Private Equity in Technology. What Are the PE Trends?

October 14, 2022 Kevin Dabrowski

You probably heard the trope that every company is now a tech company. M&A statistics seem to confirm this trend.

During the last 5 years, investments into tech-enabled businesses have grown by three hundred percent. What’s more, in 2022 deals for pure-play technology companies compromise 31% of all buyouts; as a result, technology turned into the industry’s dominant area of focus.

Nonetheless, despite this already massive growth, investors believe that the trend is still in its early stages – and will only continue to rise.

So, in this article, we’ll take a closer look at the PE plus technology landscape.




Private Equity Trends


According to Steve Roberts from PwC Germany, digitization and sustainability will continue to be the leading focus of investors.

Last year, not only was PE activity at a new record level; technology also attracted the highest number of investors. Technology, Media, and Telecommunications (TMT) convinced the most investors in the European region – 40.1%. The following two most popular industries to invest in where Industrial Manufacturing and Consumer Goods, accounting for 25.2% and 17.1% respectively.

This dominance of technology in the world of investments is hardly a surprise if you consider another interesting statistic. A staggering 99% of investors declared that they planned to invest in digitization in 2022. Particularly, they were looking to spend their money on data analytics (75%), IoT (53%), blockchain (52%), and robotics (51%).

Ergo, technology will continue play not only a major but a dominant role in PE deals.

Since the COVID-19 pandemic forced the world to aim for an unprecedented level of digitization, technology will remain a key business enabler for most enterprises. Thus, it will be hard (or virtually impossible) to escape the IT factor when investing in any serious organization.

However, from our perspective, this comes with a challenge. Investing in technology can be more difficult than putting money in an analog business. It can be like buying a used car when you know nothing about cars. Of course, the vehicle may look nice and shiny from the outside. Yet, in many cases, used cars hide some flaws under the hood, which you may not be able to spot without the knowledge about mechanics. As a result, you may end up with a car that works for now but could potentially cost you a lot of money in the long run.

The world of technology provides similar challenges.


New call-to-action


Private Equity Investment Strategies


The reason why technology and software remain one of the most complicated areas for investors to pursue is complex.

BCG points out that the overarching theme may be the opaque nature of software companies and products since they make it difficult to choose suitable investment targets.

The consulting firm points out that technology is an extremely heterogeneous part of the economy. Thus, investors may find it hard to identify external indicators of adoption and growth across a technology sector; these include patterns of customer purchases of a type of software or rising revenue among similar vendors.

As a result, private equity firms should gain an understanding of underlying market growth factors and customer behaviour that is anchored in empirical assessments. Unfortunately, such a view has been elusive at scale. For some, it may even be difficult to know what a software product does. According to BCG, it’s not rare that technology providers market their solutions in vague, inconsistent terms and cover a crisscrossing range of use cases, leaving investors unsure how to categorize any given software firm.

Therefore, if investors are looking to enjoy a sizeable return on investment, they should understand the specifics of the IT industry (and technology as a whole). In most cases, business numbers aren’t enough to judge if investing in a given enterprise is a good business choice.


One of The Answers – IT Due Diligence


Usually, a key step in establishing if the investment in a given software company makes business sense is IT due diligence.

IT due diligence aims to assess the state of a company’s IT. Some view it as a subcategory of due diligence, performed before a merger, an acquisition, or an investment in any organization. Others see it as a completely different, independent process.

But regardless of the linguistic nuances, IT due diligence always seeks to uncover several indicators – like performance, liabilities, key risks and opportunities, and potential investment associated with the company’s digital products and IT stack.

The goal is to ensure better valuation, mitigate risks, and understand if the target’s IT is sufficient to support the business in achieving its objectives related to the M&A.

To learn more about this process, make sure to read our dedicated article on IT due diligence.

Read more: IT Due Diligence – An Introduction (Different Than You Might Expect) | PGS Software


Final Thoughts


BCG points out that software holds rewards for any investor who can find advantages in the vast pool of solutions, services, and products. That’s why a sane investment strategy must be built on rigorous analysis.

Understanding software – and its use cases (or rather – usefulness) in particular – allows investors to understand patterns of growth more precisely.


The Power of Outsourcing - Take the full advantage of tailor-made software

Latest posts