4.5 years. 0 bolt-ons. 11x return

What do all standout software PE deals have in common? A buy & build strategy that instils primal fear into remaining competitors? A stomach-churning debt package?

Wrong!      

We have witnessed double-digit MOICs in deals that featured none of these tricks.  

To prove the point, consider the CBPE Capital / Xceptor case study.

Xceptor develops software for clients in the financial services and energy trading industries, which enables them to automate data processing.

CBPE is a British PE firm that targets businesses worth up to £150M. It was spun out of the British merchant bank Close Brothers in 2009. Since the inception in 2000, the fund has completed 62 investments and 100 add-on acquisitions, with an aggregate MOIC of 3x. 

3x is decent…but not spectacular. 

One deal stands out though. From the 2021 press release: 

In this article, we distil CBPE’s success into 5 key ingredients:

1. Choose target well

2. Don’t overpay

3. Strong shareholder / management alignment

4. Clear value creation agenda

5. Exit at a chunky premium to a larger PE

1: Choose target well

Many of Xceptor’s customers run legacy tech stacks that are undergoing digital transformation. Xceptor sits at the heart of these processes, enabling clients to transform data and processes without skipping a beat. Its software ensures that data is accessible, no matter where it sits and in which form.

Xceptor’s value prop is simple:

1. Enhance compliance by eliminating human error

2. Lower operational costs through low/no-code automation

Xceptor’s client roster includes household names like BNY Mellon, Lloyds and JP Morgan. However, it would be a stretch to call its product mission critical, as evidenced from the 100% NDR in FY19 (for context, ServiceNow, which counts many banks among its users, was pumping NDR of 130%+ at the time). 

Retention didn’t matter that much because the underlying market was booming. In the year leading up to the acquisition Xceptor grew topline and EBITDA 31% while expanding the EBITDA margin.

Up until that point, the business had been bootstrapped.

2: Don’t overpay

UK Companies House filings suggest that CBPE’s predecessor SVG Capital valued Xceptor at £33M EV, excluding acquisition costs.

The deal closed in August 2016. We estimate TTM EV/revenue of 5x and an EV/EBITDA of 12x. On a forward basis, the multiples work out to 3.2x and 7.4x, respectively. Not demanding at all! 

3: Strong shareholder / management alignment

The 2016 acquisition was financed with £6.5M of debt: a 5-year bullet provided by Lloyds Bank across two facilities, priced at a 3.25%-3.75% margin. Loan arrangement costs were 7%. 

The remaining funding came from unsecured loan notes of a) £16.9M to CBPE (i.e. sponsor equity) and b) £8.2M to the management (i.e. rollover). Both structured as preference shares with 10% PIK.

Two years later, as the business grew CBPE was able to upsize (to £27M - including a £2M revolver) and refinance the facility (HSBC and Silicon Valley Bank replaced Lloyds). The pricing was similar however. 

The refi allowed CBPE to recap 100% of its investment (excluding accrued interest) - just 2 years in.    

What about the management? 

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