In what has been described as the slowest M&A market for VC-backed companies in a decade, London-based Foresight Group stands out for achieving exits for four portfolio companies over the last 12 months.
“The message is that in a tough environment we’re still managing to find some interesting exits across our portfolio,” Richard Lewis, a managing director at Foresight, told Venture Capital Journal.
Foresight, which has assets under management of about £13 billion ($16.7 billion; €15.2 billion), manages more than £1 billion in its private equity portfolio, which includes VC-backed companies. It typically invests at the Series A stage in start-ups that are two to three years old, helping them to grow and reach an exit after five to six years.
Foresight’s exits run counter to a global slowdown in mergers and acquisitions. Deal volume totaled $1.3 trillion in H1, substantially lower than the $2.2 trillion in global M&A for H1 2022 and $2.6 trillion for H1 2021, according to Bloomberg data.
Venture-backed M&A has been particularly slow. Just 429 US-based start-ups backed by venture firms were acquired in the first half, putting VC-backed M&A on its slowest pace since 2013, when only 698 VC-backed start-up got acquired, according to a report by Crunchbase.
Of the four exits achieved by Foresight, three were for companies backed by funds in Foresight’s venture capital group, and one was backed by three of its venture capital trusts, publicly listed open-ended funds that raise and deploy capital annually, and a single enterprise investment scheme (EIS). Foresight did not disclose how much each of the companies sold for.
The firm notched its biggest return on investment, 16.1x, in June 2022, when Intel bought portfolio company Codeplay, an Edinburgh-based developer of software for chipmakers. One factor that helped facilitate the sale was Foresight’s partnership with Williams Advanced Engineering (WAE), based near Oxford in the UK, now owned by Fortescue Metals Group in Australia.
“We use them to provide due diligence support when we’re making an investment, but also from a business development perspective,” said Lewis. “WAE supported Codeplay in its autonomous vehicle applications. On that one, we also helped with the appointments of an M&A advisor We got some decent trade interest in that asset from some global tech organizations.”
Foresight’s most recent exit was for Imagen, a video data management company that signed a definitive agreement on June 28 to be acquired by Thomson Reuters. The Cambridge-based company helps sports organizations, media companies and other businesses manage their digital content libraries via a media management and distribution platform. The sale is expected to generate a 1.9x return for Imagen’s investors, according to a source familiar with the deal.
“What we’re seeing across our portfolio is in order for our companies to be bought by US buyers, they need to demonstrate the product or service does work in the US” and can win and satisfy US customers, Lewis told VCJ. Imagen entered the US market two to three years ago and “has a number of high-profile US customers. It’s very strong in the sports industry. It sells to the National Basketball Association, major league soccer, and Major League Baseball as well.”
Foresight’s other exits include the sale in April of WeTrack to US-based Momentus Technologies, which makes venue and event management software. WeTrack, based in London, develops software for sustainability, project management incident tracking and control rooms for the sports and events industry.
“We achieved a 2.8x return for our investors [on the WeTrack deal],” Lewis said. “Not a homerun, but a nice return. It was great to find a US buyer for that business and it’s a trade buyer with a very well-capitalized business that can support [WeTrack] in its next phase of growth.”
The firm’s fourth exit came through the sale of E.Fundamentals to CommerceIQ in July 2022 and generated a 2.5x return for Foresight. E.Fundamentals has created a software tool that helps large global brands such as Pepsi and Unilever better understand the performance and pricing of their online sales. The company was backed by two venture capital trusts and one of Foresight’s enterprise investment schemes, which resemble US investors’ separately managed accounts.
Two of Foresight’s venture partners in California helped raise E.Fundamental’s profile, which generated some interest among potential buyers. “E.Fundamentals was generating some good revenue in the US, but what is clear is that UK ventures don’t get bought unless the buyers and investors are aware of their assets, so being shy doesn’t help our investors,” Lewis noted. “We need to get out there and have a high profile for Foresight, but also for the companies we invest in.”
Foresight does that through its venture partners who have strong networks and are consistently speaking to potential buyers about portfolio companies, he said. That is complemented by visits to the US from Foresight team members in the UK, as they did last month.
Lewis acknowledged the slowdown in both the speed and number of tech exits since early last year, estimating volume fell by more than 30 percent between the first quarter of 2022 and the first quarter of this year, with the total value of deals down even more. But he sees signs of recovery. A company with top-decile assets, especially one with a high profile in the US, is able to sell them at a premium, though it may take a bit longer.
“We have a couple of companies that are in an M&A process at the moment, but I’m also talking about [the pipeline for] new investments,” Lewis said. He expects the second half of the year to be strong for Foresight.
The UK companies with the greatest appeal for US acquirers are generating more than 20 percent of their revenue in the US, Lewis noted. “[Many] are enterprise software businesses with recurring revenue [in multi-year contracts], so it’s always helpful to go through a one-year cycle to start seeing the renewal rates of these customers.”
Importance of customer support
Much of that comes down to the efforts of local customer success teams. “In early days, they might be located in the UK, but ultimately you need customer success serving these US customers on the ground,” he added. “Quite often our investment is to support the expansion of a US team, and we saw that at E.Fundamentals and Imagen.”
Because deep tech companies are typically harder to understand than enterprise software companies and less obviously scalable, there are fewer potential buyers for them, Lewis noted. He personally worked on the Codeplay sale and said other deep tech businesses sometimes require a greater effort to attract buyers.
It’s not uncommon for a mature deep tech business at the series C stage to not yet be generating revenue. More importantly, the business needs to “show technical development, and an obvious one is securing a design win and being designed into a customer’s roadmap,” he explained. “We have a number of companies that are looking to achieve that in the next six to 12 months.”
Among those companies is Cambridge Touch Technologies, a 3D touch screen business targeting the mobile handset and consumer electronics market. Lewis said there is a “huge amount of interest in the technology,” and design wins in the next year will provide “evidence that the technology works in a commercial setting.”
The sixth paragraph has been updated to reflect the corrected entities that invested in the three companies.