Why the UK tech scene is disappearing into private hands

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UK politicians are proud of the British tech scene but that enthusiasm is not so evident on the national stock market. Only last week, another UK tech business departed the public market for private capital with the $3.9bn sale of Sophos, a large established cyber security specialist based in Oxfordshire, to US private equity firm Thoma Bravo. It is only the latest example of a shift in the balance of power from listed to private that has been going on for at least a decade. And in the UK, as elsewhere in Europe, those investors who have sold out of tech have diminishing options for putting their money back to work, with very little in the way of a pipeline of high growth and large businesses to replace those being sold. Established names such as Logica, Misys and CSR have long since disappeared from the FTSE index of the UK’s biggest 250 companies. Then, the 2016 sale of chip designer Arm Holdings, arguably Britain’s most significant technology company, to Japan’s SoftBank proved a trigger for private equity to pick off dozens of smaller businesses.

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For those that remain, such as Sage, Micro Focus and Aveva, their future as listed businesses is also uncertain. One investment banker said that after Sophos, attention was now turning to these publicly quoted holdouts. “The slide rule is out,” he said. UK technology companies, particularly those in the enterprise software market, are plum targets for private equity. They generate cash, have long-term recurring revenues and often look undervalued as listed companies. Adding to this, the weakness of the pound and a trend of falling share prices has made buying in the sector much cheaper. Canada’s Open Text has denied reports it is preparing to bid for Micro Focus following reports last week but the UK company remains vulnerable, according to analysts. Its shares have halved since July and it has launched a strategic review of its business with Goldman Sachs. This is not to say that listings have completely dried up but there have only been a few of them in the UK and Europe, especially large ones. TeamViewer, a German rival to workplace messaging service Slack, came to market in Frankfurt this month at a €5bn valuation, bringing a large return for its private equity owner Permira and creating a listed rival to Europe’s largest quoted company SAP. It was the biggest float in Europe this year but, as in Britain, activity has been modest compared with the departure of longstanding listed technology names to private hands. In the UK, the £2.4bn float of Czech cyber security company Avast last year was hailed as a coup that underlined the “exceptional investor appetite” for technology companies in London but, in general, the traffic has been one way. High-growth companies such as Sophos may never return to the UK market: according to a person with direct knowledge of the situation, it is likely that its new owners will bulk up the business and then opt for a US float. Simon Russell, an investment banker at Macquarie who has advised and financed the European software sector for almost 25 years, said there were clear reasons for the public to private rebalancing. “There is a wall of money in private equity. It is long term, patient capital and there is usually an alignment between management in terms of the creation of wealth. There is no quarterly pressure and you can buy and build with support,” he said. “It is a long-term secular trend. Companies go private and want to stay there,” he said, pointing to business including Advanced Computer Software, Civica and Visma that have increased in value but have been traded between private equity funds rather than floated. Vin Murria, who founded and ran Advanced Computer Software and is now an adviser to private equity firm HG Capital, argued that because of the different tax treatment of private equity investment and executive pay in the UK, there is potential for high financial reward in the private sector. Other tax advantages of private equity, combined with the comfort of higher leverage and lower visibility during tough market transitions are other factors driving tech off public markets. “Right now, private equity holds all the cards,” she said. However, the lack of replacements for mature companies such as Sophos and Arm is a growing concern if Britain wants to be able to live up to the government’s ambitions for what it calls its “thriving tech sector which attracts brilliant people and billions of pounds of foreign investment”. “It’s like the High Street. Do we wait until everything is a charity shop or coffee shop before we do something?” said Ms Murria, who also sits on the board of Sophos. Alex van Someren, who founded and ran cryptography specialist nCipher when it was a listed company, said that the ecosystem around the UK-listed technology sector — buyside analysts, corporate finance, tech-savvy fund managers — has dried up in recent years as more companies have been sold, which diminishes Britain’s appeal as a destination for IPOs. “I feel this is a moment in time. We are at the tail-end of a spate of listings 10 and 20 years ago but there hasn’t been a replacement cycle. The supply has not been replenished. This should be recognised as a big problem,” said Mr van Someren, who is now a partner at early-stage investment fund Amadeus Capital.

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Technology research company Megabuyte calculated that there are 134 companies in the British technology and telecoms sector that are privately held and would make a sizeable float. Of those, 14 have earnings of more than £50m and could fit the bill to replace companies such as Sophos. In contrast, the number of equivalent listed companies is 59 and shrinking. At the same time, there are some burgeoning UK tech businesses that have designs on the public markets. But they are not in a great rush. Cyber security company Tessian was founded in 2013. Rather than floating on London’s Aim, where it would have had the pressure of continually raising small amounts of money for development, it has had $60m in venture capital funding from firms including Sequoia and Amadeus. Tim Sadler, co-founder, said the problem with listing is that it entails “a spreadsheet-based approach to building a company”. The amount of private capital available to a company of his type and size means it can stay in a “hyper growth” phase for longer, he added. Tessian is “absolutely” striving toward a substantial float in the future but is no rush to fill the hole left by Sophos, Mr Sadler said. “It doesn’t happen overnight. It took Sophos 15 years to get there. You will see more UK tech superstars emerge. The UK scene needs another five to 10 years.”