Private Equity And The Tech Romance
In analysis / By Tanzeel Akhtar / 02 March 2017
There is no denying the tech space is the most revolutionary sector in 21st century business and one which is attracting increased investor interest.
For a long time private equity firms have been in on the action and focused on tech buyouts. We explore how tech will evolve with the heavy involvement from the private equity sector. What are the main drivers and how will Brexit impact the relationship?
BVCA: returns in tech driven by high-growth nature
The British Private Equity and Venture Capital Association (BVCA) group released the Guide to Investing in Technology report which explores the fast moving nature and investment in new tech.
BVCA findings suggest private equity returns in the tech sector are often driven by the high-growth nature of the assets in question, and the number of exit routes open to investors has been high.
Understanding how the private equity sector operates and what investment strategies are being deployed is key to succeeding in tech which requires expert knowledge.
In the report LDC investment director at David Andrews observes the corporate buyer pool is probably more active than it has been for many years with increasing volumes of cross-border M&A in tech in 2015, not just at the top end of the deal range. The IPO market has been buoyant in the past and the volume of private equity money in the market is creating a vibrant secondaries market.
TechCity reports following a brief dip in M&A deals in 2015, the number of deals increased again in 2016 with over 20 deals of more than €100m transaction size each, with the UK leading the way in Europe.
BVCA found secondary buyouts are certainly gathering pace in the sector in Europe, with four of the ten largest deals recorded in the last six years being the sales of assets from one private equity firm to another.
The group identifies the recovery in the IPO markets in the last few years has a lot to do with the uptick in deal activity in the sector, with investors heartened by the re-opening of that most-popular route to exit for tech businesses, but options remain varied.
Pitchbook: Most active PE investors in SaaS
The trend of the software as a service (SaaS) delivery model has been rapidly displacing legacy packaged software and IT spend has been increasing one the years. In an environment where we are witnessing cloud consolidation, we have seen huge purchases such as Salesforce.com buying Demandware for $2.8 billion,
Pitchbook, a M&A, private equity and venture capital database reports it was back in 2013, private equity investor activity in SaaS businesses began to climb. PitchBook reports that private equity firms did 567 tech deals worth $159.8 billion were completed in 2016 the highest in the sector in the last fifteen years.
Most recent announcement includes Blackstone, which manages $100 billion in private equity assets, bought a majority stake in the cloud computing business Cloudreach.
Some of the most active private equity investors in the SaaS space include; Vista Equity Partners, Insight Venture Partners, Thoma Bravo, TA Associates, Marlin Equity Partners, HgCapital, Bain Capital and Silver Lake.
One of the largest private equity exits of the year in the Bay Area involves computer security company Blue Coat Systems.
Private equity sector prepared for Brexit
There is no doubt the decision to Brexit will change the scenario for private equity and the tech space in the UK creating both threats and opportunities for firms.
The London School of Economics (LSE), in the LSE Business Review reports a number of Brexit related factors could negatively impact on private equity firms’ abilities to conduct deals.
The first concern is many debt funds are foreign-owned and may exit the UK in the light of Brexit. This would reduce debt availability and make it more difficult to put the finances together to fund acquisitions.
The LSE notes on the positive side, Brexit will allow the UK to develop its own policies on private equity operations within the UK. One example is the UK government would be able to re-introduce more flexibility concerning state aid to stimulate private equity investment in growth finance and the buyout sector.
The macroeconomic impact of Brexit is yet to be felt as the UK has not yet exited the EU.