Economics

How Ancestry Made A Fortune For Spectrum Equity

Sometimes it only takes one company to make a fund successful.

Meet Spectrum Equity Investors V, a 2005 vintage vehicle from the Boston-based firm that raised $1.2 billion.

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What makes this fund special? Consider: It has the highest TVPI (2.37x) of any growth fund since 2000, according to the PitchBook Platform. It also had a 17.9% IRR as of the end of 4Q 2016, ranking seventh. How'd it happen? The firm's brain trust put its financial might behind a company that helps users track their genealogical heritage.

In 2003, Spectrum Equity bought a minority stake in Ancestry.com for $13 million. Four years later, the firm went all in, acquiring a majority stake in the Utah-based company in a deal valued at some $300 million. As part of the deal, Spectrum devoted about $100 million of its own capital through the aforementioned Spectrum Equity Investors V, according to PE Hub.

Looking to cash out, the Boston-based outfit took the company public in a 2009 IPO that raised $115 million. The firm, which then owned 67% of the company, unloaded about 10% of its 25.7 million shares through the public offering, then sold shares again via a pair of secondary offerings in 2010 and 2011. As a result, Spectrum realized a reported $360 million in proceeds and $221.5 million in profits.

Life on the open market was short-lived, however. Shares began to dip in 2012 when NBC canceled the show "Who Do You Think Are?"—which used Ancestry's product to reveal guests' family heritage. (The show was eventually revived by TLC.) A few months later, a group of investors led by Permira took the company private in a $1.6 billion deal. The result: Spectrum earned a reported 7x return on its original investment while also maintaining a roughly 31% stake in the company.

In May 2016, the Permira-led group sold a minority stake in Ancestry to Silver Lake and sovereign wealth fund GIC at a $2.6 billion valuation. As part of the deal, Stoneway made a full exit while Permira and Spectrum maintained a minority interest. (It had treated them well so far, so why not?) At the time, Ancestry had more than 2.2 million subscribers and was coming off its first year of profitability.

Enter June 2017, when the company confidentially filed for an IPO that could value it as high as $3 billion. That plan hit a snag earlier this month when it was announced that longtime CEO Tim Sullivan would step down and the IPO plans would be postponed. Ancestry CFO and COO Howard Hochhauser is acting as CEO in the interim, and, presumably after Sullivan's replacement is found, a public offering is still likely in the company's future.

And when it happens, Spectrum Equity and its investors will once again stand to benefit.

Check out the full list of billion-dollar growth funds.

Article by Adam Lewis, PitchBook