Ownership of Trace3 Inc., one of Orange County’s largest privately held technology companies, is set to change hands among out-of-town investment firms, bringing with it a hefty roster of more than 2,500 clients and annual revenue of $1.4 billion.
H.I.G. Capital of Miami said Sept. 27 that one of its affiliates had entered into a definitive agreement to sell the Irvine-based IT services provider and consulting firm to private equity company American Securities LLC of New York.
No financial terms were released. Private equity trade publication PE Hub in May pegged Trace3’s earnings before interest, taxes, depreciation, and amortization at around $100 million, citing officials familiar with the company’s operations.
Industry data pegs sales prices for larger IT service firms to run around multiples of 14 times EBITDA, suggesting a price in the $1.4 billion range for Trace3.
Local Ties
“Trace3’s deep engineering expertise, extensive suite of capabilities, and differentiated focus on emerging technology uniquely positions the company to address evolving technology challenges for its clients,” American Securities Managing Director Kevin Penn said in a statement.
It’s not the first investment in a local firm for American Securities, which counts more than $25 billion of assets under management, and typically invests in companies with between $200 million and $2 billion in revenue.
Trace3 was a prior backer of Costa Mesa restaurant chain El Pollo Loco Holdings Inc. (Nasdaq: LOCO), and this January completed the purchase of Santa Ana’s Foundation Building Materials, a distributor of wallboard, suspended ceiling systems and other products, in a $1.4 billion deal including the assumption of debt.
Next Phase
Trace3, with headquarters along the Santa Ana (5) Freeway in the Irvine Spectrum area, counted 25 offices nationwide as of May. It moved up three notches to No. 14 on this year’s Business Journal list of the county’s largest private companies by revenue.
“H.I.G. was an invaluable partner who enabled us to maintain the culture that makes Trace3 special, while providing strategic vision in helping us build one of the largest solutions providers in the U.S.,” said Rich Fennessy, chief executive of Trace3.
He said Trace3 would now “embark on our next phase of growth,” echoing prior comments; Fennessy told the Business Journal late last year he was “looking forward to continuing to grow and build the business.”
He said he planned on “always adding more clients, always adding more teammates.”
Trace3, which was founded in 2002, offers a broad mix of end-to-end technology services, ranging from artificial intelligence and data science to cloud computing and security consulting. It counted 170 OC employees as of May.
The company’s clients include many Fortune 500 companies. Its customer base has historically been strong in finance, securities, healthcare, entertainment and manufacturing.
Revenue Tripled
H.I.G., a global alternative investment firm with $45 billion of equity capital under management, typically focuses on the small cap and mid cap segments of the market.
It was founded in 1993 by co-CEOs Sami Mnaymneh, who previously was a managing director with The Blackstone Group and a vice president in the M&A; department at Morgan Stanley & Co., and Tony Tamer, who was a partner at Bain & Company where he advised several Fortune 500 companies on M&A.;
In 2017, H.I.G. bought Trace3. The company said that Trace3 tripled revenue during that time to $1.4 billion, becoming a leading national player while broadening its managed services offering.
Trace3’s strategic partners include AWS, Cisco, Dell Technologies, Google Cloud, Microsoft and Broadcom division Symantek.
The bulk of Trace3’s clients is made up of “very large enterprises,” Executive Chairman Tyler Beecher said in May. Beecher took on the role two years ago, after having served as CEO.
Beecher led the merger with Grand Rapids, Mich.-based Data Strategy and Optio Data in 2018. Trace3 also acquired Groupware Technology in Campbell in Silicon Valey last year.
Trace3 also maintains a venture capital briefing program, with a focus on emerging technologies, and provides clients with extensive research focused on the latest IT trends.
‘Extremely Successful’
“The partnership with Trace3 has been an extremely successful one for H.I.G., our investors, and the company,” said Matthew Robinson, managing director at H.I.G. Capital.
American Securities, which began in 1947 as a family office, opened its offices in 1994 to outside investors seeking attractive risk-adjusted rates of return. The company has 23 current investments that generate about $29 billion in annual revenue.
“We partner with management teams to drive long term value,” its website said.
The sale remained subject to customary closing conditions as of press time.
Guggenheim Securities LLC served as the exclusive financial adviser to Trace3; Akerman LLP and Latham & Watkins LLP served as legal counsel to Trace3 and H.I.G. for this transaction. Kirkland & Ellis LLP represented American Securities.
