What's the Magic of Private Equity?

Long gone are the (good ol'?) days when tech companies appeared to advance their product/service concept from a cocktail napkin-based business plan to Wall Street without skipping a beat.

We can all rattle off dozens of companies that went public prematurely. Today, however, unless you're the hottest, customer-laden social-media outfit with more than a reasonable expectation of success, an IPO is probably not in your future anytime soon.

Financing alternatives currently run the gamut, from bringing on partners with very deep pockets to taking on yet another round of late-stage VC investment. The newer kid on the block that might start to appear more often, though, is the private equity (PE) deal.

As the term suggests, private equity involves the purchase and management of an equity stake on behalf of investors. Instead of public shares as a result of an IPO, however, institutional investors including pension funds, high net worth individuals, and insurance companies, for example, put money into a fund created by a private equity company. The fund uses this money, adding debt if necessary, and the experience and knowledge of its team to invest in companies, or build corporate entities.

What's key to these investments is that PE firms aim to create long-term value, rather than turn a quick buck. They typically purchase a whole company, rather than a percentage of it, and provide the company the one element that most other types of investment lack -- time.

Light Reading is not alone in believing that the optical networking sector is on the uptick -- PE firm Marlin Equity Partners , which has more than $2.6 billion of capital under management and a track record of more than 70 acquisitions, clearly is of the same mind. It has spent the past 18 months or so building Coriant , a global supplier of optical transport, OTN switching, and software-defined service control and management solutions, through a series of strategic acquisitions based around the optical unit of Nokia Networks (NSN) and the subsequent purchase of Tellabs. (See Coriant Launches Dynamic Optical Cloud and Qualcomm Buys HP Mobile Patents.)

Here's how Coriant was built by Marlin:

Today, Coriant operates worldwide in more than 48 countries and is headquartered in Munich, Germany, with R&D centers in Asia-Pacific, Germany, Portugal, and the US, as well as a production center in Berlin.

The vendor, which competes with the likes of Alcatel-Lucent (NYSE: ALU), Ciena Corp. (NYSE: CIEN), Cisco Systems Inc. (Nasdaq: CSCO), Huawei Technologies Co. Ltd. , Infinera Corp. (Nasdaq: INFN), and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) for transport equipment deals with Tier 1 carriers, is determined to stand out from the crowd by focusing on innovation.

According to Coriant's CEO, Pat DiPietro, "Innovation will continue to be critical to the optical components and optical systems market sectors. This has never been as true as it is today. We believe the rapid pace of innovation in end-user devices, applications and services is driving the need for equal or even greater innovation at the optical layer of the network. As the foundation for end-to-end connectivity for today's high-bandwidth applications, the optical network requires constant innovation in speed, reach and flexibility. This is not only about hardware-based innovation, but also software."

When asked about how he thought components innovation will be funded, DiPietro explained: "The concurrent demand for high-bandwidth mobile, video and cloud-based services and applications is creating a more robust ecosystem in the optical components market than we've seen for some time. We're seeing a lot of cutting-edge innovation coming from smaller startups backed by traditional venture capital investment models. We believe this line of funding will continue to fuel innovation in the sector."

DiPietro also said that publicly funded companies would continue to contribute to the sourcing options for end-to-end system suppliers such as Coriant. "That said," added DiPietro, "we believe private equity can be a viable funding alternative. What is critical, however, is for private equity firms to have not only the requisite capital resources, but also the patience for longer-term investing. After all, the long-term growth opportunity in the optical sector is tied to continuous innovation, as well as the competitive advantage that comes from taking innovation from lab prototypes to commercial adoption. This requires taking a long-term approach to investment and making a sustained commitment to R&D that enhances the long-term value of a company's customer offerings."

DiPietro points to the uniqueness of Marlin Equity Partners in that the company benefits from a business model that leverages deep in-house technical expertise, extensive industry experience, and an understanding of the innovation and R&D necessary to build Tier 1 optical networks. "We believe this model is required for private equity to be successful in this space," added DiPietro.

Coriant isn't the only example of private equity involvement in the global communications networking sector, of course. In the Service Provider Information Technology (SPIT) sector, Thoma Bravo has made a string of acquisitions to build a portfolio that includes expertise in network management, analytics, security, and testing, while Chinese SPIT giant AsiaInfo Inc. (Nasdaq: ASIA) is now under PE ownership. (See AsiaInfo-Linkage Goes Private, Private Equity Firm to Buy Empirix, PE Firm Takes Control of InfoVista and Blue Coat Merger Approved.)

