Adams Street Partners partner and co-head of global venture fund investments Brijesh Jeevarathnam discusses how technology is completely reshaping the market.
How do you get exposure (and measure allocations) to technology?
Technology is really pervading every industry vertical. Tech used to be an industry vertical like healthcare or consumer and in the space of a decade it has moved from a vertical to a horizontal. When we look at portfolios, we are hard-pressed to find areas where technology is not playing a meaningful role or a massive, transformational role.
In large buyouts we see firms using technology to drive value creation in their portfolio companies in a fundamental way. In mid-market growth equity, for example, there are managers using cutting edge technologies like robotic process automation (RPA) to automate routine tasks across their portfolios, in anything from HR to consumer businesses, to drive revenue and to reduce costs.
Obviously, venture is predominantly technology-driven or technology-enabled, and venture has become a global business. 20 years ago, venture was mostly a US asset class with offshoots in Europe and Israel, but now there are great opportunities coming out of Europe in fintech and digital media; China is really leapfrogging the US in some areas; US venture has stayed robust; and India and Latin America are quickly emerging.
Where is there most opportunity to put capital to work?
There are more opportunities to invest in technology around the world than ever before. We have seen an expansion of the opportunity set by geography, by investment stage and by sector.
Previously, technology exposure tended to be mostly venture-focused, but now if somebody wants technology but no early stage exposure, we can give them exposure to more mature technology assets through buyouts and growth capital, which wasn’t as prevalent 10-15 years ago.
There are also many more investable technology sectors now than there used to be: on the enterprise IT side with the cloud and cybersecurity and on the consumer retail side, too, where millennials and Generation Z are looking at very different consumption patterns and work behaviours than prior generations.
Everything is being disrupted and reshaped by technology. And we have seen the emergence of frontier technologies like spacetech and esports, which have started to produce large venture-backed companies.
How is tech investing impacted by macroeconomic cycles?
Every large company is facing some existential threat from start-ups and looking at some degree of digital transformation. A decade ago, when we looked at M&As of our technology portfolio companies, the buyers would be large technology companies like Oracle, Microsoft and Cisco. Today, those buyers are still there, but so are the offline/old-world companies looking to acquire tech assets: companies like Walmart, McDonald’s or General Motors.
The current innovation cycle is strong and will last another 10-15 years, and that is distinct from the capital markets cycle, which people expect may take a turn at some point over the next one to three years. The capital markets cycle impacts technology principally through late-stage valuations, but at the earlier stage, for new company creation and early stage venture, it doesn’t matter.
What is the impact of tech companies staying private for longer?
Now, venture-backed companies tend to stay private for about 10 years, compared with roughly five to seven years historically. That trend of companies staying private longer will likely sustain, because the addressable markets for these companies have got so much larger and they prefer to tackle their scaling challenges while still in the private markets. Also, the supply of growth capital has been readily available.
Private companies do present opportunities to realise early stage investments in the growth phase and we have seen a few examples of growth investors taking out early stage investors through a secondary when a large growth investment round is raised. So, there is still some liquidity for LPs and GPs.