Sure, Private Equity Likes Proptech — It’s Just That It Likes to Go Big

Private equity firms’ larger, more aggressive investments aren’t always the best fit for a field full of smaller startups

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Private equity invested in proptech for years, but its degree of interest in the sector has fluctuated over time as PE investors struggled to find real estate tech companies that measure up to their yield expectations.

On the other side of the equation, proptech entrepreneurs continue to consider whether to take the PE money and run, or to accept venture capital funding that comes with less pressure to produce huge profits.

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That investment-yield tension still brings private equity interest to proptech, but the relationship often remains in the shadows compared to VC investments and bootstrapping. That’s especially true in pre-seed and seed stages of development, experts said.

“I think you see continued and growing interest of private equity in proptech, and that is a function of the space just continuing to mature,” said Christopher Yip, partner at RET Ventures, a seed-stage proptech venture capital firm based in Park City, Utah. “Private equity typically means a later-stage investor, where companies are typically either at break-even profitability or just about to get to break-even. I’d say most of the private equity activity we see in proptech right now is from traditional generalists — growth private equity.”

Yip knows both investment sectors well. Along with his VC work at RET, he spent 12 years at global private equity firm TPG, where he led growth and private equity investments in tech-enabled companies.

“Obviously, the market slowdown has meant that everything’s more disciplined on valuation,” said Yip. “Private equity is more conservative around underwriting exits from a financial perspective, so the quote/unquote deal math may not work as well. But I think the general attention to the sector continues to grow.”

Property services platform Lessen’s acquisition of facilities maintenance technology company SMS Assist in January 2023 could be considered one way in which private equity is keeping its nose under the proptech tent. Lessen used debt and equity funding from firms such as Monroe Capital, Värde Partners and Koch Real Estate Investments.

The largest private-to-private proptech M&A deal to date at that time, the transaction consisted of cash and stock, with Lessen raising approximately $500 million in combined new debt and equity, in addition to SMS Assist stockholders exchanging a portion of SMS stock for Lessen stock. That increased the combined companies’ valuation to more than $2 billion in enterprise value, according to a Lessen announcement at the time.

Now, however, direct private equity investments in proptech look to be a bit more difficult to pull off.

“We saw some folks who I traditionally think of as growth private equity investors move earlier,” said Yip of PE investments a few years ago. “So we certainly saw people paying higher multiples two or three years ago to get a toehold, and they kind of paid up for earlier-stage businesses. I think that has largely gone away.

“I talk to a lot of private equity firms about our portfolio at RET. We now have 35-odd companies that we’re still actively invested in, a third of them are later-stage, a stage that might attract private equity interest. So they’re always calling. But I think they’ve gone back to sticking to their knitting, where they’re looking at businesses that are closing in on high single digits, $10 million in revenue, and saying, ‘Can these businesses be a $30 million or $40 million revenue business over time?’ ”

Among the examples of private equity funding in the proptech sector since 2018 are Insight Partner’s investment in CoreLogic, VTS and HqO; Stone Point Capital’s investment in CoreLogic; TA Associates’ investment in Green Street; Silver Lake’s investment in LightBox; Blackstone’s investment in Dealpath, VTS and Proda; Brookfield’s investment in various undisclosed proptech companies; Thoma Bravo’s investment in RealPage; and Hg Capital’s investment  in many EU-based firms.

“PE is all over proptech,” said L.D. Salmanson, CEO and co-founder of Cherre, a major proptech data company. “They just can’t write small checks into early-stage ideas that may never scale or can’t return the multiple required. How many firms can you write a $500 million check into? Two? Five? It’s a short list. The PEs are there. Good proptech firms for PE, not so much.”

Eric Brody, a developer and co-founder of Anax Real Estate Partners and Anax Ventures, an early-stage proptech investment fund, is a lot more skeptical about private equity’s role in proptech investment and growth.

“I think that private equity in proptech is almost nonexistent, meaning their interests just don’t align with the way in which you invest in proptech,” said Brody. “Private equity, I don’t think, is the right choice for proptech.”

The relative immaturity of the proptech sector, let alone that of individual companies, is an ongoing issue for both sides, he added.

“They don’t know how to like proptech today, so we’re not seeing much private equity in the space,” Brody said. “And what we’re also seeing in proptech is companies that are like a hybrid between a unicorn, 1,000x company, and a really good company doing 50x or 10x. Unfortunately, venture capital isn’t interested. They take these massive swings, so there’s this space searching for the appropriate capital.”

According to the Center for Real Estate Technology & Innovation (CRETI), a proptech data company, proptech valuations are down 80 percent and investments into real estate technologies are down, Brody noted.

“What I’m learning is that tech is the future, but how big is its impact on real estate?,” said Brody. “It just might not be a 1,000x return. But what about if it’s just a slight advantage? Then, the value is there. So everyone is trying to learn what’s the appropriate capital. It can’t be venture looking for 1,000x, and it can’t be private equity, which needs to move hundreds of millions. So there’s a void right now.”

Unlike private equity firms, when ANAX Ventures began, it used its domain expertise in real estate development to make smaller investments in proptech.

“We were a small venture fund where basically the thesis was, ‘Does it make me a better builder, developer, manager, or improve the way that you occupy our assets?’ ” said Brody. “We were making micro investments.”

The gap between private equity interests and expectations in proptech companies and those of real estate tech-focused venture capital firms leaves a wide playing field for both, including Anax Ventures, Brody said.

“I think that, first of all, there will be enough funding for any of the ideas and the founders that are using domain expertise within their thesis of how technology has to meet their audience where they’re at and then pull them toward the technology that they’re creating,” he said.

“The question then becomes, what capital is going to be available? Private equity has a very specific seven- to 10-year horizon, and is probably not the best place to deliver capital. Venture capital wants to know that you are going to change society immediately or over time with some grandiose idea. So, yes, if you have one of those ideas, venture is there for you.”

Philip Russo can be reached at prusso@commercialobserver.com.