As the world steers towards a technology-driven future, private equity firms are getting ahead by increasingly investing in tech. The past two years have only accelerated this as covid-19 forced businesses to undergo rapid digital transformations.
Emanuel Johnsson, a partner at Verdane, says: “Almost all PE funds have some type of tech angle today. Even traditional outspoken generalist funds, who used to deliberately shy away from anything related to ‘tech’, have either tried to build practices around certain holdings that they can arguably claim to be ‘tech’ and built a tech PE team around those, or taken it one step further with platform extensions and launched separate growth/tech-oriented funds.”
According to Bloomberg data, private equity firms spent $80 billion acquiring companies in the global technology sector in Q1 this year – an all-time high for a quarter and up 141 percent on the same period in 2020.
Continued appetite for software
When it comes to the type of tech companies private equity firms are investing in, software-as-a-service businesses are among the top of the list. Recurring cashflow and high gross margins are the main drivers of this, says Riverside’s co-CEO, Stewart Kohl: “SaaS, with its beautiful recurring revenues is high on everyone’s dance card. It’s no longer early innings here, but the applications seem almost endless. So, yes, this trend will continue.”
Earlier this year, Riverside exited SaaS provider ARCOS. The company’s revenue and EBITDA increased more than 5.5x during the firm’s investment period. In addition, Greenphire, a provider of financial lifecycle management software for clinical trials and another of Riverside’s 2021 exits, experienced revenue growth of 680 percent during the firm’s holding period. “We’ve loved SaaS for a long time because investing in very small SaaS companies poised for growth can be very compelling,” says Kohl.
Data is another area that is of increasing interest to investors, especially as more companies look to offer personalised, innovative solutions. Yann du Rusquec, a managing partner in the growth team at Eurazeo, says: “More companies are using it, even the most traditional ones. They are building teams of data scientists, who need to collaborate with developers as well as business analysts, and in order to manage that collaboration and involve a rapidly growing number of employees, companies need the right data tools. This is one of the most promising markets in Europe and the US.”
Tech talent war
Arguably, one of the most important aspects of private equity investing is finding the right team to lead and help grow portfolio companies. Du Rusquec predicts that Europe will experience a tech “talent war” in the coming years: “Since the market is quickly ramping up, I anticipate it will be more and more difficult to recruit talent, in particular senior executives. The number one priority of tech companies will be to navigate this talent war.”
Ali Ramadan, a partner at law firm Goodwin, agrees: “In every industry we have seen the battle for talent intensify over the last few years – this is the case in particular with tech. From a deal sourcing and operational perspective firms look for people who can execute, with many investors targeting founders who have successfully built and exited businesses.”
Despite this, du Rusquec is optimistic about the recruitment process and says the calibre of candidates has grown considerably: “It is now possible to find candidates with a lot of relevant experience, which wasn’t the case 10 years ago.”
Focus on specialised teams
As firms look to win deals, there will be a continued focus on hiring diverse teams that include sector specialists, says Verdane’s Johnsson: “What used to be a management team presenting to a VC or PE firm years ago has changed. Investors now have to present a must-have talent team to support the management team on its next growth journey. We like to think this is a given, but there is still a lot of expectation out there that management must forecast, deliver and report; when in reality, the expectation should equally lie on the board to be highly engaged.”
In 2016, Verdane decided to reinvest all its management fees back into the Verdane platform to hire people with sector expertise from within its network to form Verdane Elevate – the firm’s operational expert team. The aim was to utilise employee skills by enabling them to do what they are best at in order to supercharge the growth of Verdane’s portfolio companies.
“We typically start the conversation [by] asking what the C-level executives would want their board to do for them, focusing on the top three-to-five must-win battles as the management team see them, and how we can win those together,” says Johnsson.
With rapid growth often comes the need for new regulations and policies. “National security is becoming an increasing issue in tech and is emerging as a key trend in tech investment,” says Goodwin’s Ramadan.
The UK, which has one of the most advanced tech ecosystems, is set to implement a foreign direct investment review regime in January 2022, similar to the Committee on Foreign Investment in the US regime. “This will mean there will be more scrutiny on tech investments with both companies and investors needing to consider if investments would be caught by such regimes and need government approval,” says Ramadan.
The Chinese government has also cracked down on big technology companies, such as Tencent, Alibaba and Ant Group. Ramadan says: “China’s recent technology crackdown is a symptom of broader political and regulatory concerns with the size of big tech companies and the pace of technological transformation, a concern that is shared by the public in the US and many European countries.”
China’s move could mark the start of an era where tech regulations and how to implement and comply with them will present considerable challenges for governments and tech companies. “Everywhere in the world governments are figuring out how to appropriately regulate technology superpowers, which can be forces for good or evil. It is a tricky equation,” says Riverside’s Kohl.