With trillions in ‘dry powder’, investors once again eye proptech

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In a Wednesday afternoon session at Inman Connect Las Vegas, moderator Greg Robertson spoke with Chris Gough of Houlihan Lokey and Dominic Chan of Vaquero about the dearth of proptech deals that have accompanied the thus-far lackluster 2023 real estate market.

Echoing his earlier remarks, Gough predicted some “thawing” in the category for buyers wanting to do deals, while he sees sellers getting more comfortable with the macroeconomic environment. “Some of the scaries — like the debt ceiling negotiation and the regional banking crisis — are in the rearview mirror,” he said, “and it’s giving people an increased level of confidence for the rest of the year and 2024.”

Chan agreed, adding that capital markets are “sitting on about $2.4 trillion in dry powder. For most private equity and VC, that’s an all-time high,” with little M&A volume and few IPOs. 

“On the flip side you have highly profitable, decent growth companies in certain markets such as construction software and databases for real estate, including vacation rentals, which is a pretty hot space,” Chan said. “You’re still seeing relatively robust multiples and valuations, mainly because there’s also huge scarcity and great assets in the market compared to the overall volume.”

Money tends to be deployed, Gough said. Typically, investment funds have defined ways in which they need to provide funding, so the money will need to go somewhere. The lens for a lot of investors, however, is starting to narrow, he said.

“It used to be growth at all costs,” Gough said. Now, however, investors are looking for ultra-high-quality KPIs. “Businesses are asking, ‘Is this a business that’s top quartile and able to sustain itself’” regardless of what’s going on in the broader economy?

According to Chan, “Investors are becoming much more disciplined and looking for profitability, gross margins and retention.”

While the goal for companies used to be IPOs, Chan sees that changing. “There are a few tech companies that are getting ready to get teed up to go public, largely because the public markets have performed well.” However, he added, going public isn’t necessarily the goal anymore for every company, and private equity has become even more important as a result.

In relation to real estate, Gough said that the fundamental dynamics of the industry and the emphasis on both agent and customer retention, should make founders of real estate-related businesses think differently about the way they scale. In opposition to the “shiny-object” focus of many agents, the key KPI for the business owner should be revenue retention. 

“Are you able to hold the customer and upsell over the life of the company? That tends to be lower in this industry than others,” Gough said. That’s why many real estate business owners look to adding title, mortgage and insurance to expand their customer-related revenue cycle.

Chan said that transaction-related services that focus on AI integrations for documentation, payments and processes add value to functions that used to be manually driven within the industry. Construction tech, supply chain-related services for homebuilding and other areas that are integral to the growth of the economy are also attracting a lot of attention from acquirers and investors.