That private equity firms like investing in technology is nothing new, but covid-19 has dramatically altered the way both businesses and consumers interact with tech, opening up a whole new swathe of opportunities for investors. As demand for healthtech, edtech, e-commerce and home working solutions has accelerated, so too have entry and exit options for dealmakers.

Michael Weber, partner at lower mid-market investor Riverside Europe, says: “Covid has been an accelerator for digitalisation processes that were happening already at a much slower pace. It has become an absolutely critical factor to digitalise processes in healthtech, education, commerce and in the way we work.”

He adds: “You could also argue that beyond these areas, on a macro level, covid is speeding up transformation processes in all industries right now, that otherwise might have dragged out for another decade. Most interesting to private equity are tech areas that are critical to the new normal, like software tools to enable students to collaborate online in work groups, software that enables digital trade fairs, or smarter conference tools.”

It is no surprise that investments that tune in to these technology-driven, long-term shifts have fuelled private equity activity in Europe through 2020. Martin Luen, a managing director in the European investment banking team at Baird, says: “The areas where we have seen sustained dealflow have been in anything around technology and software, and anything around healthcare. Anything dependent on being in the office, travel or social interaction has struggled.”

How has that impacted the appetite of private equity buyers? “Only the best businesses are coming to market, because if your business has not performed well during lockdown you are not going to attempt to sell it,” says Luen. “We have seen a reduction in the number of assets being sold but the same weight of private equity capital looking to deploy, which means an intensification of demand. That results in higher prices – in many cases the assets being sold are attracting even higher premium prices than they might have done previously.”

Learning at a distance

Baird served as financial advisor to American Safety Council over the summer when it was sold by Falfurrias Capital Partners to Ridgemont Equity Partners. ASC, which is based in Orlando, Florida, is a leading provider of online training and certification around health and safety in the workplace.

“Because health and safety is a regulatory requirement, you need to do it,” says Luen. “The demand from companies needing to do training didn’t go away, but all of a sudden all employees needed to take that training at home. The business had grown phenomenally well through lockdown and was not officially for sale, but because private equity demand was so high, they started knocking on the door and making offers. They did a deal in a very short space of time and paid a premium price.”

Ryan Vaswani, an emerging tech analyst at PitchBook, says covid-19 is normalising technology as a tool in parent-student-teacher relationships. “The market as a whole amounts to a $227 billion opportunity in 2020,” he says. “While the pandemic may reduce total education expenditure in the near term, the crisis is likely to expedite the transition to digital learning infrastructure.” According to PitchBook, globally, the value of late-stage venture deals in the edtech space in 2020 had surpassed anything seen in the previous decade by the end of September.

The same trends can be seen in healthtech, where sponsors have been keen to capitalise on the shift of patient-doctor relationships to online, and the rapid acceptance of tech in the industry. Elias Korosis, a partner and head of growth investing and strategy at Hermes GPE, says: “We have an investment in a company that was pulling together patients and doctors and very quickly they transformed their product into a virtual consultation product. That would have taken a long time to get done before, but it happened in weeks.”

Consumers move to a new normal

The changes in consumer and worker behaviour that will result from the pandemic are likely to throw up an even greater number of opportunities, says Weber. “Most likely the new normal will be a mix of our old life and work style with many of the newly discovered advantages of technology,” he says, pointing to e-commerce and digital tools for collaborative work as examples.

He continues: “Consumer patterns will change due to this experience and most likely businesses that support more local production and work will benefit. One example could also be new co-working software solutions that use now unused office space or hotel space and make it available with day passes to anyone who is interested in getting out of the home office for some time.”

At Hermes GPE, e-commerce investments are doing well, according to Korosis. A prime example in the sector is Polish e-commerce platform Allegro. The business, which is owned by private equity groups Cinven, Permira and Mid Europa Partners, listed on the Warsaw Stock Exchange in October with an implied market cap of 44 billion zloty ($11.5 billion; €9.8 billion), making it the country’s largest listed company. The share price soared on the first day of trading, closing at 63 percent above the initial public offering price.

Online home furnishings and interior design have also been strong performers, as consumers look to upgrade their homes while forced to spend more time indoors. Meanwhile, food delivery, through companies like Uber Eats, Deliveroo and Just Eat, has seen a boost in demand as customers have avoided supermarkets and ordered takeaway meals and groceries. Deliveroo is said to be eyeing an initial public offering in 2021 after UK regulators finally cleared a $575 million funding round led by Amazon in August.

“Another area that is benefiting in a big way is cybersecurity,” says Korosis. “That used to be a really complex investment area, but now the risk around cybersecurity has moved from your office into your home and your ability to work from home very much depends on having a secure system, so that has taken off.”

IT services is a big beneficiary. “Those companies have suddenly had a bunch of clients calling up saying they need to install Microsoft Teams across all their offices and asking for consulting services,” says Luen. “Or their clients are saying that they provide services in education in a classroom, for example, and they need help to design an application that enables them to take that online.”

Will Yates, a partner in the private equity and financial sponsors group at law firm Travers Smith, says: “While the core providers of those video conferencing and collaborative working tools are all relatively mature, like MS Teams and Zoom, we expect there to be a lot of focus on the middlemen helping SMEs to invest in the tech they need to enable remote working.”

Private equity ready to pounce

Every general partner is now questioning their investment strategy to see how to take advantage of these trends, says Weber. “In my view, it all depends on whether you fit into the new normal world or not – companies that are enabling the new normal will be more sought after than ever before and the opposite is true for the rest,” he says. “Next to the medical covid test, we will be seeing a kind of commercial test for the sustainability of business models. Every GP is doing the covid check on their portfolio looking for negative and positive impact. If there is a positive impact, they are looking at how to accelerate that.”

Korosis says the bullish market is creating new exit opportunities: “The flip side of the pricing issue is that it’s not a bad environment to try to engage in exits if you have gone through the first few years of value creation that was in your original business plan. We are active across the spectrum – we are active on entry, very active on portfolio management, and we have assets that are marked up and ready to take advantage of the exit conditions.”

The burgeoning pipeline for exits is certainly evident to Luen at Baird, who sees a lot of private equity firms starting to look at opportunities. He says: “There is definitely a shift going on – firms that have legacy business services businesses, perhaps in pure consulting, are looking to pivot those into IT or technology consulting in order to attract a premium valuation. Classic services businesses are looking at using technology to do the job better, which means they are transforming from people businesses to technology businesses and can attract a technology valuation multiple as a result.”

Yates points out that the logistics industry supporting e-commerce, and the infrastructure behind broadband, 5G and data centres, continues to be of interest to certain types of asset managers. “There is a huge amount of firepower in the hands of private capital providers and covid has accelerated trends that many of them were already focused on as a source of value creation,” he says.

“We are seeing a lot of dealflow, perhaps more than this time last year, and that involves a broad range of businesses that have proved themselves to be resilient to the covid crisis. For a lot of those, technology will have played a key role in preparedness and resilience in operating through the last few months.”

Advisors expect to see many more deals in the months ahead as sponsors target exit and entry opportunities off the back of a covid-fuelled tech transformation.