Enterprise work management and collaboration software firm Smartsheet Inc. is holding talks with U.S. investment bankers after attracting interest from private equity firms exploring the possibility of a buyout, Reuters reported today.

The Bellevue, Washington-based company, which has a market capitalization of $6.6 billion, is reportedly working with Qatalyst Partners to review the approaches of a number of private equity firms, people familiar with the matter told Reuters. The report added that Smartsheet has not yet made any final decision on whether it should agree to being acquired, and it’s possible that the company will reject their offers and remain independent, the source said.

Although the source requested anonymity, the news excited shareholders of the publicly listed company, and its share price gained more than 5.5% in trading today.

Lately, private equity firms have been targeting deals in the technology and services industries, having sat on the sidelines for much of 2023 because of higher interest rates that made leveraged buyouts more difficult to finance. But this year that financing has become more readily available, and private equity deal volumes rose 41% in the first half of the year, Reuters said.

Smartsheet is a leader in the collaborative work management space, providing a modern alternative to traditional project management tools. Its main focus is on the collaborative aspects of project management, as opposed to functions such as schedules and tasks. Using its software, organizations can manage, track and automate project workflows through a single platform, with more advanced features and capabilities relating to project management than Microsoft Corp.’s Excel.

The company is focused on winning over big corporate enterprises, with customers including Cisco Systems Inc., Pfizer Inc. and American Airlines Inc. All told, it claims to serve around 85% of the Fortune 500, competing against products such as Asana Inc. and Monday.com Ltd., which both target smaller companies.

Smartsheet is a fast-growing company that aims for revenue growth at the expense of its bottom line. Though it has delivered a string of quarters in which it showed significant sales growth, it has also posted a string of losses. In more recent quarters, it has been working to trim those losses as it improves its profit margins.

For the fiscal year ending Jan. 31, the company reported total revenue of $904 million, up from $714 million a year earlier, while its pretax losses narrowed from $213 million to just $96 million. At the end of April 2024, it had $334 million in cash on hand and carried no debt.

Reuters explained that traditional banks are reluctant to provide funding to companies that have used up their cash flow, and that’s what makes it more difficult for private equity firms to attract funding.

To get around this, some private equity firms instead turn to “shadow banks,” or investment firms that operate outside the traditional banking sector. Those investment firms have more flexibility to provide loans because they’re not under the same regulatory scrutiny as traditional banks.

As a result, they can offer funding that doesn’t hinge so much on a company’s cash flow and more on its sales. These kinds of loans are often referred to as “annual recurring revenue loans.”

It is, however, a much riskier type of loan and can easily go sour. For instance, Vista Equity LLC said in May that it had written off the entire equity value of its investment in the education software company Pluralsight Inc., just three years after paying $3.5 billion to take it private.

Image: Smartsheet