Braham Moondi:
Hello, everyone. Welcome to our third episode of BDO’s PE Market Pulse, where we invite a leader in the private equity ecosystem to share their thoughts on current market activity. I'm your host, Braham Moondi, national leader of BDO Canada's PE Practice and Assurance, and I have the immense pleasure of having Gil Nayot join us today.
Gil is a partner at Vertu Capital, a Canadian private equity firm that invests in technology companies that are growing and have scalable business models, with a focus on software and software-enabled businesses. So welcome, Gil.
Gil Nayot:
Hi everyone! Nice to be here.
Braham Moondi:
It's a pleasure. Tech is always an interesting sector and very close to my heart. Of course, very close to your heart as well. So I know we're going to have some fun today. So I'll start off with our questions.
2023 was a bit of a volatile year in terms of PE activity. How do you foresee 2024 shaping up for Canadian private equity firms, especially with deals in the tech sector? Any particular trends or emerging technologies that you find promising?
Gil Nayot:
Yeah, great question and a timely one as we jump into 2024. I think 2024 is going to be a very productive year for Canadian private equity overall, but particularly for technology private equity. I frame it in two different lenses: the macro and the micro.
From a macro perspective, ignoring the recent public market exuberance—which is probably a topic unto itself—there's definitely confidence building in the public markets. Public markets can be fickle, but we're seeing capital come back in and prices elevate. This is largely due to interest rates coming down. We're starting to see signals of broader market expectations that rates will drop and signal a soft landing. From that perspective, the market is pivoting towards more stability.
On a micro level, companies are now more able to forecast their businesses, having faced significant volatility in 2022-2023. With less volatility, there's more ability to forecast, leading to greater confidence in terms of where companies are going and the investments they need to make. More confidence is coming into the market from the company side.
From an investor perspective, there's also more confidence. Investors are increasingly able to build conviction in the investment thesis and in company opportunities, just as companies' ability to forecast their business is growing. This convergence of buyer and seller expectations is underpinned by these factors, especially as the vintages of 2021 and 2022 become less recent history, leading to a normalization of the market.
Braham Moondi:
When PE firms from across the globe invest in Canada, how do you find the current competitive landscape for deals in Canada?
Gil Nayot:
There's always firms around the world investing in Canada, and these are great firms. However, their activity up here is a strong validation of Canada's attractiveness, especially in well-built technology businesses. Founders and management teams of growing tech companies know they have a choice. For those looking for sophisticated, technology-focused investors and strong, like-minded partners, Vertu is really the clear winner and choice.
Braham Moondi:
Value creation discussions over the past year and a half have focused on technology solutions that companies need to implement. What are your views on this impacting the valuations of technology companies servicing these needs?
Gil Nayot:
The growth of software and tech spending is significant—it's a $5 trillion market today, projected to grow to $6.5 trillion by 2027. Gartner estimates that IT spending growth will come primarily from software and IT services rather than from data centers, hardware, and communication services. Software is a major deflationary force that businesses can use to combat inflationary pressures. Technologies like cloud computing, workflow automation, and AI drive efficiency, which propels companies to grow and increases valuations. Our tech investments have strong growth prospects, clear value articulation, and high quality of earnings, all of which contribute to strong valuations.
Braham Moondi:
Vertu looks for profitable B2B software companies, typically with over $15 million in revenue. Before a tech company considers approaching Vertu for a possible investment, what are some of the key metrics and risk factors you're looking out for?
Gil Nayot:
At Vertu, we focus on B2B software and software-enabled businesses. We're interested in high-quality revenue with strong recurring revenues and attractive retention statistics. We also evaluate whether the company is underpinned by complex and proprietary intellectual property, which drives differentiation and value. We seek companies that have achieved a scalable business model, with happy customers and global growth. Lastly, we look for companies that understand themselves well, know what it takes to achieve the next growth inflection point, and want a partner to support them along that journey.
Braham Moondi:
Once a company receives investment from your firm, what can they expect to happen next? How are you involved in the value creation and strategy of that business?
Gil Nayot:
Once we invest, we build a deliberate and methodical diligence approach, learning as much as we can about the business, evaluating opportunities, and identifying risks. We are very open and transparent with businesses about our findings and the implications. We then collaborate with the company to create a joint action plan, aligning on strategy, tactics, and goals. This ensures everyone is working towards the same objectives.
Braham Moondi:
Finally, Vertu Capital is the first female-founded private equity firm in Canada, with Lisa being involved in various initiatives to elevate women and named one of Canada's top most powerful women. Looking at your team and the diversity, how do you see upcoming ESG rules and regulations impacting the technology industry in your portfolio?
Gil Nayot:
Lisa has built something amazing here, and Vertu's support for diversity is a key part of our identity. As ESG regulations evolve, they will increasingly impact the technology industry. Diversity is just one aspect of ESG, but it is crucial. We believe that a strong focus on diversity and other ESG factors will enhance the long-term success and resilience of our portfolio companies.
That is, those are the principles that I would employ and, surprisingly, Vertu's employed.
Braham Moondi:
Exactly! No, that's amazing.
And just a current or recent book that you read that you'd like to share?
Braham Moondi:
Oh! I'm on a hit right now of like not novels versus nonfiction. So I started reading a number of the Jack Reacher books because the show is back on Prime. So I wanted to catch up on the book versus the show version.
Braham Moondi:
Yes. And compare those differences.
All right. Well, thank you so much, Gil, for your time today. That's all the time that we have. And thank you to all the listeners for watching this episode of PE Market Pulse.
Gil Nayot:
Yeah, Braham, thanks so much for having me. This was great.
Braham Moondi:
Of course.