Ben Lerner
Ben Lerner, managing director of advisory firm Lerner Associates

Entering the M+A arena

Massive valuations in IPOs such as Uber, Lyft and Pinterest show what a seller’s market it is in tech right now and the property side is no exception. Nicola Byrne sat down with Ben Lerner, mergers and acquisitions advisor, to talk consolidation and maturity in the proptech industry.

NB: What trends are you seeing in the current market?

BL: What we’re seeing is that some of the startup companies are now maturing, whilst some of them have gone away not having survived. There’s a whole bunch coming through where they have decent traction, revenues, strong growth and in many cases, profits. Ultimately, those companies are looking for funding for the next stage of their growth, whether they want to expand internationally, enter new markets, or simply move to the next phase of their longer term strategy. Companies are thinking about ‘cashing in’ or thinking about their ownership structure with possible exits, management buyout or similar.

You’re also seeing some of those big software players that have existed in the market for ages, many backed by private equity firms, looking to broaden their product set, as well as enter new markets or simply grow revenues, by investing in or acquiring some of these growing companies. Very few, if any, of the big established software providers have got true end-to-end solutions to serve their clients and this alone is often a reason to look at acquiring other businesses.

We’re also seeing a huge amount of general investment going into the space, a lot of venture capital is pouring in at the very early stage of businesses, but also at a later stage, whether it’s large real estate companies looking to acquire businesses or private equity firms trying to buy decent growth companies or solid platforms. The overall real estate tech space is hot to any investor, strategic, family offices or institutional.

Can you give me some examples of where you see this happening?

There is certainly a huge amount of acquisition and investment activity coming out MRI, RealPage, iOffice, Appfolio, to name a few, and there are obviously the Silverlake/ZPG, Accel-KKR/Reapit, Accruent (Fortive)/Kykloud deals in recent years that spring to mind. You also see real estate companies acquiring or investing in software companies, and data players such as CoStar with their acquisition of Realla.

What are the benefits of this consolidation?

For the smaller company, aside from the opportunity to realise some of their hard work with a nice full or partial exit, it’s a route to a bigger marketplace and the chance to do bigger and better things with the support that a large company or investor can bring, both financially and operationally. If they’re aligned strategically with one of the bigger players, they get access to a huge client base, an international market – all those things that would be much harder for them to do themselves because a lot of these are pinch-point solutions where they’re only fulfilling one part of the equation. Consolidation is just a natural effect of a maturing market, where you have a massive voluminous startup area like proptech.

What are the effects on the real estate industry of this maturing market?

It certainly helps the adoption of real estate tech. It’s become a lot more mainstream because it’s proven, tested, and has traction. It’s not just the forward-thinking ones who are getting involved in the digital transformation, you’re seeing that throughout the real estate industry with even smaller real estate companies, or those who are not necessarily early adopters.

Real estate companies are expecting their core service providers to be able to offer much more breadth in their solutions but equally are ever more confident to have a broad range of providers to take advantage of the best-in-class solutions, even where they are still relatively ‘young’. Much better interoperability, API partnerships [apps appearing on each other’s pages] and the flow of data between systems make this much easier. As well, whether it’s residential, or commercial, industrial or retail, the general real estate industry in the Western world is a harder place to operate than it once was, and with predicted instability and a possible downturn forthcoming, be it economically or politically or both, in Europe and across the pond, the big real estate players are looking to tech as strategic and opportunistic investments.

Have you got any advice that you could share for these companies that are going through maturity?

The general point always is for them to plan exactly what they’re looking for. Are they looking potentially for an exit? Is this the right time to move on and do something else and let somebody else to take it on? Are they looking for funding to take them to the next level and what does that look like? Are they looking at equity or debt funding, are they prepared prepared to dilute their ownership in the company, and let somebody else come on board and support their growth or simply bring an immediate reward?

My advice is to keep an eye on the current state of the market in terms of M&A and acquisitions, to get a feel for what the market is doing and offering. Building relationships with those active in the finance and M&A space is a great way to test the waters and understand the opportunities and options. Brokers, bankers and advisors are adept at building long-term relationships and are happy to spend time discussing possibilities.

If we look at the market now, particularly in the US but also in the UK and beyond, companies are paying top dollar for tech businesses. What companies are willing to pay has never been higher, and if a business is thinking of an exit any time soon, or in the next few years, they should actually stop and think whether they want to work on their business for three or four years because it’s got great potential and strongly believe it’s a disruptive gamechanger, or take advantage of the multiples that investors are prepared to pay for such businesses now.

What is clear is that right now it’s a seller’s market.

They should also be looking at strategic versus just general investors. Should they align themselves with a strategic buyer such as an established tech provider which can give them a whole new opportunity and network, or should they just look for pure financing companies who might be able to offer them a more attractive deal but can’t necessarily take the business into new markets. Is a real estate player going to bring them more opportunity or stifle opportunity? There are many different options and each one comes with its own merits.

What is the industry going to look like in the next five years?

You’re going to see much more consolidation, more M&A activity. I personally think that at some point in the next few years, as the Western world potentially sees an economic downturn, investment companies will think longer and harder before making their investments. That isn’t to say that investment will slow in the immediate future. On the contrary, the signs are that the proptech sector is very attractive to investors and will continue to be. I expect that we’ll see a lot more investment coming in at the mature company point as these start to shine through. As the property market takes an upturn, which I don’t think anyone’s forecasting any time soon, but as the property industry generally becomes better, you’ll see the real estate players investing much more again in property. It feels to me that the time is right to be thinking about longer term plans if you own a scaling business that’s got decent traction and to keep a good eye and ear on what is happening in the finance space.

Ben Lerner is managing director of advisory firm Lerner Associates. He was previously a director at Qube, now part of MRI Software, and is a venture partner of Concrete VC, mentor at MetaProp, Pi Labs, and Goldacre.

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