NEW YORK  - Software M&A is making private-equity shops click on club deals. A group of at least five buyers led by Hellman & Friedman - including Blackstone, the Canada Pension Plan Investment Board and Singapore’s GIC - is paying more than 30 times EBITDA for its $11 billion buyout of Ultimate Software. Private equity is targeting cloud companies because their growth is so appealing. But such lofty valuations require big equity checks few can or want to write. That means teaming up, despite the risks that entails.

Private-equity funds targeting technology held more than $500 billion in assets under management by the end of 2018, estimates Preqin – which is twice as much the sector did five years earlier.

In part this is just a reflection of the larger role technology plays in society and the economy. Juicy returns help – Hellman & Friedman’s tech and software buyouts over the past two decades have averaged a 30 percent internal rate of return, according to someone familiar with the firm’s record.

Cloud firms are growing quickly. Ultimate, for example, is projected to increase revenue and EBITDA by 20 percent this year. The result is rising multiples. The average tech buyout took place at 17 times EBITDA last year, according to Refinitiv data. It was 14.7 in 2007.

That means private-equity buyers can’t slap on too much debt. Instead, they have to pony up more equity. Generally, when deal values reach 11 digits, the risk is too concentrated for one buyer to shoulder.

Such club deals acquired a bad reputation following the last boom. Allegations of collusion at some deals surfaced, and others, such as TXU, blew up. It’s also harder to manage and exit an investment when partners have differing views on valuation, strategy and desire for liquidity. The 2005 buyout of SunGard became dysfunctional because there were seven private-equity owners.

Not all multi-buyer LBOs are the same, however. The rise of semi-passive investors, such as pension boards and sovereign-wealth funds, means bigger deals can be done now with fewer active general partners. Just two GPs are likely to make most of the decisions on the Ultimate Software investment, for example.

That doesn’t rule out problems: Newer players may not be as pushy, but they’re no shrinking violets. Perhaps the risks of collaboration are worth the price of admission for such fast-growing firms. It may also simply indicate expectations are too high and capital too plentiful.

CONTEXT NEWS

- Ultimate Software said on Feb. 4 it had agreed to sell itself to an investor group led by Hellman & Friedman in a deal valued at $11 billion. Significant investors include Blackstone, GIC and the Canada Pension Plan Investment Board. Other members include JMI Equity.

- Under the agreement, investors in the cloud-software company will receive $331.50 per share, or a premium of approximately 19 percent to the shares' closing price on Feb. 1, the last day of trading before the deal was announced.

(Editing by Antony Currie and Martin Langfield)

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