Weekend riff: The strange death of Pluralsight's value

• Cautious Optimism will come out a little later each weekday next week as I make a quick dash to the West Coast to hang with the This Week in Startups crew.

• p.s. I cited The Information in Friday’s notes on Perplexity AI’s possible fundraise and present ARR. TechCrunch broke that story, folks pointed out via email. My bad! — Alex

Welcome to the weekend. Instead of waiting for Monday, I want to chat about Pluralsight's strange situation today. The edtech company with a technology-industry focus is now worth nothing after its owner, Vista Equity Partners, wrote “off the entire equity value of its investment,” per Dan Primack.

Given that the transaction between Pluralsight and Vista was valued at $3.5 billion when announced in December 2020, news that the company’s owner was marking it to zero made people wonder what the hell happened. To understand, we have to go back in time.

Rewinding the clock

After raising around $190 million while private, Pluralsight filed to go public in April of 2018. As I reported the time, it was growing quickly at the expense of rising losses:

Pluralsight recorded 2015 revenue of $108.4 million, $131.8 million in 2016, and $166.8 million in 2017 […] growth rates of 21.6 percent and 26.5 percent. So, the company has managed to accelerate its growth pace recently from a higher revenue base.

That would normally be quite encouraging, but Pluralsight paid for the growth quite dearly. Indeed, the company’s net loss […] ballooned from $20.6 million in 2016 to $96.5 million in 2017.

Pluralsight eventually priced its IPO at $15 per share (above its raised range) valuing it at $2 billion and opened at $20. The company eventually saw its value rise to nearly $40 per share later that year.

Like many companies, Pluralsight saw its value fall off a cliff during the early COVID period. Its shares recovered to a little more than $20 apiece before starting to shed value again later in 2020. Enter private equity, which offered “$20.26 per share in an all-cash transaction,” a sum that “represent[ed] a premium of approximately 25%” to its 30-day average price at the time.

Remember that this deal came together before 2021-era exuberance really kicked into high gear.

What shape was Pluralsight in when it sold? Investing.com’s historical notes on the company’s performance in 2020 indicate that its revenues grew “24% to $391.9M [in 2020 while its] net loss increased 14% to $128.1M.” Plenty of growth, but still losing lots of money.

Layoffs arrived to help stem the red ink—at least three rounds. Those cuts likely helped the company reduce its losses, but a weight around the company’s neck made its financial situation far from pretty even after it reduced its operating costs.

When Vista took it private, Pluralsight also took on a lot of debt. Here’s S&P Global back in 2021 discussing the setup in a story covering a separate transaction:

In April, Pluralsight received a $1.175 billion recurring revenue term loan, alongside a $100 million revolver, backing the take-private acquisition of the workforce development company by Vista Equity.

That’s a lot of debt. The terms of which matter. Here’s S&P Global again, also from 2021:

[Pluralsight’s] debt features covenants based on recurring revenue through December 2023, switching to EBITDA-based covenants thereafter. Interest on the loan was L+800, with a 1% floor, ‘resulting in a 9% coupon in a market where bread-and-butter unitranche financings offered L+550 to 600,’ Wells Fargo said.

What does L+800 mean? The LIBOR rate plus 800 basis points, or 8%.

But what happened to global interest rates since the debt was put together? They went up; a lot. Skipping some technical material, the presumption amongst observers is that as rates rose, Pluralsight’s L+800 debts got incredibly expensive very quickly. By my math, the cost on the debt in question rose to more than 13%, if nothing else changed. We’re speaking loosely here so don’t hold me to these figures, but 13% against even $1 billion in debt is $130 million per year in interest costs alone.

Pluralsight couldn’t bear it. So, private equity did private equity things to keep the ball rolling. Bloomberg reports Pluralsight moved IP to a “new subsidiary,” allowing it to raise more money. That capital was used to “pay interest to existing lenders.” But with the IP moved to a new corporate domicile, the original asset is now worth a lot less. Perhaps, say, zero.

One way that private equity makes money is by buying companies, tuning them up, and then relisting them. Another way is buying companies, cutting them up into smaller pieces, and selling those off piecemeal. You can also use debt to buy companies that purchased entities have to pay off. Or, my favorite, you can buy a company and then have it pay you huge sums of money it has to borrow and then make payments against.

The PE game can prove very lucrative. Yahoo, my former employer, was purchased from Verizon by Apollo. Apollo used ~$2 billion in debt to help pay for the $5 billion deal. Then Yahoo sold off some of its parts and paid off that debt. Yahoo is reportedly profitable and doing more in yearly revenue than it cost for Apollo to buy, even more so when you back out the debt used that was financed by selloffs.

Pluralsight’s far from dead as an operating entity, with reportedly rising EBITDA. Good, but against expensive debts it wasn’t enough.

Sure, the rise in interest rates caught a lot of folks flat-footed. But did we really expect ZIRP to last forever?

I have mixed views on private equity as an industry. Certainly, in a capitalist economy, you will have private capital pools doing deals and looking to make money. No issues there. But what private equity often does in my experience watching its dealmaking is take companies that were viable and turn them into collections of overworked, undercomped staffers stuck servicing debt that they got nothing from. It sucks for staff, often. That just seems unfair to the people actually doing the work.

Regardless, to everyone at Pluralsight, I hope things get better and your jobs are safe. Certainly, the folks at Vista are doing just fine.