In addition, Genband Inc. is now part of the One Equity Partners (OEP) portfolio. (See What's Next for Genband?)

And only recently, PE firms have been lining up to bid for the telecom infrastructure business of Spanish utility firm Gas Natural, while a group of private equity players, including Providence Equity Partners, CCMP Capital Advisors, Quadrangle Capital and Thomas H. Lee, have struck a €7.2 billion ($10 billion) deal to sell Spanish cable operator ONO to Vodafone Group plc (NYSE: VOD). (See ONO Says Yes to Vodafone.)

Private equity financing isn't new in telecom, but it's starting to become a more likely option, whether to cobble together smaller entities into one gigantic competitor, as has happened with Coriant, or to resurrect a less-than-stellar player that has good bones but performs in an underwhelming fashion.

Expect PE to be seen more often and more effectively, giving more time to its charges to transition, grow and contend than rivals under pressure from investors with near-term returns in mind.

— Carolyn Mathas, contributing editor, special to Light Reading

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CMathas 4/23/2014 | 12:10:21 PM
Re: Success stories ? Choosing to work with a PE firm that didn't have vast experience in the industry segment would be pretty suicidal.
CMathas 4/23/2014 | 12:02:58 PM
Re: Success stories ? Yes, short term let's you see success or failure quickly--or does it? Many successes really do just take some time, especially when the company has seen any kind of disruption, or the industry has. It's refreshing to see any investments taken on for the long haul, especially with a PE company that actually has substantial experience in the industry where they're investing.
smkinoshita 4/22/2014 | 6:15:58 PM
Re: Success stories ? I think the key here is "long term".  It's very hard to ask for success stories on a project that has a long-term view.  Typically, playing the long game is similar to bamboo -- it grows very little in the initial years and then grows extremely rapidly.

That's also what makes a long-term approach scary -- the quick-buck version lets one see success or failure quickly, but the long-term approach might mean that one waits around a long time just to see failure happen.  At the same time, the long-term approach also pays off significantly better.  Look at Apple.  Anyone who invested in Apple and bailed before Jobs turned it around is probably still regretting the decision.
danielcawrey 4/22/2014 | 3:02:49 PM
Re: Success stories ? These types of deals require a ton of money, and private equity can be a source of that money. Whether success or failure, these types of infrastructure plays require massive amounts of capital.

So, the magic is money. And I would question whether many of these firms have the experience to make the right choices. 
CMathas 4/22/2014 | 12:56:34 PM
Re: Success stories ? It's also beneficial when the PE firm has substantial experience in the industry involved--setting it apart from a business only deal and ensuring that there is the experience necessary to be able to hang in there for the long term.

Vishnu Goel 4/22/2014 | 12:51:13 PM
Re: Success stories ? Generally the PE magic revolves round the domain knowledge,long term staying power and patience of extra-ordinary nature.I think consistently one aspect is ignored.That is the customer facing strengths of the Company in control.Brand Power of the company across the geographies,and track record on aggregation is very important too.Coriant has to exhibit this among other things! Vishnu Goel T&M +919810101238
derac7020 4/22/2014 | 12:34:56 PM
Re: Success stories ? Good points.  I was looking at it from the point of the 'company' thriving as in growing in the markets targeted.   Perhaps it was just too broad a question.   
derac7020 4/22/2014 | 12:33:08 PM
Re: Success stories ? I would say that its early make a call on Coriant
[email protected] 4/22/2014 | 12:29:47 PM
Re: Success stories ? It depends on what you mean by a PE success story.... a 'success' for the PE firm might not be viewed as a success for the company it has acquired/run/invested in.

So, do you mean, a successful PE intervention where the company under PE control has thrived? If so, using what crietria? Revenues? profitability? market share? valuation? All of those?

[email protected] 4/22/2014 | 12:27:31 PM
Re: Success stories ? It's too early tosay whether Coriant is a success or not but the earky indications are that it has a very clear vision, a solid operational model and some very able individuals at the exec level, all of which are needed to stand a chance.

Let's see how thinjgs are going ina a year's time. 
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