As the Nasdaq makes new highs on a near-weekly basis and many 2016 tech IPOs trade well above their offering prices, private equity appears hungry to cash in -- a sign that conditions may have gotten frothy.
Last week, Optiv, a security services provider controlled by investment firm Blackstone (BX) , filed for an IPO under the symbol OPTV. And yesterday, managed IT services firm Presidio, which is owned by investment firm Apollo Global Management (APO) , filed for an offering. No symbol has been proposed yet.
Ahead of Presidio's filing, The Wall Street Journal reported hearing from sources that the company is "expected" to get an IPO valuation of up to $3 billion.
Optiv, the product of a 2015 merger between security tech firms Accuvant and FishNet Security, likes to market itself as a cybersecurity company. In practice, though, the company is a traditional IT security firm -- it provides a number of services for implementing and reselling security hardware and software, as well as for managing a company's security infrastructure.
The company's growth profile is certainly closer to that of established security IT names than the likes of Palo Alto Networks (PANW) , Proofpoint (PFPT) , CyberArk (CYBR) and Qualys (QLYS) , whose sales have surged in recent years thanks to share gains and rising corporate cybersecurity spend.
On a merger-adjusted basis, Optiv's revenue fell 4% annually to $643.8 million, thanks partly to an ongoing shift (also experienced by many peers) towards subscription and service revenue streams relative to up-front product sales. A $5.7 million net loss was posted, down from a $13.6 million loss a year earlier.
Like Optiv, Presidio has taken an acquisition-heavy approach to growth, and provides a variety of services for implementing and managing parts of a company's IT infrastructure. Its solutions cover networking and collaboration hardware, cloud data centers, security infrastructures and analytics systems, among other things. Optiv is listed as a competitor in Presidio's IPO filing, as are Dell, Accenture (ACN) , AT&T (T) , Amazon Web Services (AWS) and several others.
Presidio's top-line performance has been a little better than Optiv's in recent quarters, but not exactly spectacular. Revenue rose 14% on a merger-adjusted basis in the fiscal year ending June 30 to $2.71 billion, and 7% in calendar Q3 to $738 million. Adjusted net income totaled $81.2 million in the former period, and $24.5 million in the latter.
Since Optiv and Presidio are both PE-controlled companies, it shouldn't be a surprise that both are going public with healthy, though not massive, amounts of debt. Optiv had $633 million in debt as of Sept. 30; Presidio had $1.04 billion.
Each company is also vulnerable to an extent to the steady migration of corporate IT spending from on-premise infrastructures to public cloud apps and services. IBM (IBM) , HP Enterprise, Computer Sciences (CSC) and others have seen their IT services revenue decline as their clients choose to run a greater portion of their workloads on platforms such as AWS and Microsoft Azure rather than their own infrastructures.
The IPO filings follow impressive 2016 debuts for cloud communications service provider Twilio (TWLO) , optical component and module vendor Acacia Communications (ACIA) , converged infrastructure hardware and software provider Nutanix (NTNX) and cloud spend management app developer Coupa Software (COUP) , among others.
It also comes with Snapchat parent Snap Inc. reportedly set to go public in early 2017 -- the company is believed to have confidentially filed for an IPO -- in an offering that aims for a $20 billion to $25 billion valuation.
PE firms generally know a hot market when they see one. It follows that they'd be hungry to take advantage of a hot tech IPO market -- and more broadly, buoyant tech equity markets -- to launch offerings for companies that aren't exactly blemish-free. Just talk up their exposure to fields that get investors excited -- say, cybersecurity or the cloud -- and let the bankers take care of the rest.
It also might not be a coincidence that Optiv and Presidio's offerings are coming at a time when PE firms are sitting on unprecedented cash piles. Alternative asset intelligence provider Preqin estimates PE firms have $862 billion in dry powder on hand -- the highest figure since 2008 -- as money managers balk at the steep prices attached to deals. Bloomberg estimates total spending on M&A has dropped 13% this year.
A number of PE firms appear to be operating with the attitude that this is a seller's market. That doesn't mean tech investors need to do the same, but it is perhaps a good argument for treading carefully. Particularly when it comes to IPOs being floated by PE firms.