other companies that didn’t fi t our profile and we thus spent a lot of time engineering a team-up to allow the Permira funds to only acquire what we wanted, including getting the assets that became Pepperjam. Time was tight, we had only a few weeks to carry our due diligence and structure the entire enterprise – an extremely complex process involving separating multiple businesses from a division that was itself about to be carved out of eBay.

Crucially, we went through this process without heavily burdening CEO Mark Lavelle, to give him the capacity to continue with his own challenge of running the business. To date, the partnership has proved fruitful; commissioned research from IDC estimated that merchants on the Magento platform sold $101 billion in merchandise to nearly 51 million shoppers in 2016, putting Magento at the top of global e-commerce platforms. It continues to successfully expand the customer base into new geographies. In January, Magento partnered with Hillhouse Capital, a global investment management firm with a strong presence in Asia, to fuel further growth across the company and particularly in China. Hillhouse Capital invested $250 million to enable the expansion of sales, marketing and client support, new product innovation and future acquisitions as well as marking the value of Magento at multiples of the price the Permira funds paid for it.

Another good example of navigating through complexity is Ancestry (P4, 2012), the global leader in family genealogy. When we first started exploring the business, its nascent DNA product was contributing virtually no revenue and was ignored by the market. Most people who looked at it thought it should have been shut down. We took a contrarian view and saw massive potential upside in the ability of the DNA business to drive future revenues both on its own and in opening new markets for the company’s core subscription business.

As part of the value creation plan, significant marketing and product spend was allocated to the business, and at the point of partial exit it constituted the greatest share of the company’s revenue growth and real scale. The success came down to a team that had the patience, focus and expertise to understand the complexities of the company, develop a growth thesis and see it through with complete conviction. While the funds’ substantially exited the investment in 2016, P4 continues to be a minority investor benefiting from the upside left in Ancestry’s continued growth.

Cross-sector collaboration

We believe that we collaborate across sector and geographical boundaries much better than others. Perhaps we would say that, but in each of Healthcare IT, Consumer Technology,

Fintech and Edtech we have dedicated team members that spend the vast majority of their time on these growth sub-sectors. Many of these businesses may not identify themselves as technology companies; but on probing deeper, many share the same characteristics.

In October, the funds backed Allegro Group (P6, 2017), Poland’s largest online marketplace. The company spans the Consumer-Technology space, meaning we have been able to combine the operational know-how of our dedicated Technology and Consumer teams to create a growth plan that brings together the best of each. It’s still early days, but we have already begun working with management to build a technology ecosystem around the company that creates a more user-friendly experience on the site to drive traffic and conversion rates.

Releasing potential

We have a very clearly defined approach to help grow technology businesses that has been cultivated over 30 years of doing just that. We use it in diligence to frame our thinking and give structure to our value creation thesis, but what we don’t do is force a management to adopt it. We’re high touch but collaborative, valuing trust and delegation as a tool for growth. We’re not here to parent management through every small decision because we want the best management teams to do what they do best and grow their businesses.