PE paying 8x less for tech assets than trade buyers – report

PE firms are striking cheaper deals than their trade peers despite a 30% increase in capital invested compared with last year, says S&P Global Market Intelligence.

Private equity firms are paying multiples eight times lower than trade buyers for technology businesses despite nearly $2 billion extra of private equity capital being invested in the sector in Q1 2017 compared with the same period last year, according to S&P.

EMEA-based private equity firms paid 12.7x earnings on average for businesses in the information technology space, according to S&P Global Market Intelligence, compared with the average of 20.6x for all buyers.

The decline in entry multiples comes in spite of a surge of private equity capital into the sector. S&P Global Market Intelligence says EMEA-based GPs invested $6.1 billion in technology companies in the first quarter of 2016, a more than 30 percent increase on the same period last year.

“Technology and digitilisation is disrupting all industries and although still in its infancy the digitilisation revolution is now starting to develop a critical mass. Private equity buyers are observing this and are riding the beginning of the wave,” Silvina Aldeco-Martinez, managing director at S&P Global Market Intelligence told PEI. She said the trend is enduring and will continue to provide healthy deal-flow. “This trend is a structural change and is not something that crystallises in a year or two.”

The multiples being paid by private equity firms so far this year are significantly lower than previous yearly averages, which hit a peak of 39x earnings in 2014. The average entry multiple paid by private equity for software companies last year was 20x.

In the last year a number of brand-name buyout firms have raised dedicated funds to capitalise on the digitilisation revolution.

Early last year CVC Capital Partners raised $1 billion for its first fund making growth investments in software and “technology-enabled” businesses, which was followed by Stockholm-headquartered EQT closing its first-ever venture capital fund on €566 million. Then at the end of the year KKR raised its first tech fund, the Next Generation Technology Growth Fund, closing on $711 million.

Levels of tech investment in EMEA are likely to get a further boost when the London-based $100 billion Vision fund being raised by Japanese technology giant SoftBank hits the ground, a significant portion of which will be focused on EMEA investment.