Fund focus: LPs endorse Potentia’s software thesis

Potentia Capital’s debut fundraise was a protracted affair, not least because of uncertainty as to whether the B2B technology industry in Australia was large enough to justify a specialist strategy. The swift process for Fund II, which recently closed at the hard cap of AUD 635m (USD 438m) after about four months in the market, suggests those questions have been satisfactorily answered.

“The breadth and volume of opportunities we are seeing compared to 2015, when we were established, is much greater,” said Michael McNamara (pictured), a partner and a Potentia team member from the outset, having previously worked alongside co-founder Andrew Gray at Archer Capital.

This sentiment is supported by announced deal activity. More than USD 15bn was deployed in Australia’s technology sector – B2B and B2C segments – between 2017 and 2021, a fourfold increase on the preceding five years, according to AVCJ Research. This period has been punctuated by a few large-cap transactions, but the small buyout and growth space has expanded significantly as well.

Potentia is a mid-market buyout specialist, though the mandate includes minority equity and the firm recently made its debut in this area with construction tendering platform EstimateOne. It targets relatively mature companies with AUD 10m-AUD 50m in annual revenue – described as solid growers rather than high-growth, high-multiple plays favoured by earlier-stage investors.

There were eight investments in B2B software companies from Fund I and one of these positions has been exited: compliance software-as-a-service provider CompliSpace was sold for about AUD 110m in late 2021, generating a 4.3x multiple after an 18-month hold. This followed a 16x return on payroll software specialist Ascender, which pre-dated Fund I. The remaining Fund I portfolio is marked at 2x.

Each of the 10 largest LPs in Fund I – which had an AUD 382m corpus, two-thirds of its sourced from domestic investors – re-upped in the successor vehicle. These include Aware Super and MLC in Australia, New Zealand insurer ACC, and US-based Franklin Park.

Among the new investors are HarbourVest Partners and Cbus. HarbourVest was one of the two principal co-investors in Ascender, which Potentia pursued on a deal-by-deal basis. The other was MLC. Last year, Cbus recruited Serge Allaire, formerly a portfolio manager at MLC, to lead its revamped private equity strategy.

“Fund II was a very efficient process. When you have a supportive investor base, it makes things much easier,” McNamara observed. “We also took the opportunity to bring in some different viewpoints with a bit more of an overseas skew. Finally, we delivered a lot of co-investment in Fund I and we wanted to ensure that, for some of the larger deals in Fund II, we had a supportive LP base.”

Potentia’s team has grown to 23 as part of efforts to consolidate its advantage as a sector-focused investor. Recruits include a director of deal sourcing who brings data science to pipeline cultivation, while the operations team – led by co-founder and ex-MYOB CEO Tim Reed – now features specialists with expertise in areas such as human resources and finance as well as generalist operating partners.

In addition, the firm has hired people in New Zealand and Singapore to broaden its geographic coverage. Ascender made three bolt-on acquisitions during Potentia’s ownership, and the Singapore presence is intended to explore M&A opportunities in the region for other portfolio companies. “We want to build regional leaders, which are attractive targets for strategics,” McNamara said.

Ascender and CompliSpace were both sold to strategic players – US-based Ceridian and UK-based Ideagen, respectively. However, McNamara is keen to highlight other exit channels as well. Ascender attracted interest from private equity and PE-owned strategics in addition to the likes of Ceridian. Prior to COVID-19, Potentia was keen on taking the company public.

“There were some good continuing targets for growth and retaining a minority stake would have been interesting, but ultimately, the markets seized up. We paused for a few months and then took the strategic route,” he said. “I think there could be an IPO exit for certain businesses – just not right now. The Australian market has been under-indexed in technology generally.”

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Australasia
• Technology
• Buyout
• Fundraising
• GPs
• Australia
• New Zealand
• Potentia Capital
• Fundraising
• enterprise software