The rise of private equity in technology M&A

Private equity firms have been a hot topic in this year’s M&A market. 57% of his public-private technology deals in the first half of 2023 were led by private equity. This is nearly double the share of public-private technology deals in 2020, 2021, and 2022.1 Morgan Stanley bankers say the rise of private equity in technology deals is just beginning.

Morgan Stanley’s Capital Connections Summit brought together top executives from the private equity and venture capital communities to discuss the state of opportunity in technology M&A. Investors gathered in Pebble Beach, California, to discuss the outlook for software M&A and the key themes to watch in the next wave of M&A.

“We have brought together the world’s top private equity and venture capital funds because these two groups will inevitably collaborate on deals. Now more than ever, we are excited to work together. ” said Umi Mehta, Global Head of Private Equity and Venture Technology. Capital Investment Banking hosted the Capital Connection Summit. “The summit aims to not only highlight private equity firms as the most active high-tech M&A buyers in the short and medium term, but also to highlight venture capital firms as partners to help private equity grow and monetize future assets.・It was to emphasize the fund.”

Private equity’s evolution to technology M&A advantage

Private equity firms have evolved into subject matter experts that provide technology companies with operational expertise and opportunities to invest in sales, marketing, and research and development, according to EB Kapnick, head of East Coast Technology M&A. That’s what it means. They are looking for high-quality technology companies with growth potential, with large addressable markets and durable business models.

“Private equity firms are increasing their expertise and specialization in software technology, making high-tech companies increasingly of interest to strategic buyers,” Kapnick said. “With their experience, they can make good companies even better, which makes them competitive buyers. They not only reduce costs, but also increase profits and accelerate growth. , we are welcoming a new leader.”

They have also raised larger funds, with available capital now reaching a record $2.49 trillion.2 In this market, private equity firms often end up paying premiums equal to or higher than strategic buyers. Melissa Knox, global head of software investment banking, said the price differential between technology buyers and sellers is finally narrowing this year. This is helping to further drive private equity M&A activity, especially as sellers temper valuation expectations following peak levels in 2021.

How the macroeconomic environment cooled IPOs

In 2022, concerns about rising interest rates, inflation and recession weighed on consumer spending, advertising and corporate profits and stock prices in the tech industry. In 2022 and his 2023, publicly traded technology companies felt pressure to prioritize operational efficiency and cost reduction and accomplish more with less. However, these efforts can take time, and the public market is not always willing to wait. As such, some public technology companies will consider returning to private ownership. Selling your company to a financial sponsor gives you the opportunity to rebuild without the pressure of making a profit in a difficult market environment.

Privately held companies, on the other hand, are now less willing to consider an IPO and more open to the possibility of a sale. “The bar to go public is much higher in terms of size and financial health,” Knox says. “Managing employees and finances on a quarterly basis is difficult. Many private companies would rather merge or be acquired than do an IPO.”

Private equity firm eyes cloud companies amid AI disruption

Consolidation of cloud-based software companies could also create additional acquisition opportunities for private equity firms. While many cloud companies flourished after 2020 and 2021 promoted remote work and e-commerce, recent innovations in artificial intelligence may make some of these businesses unnecessary. Other businesses may create greater demand. For example, cloud-based customer support companies may be adversely affected by the potential for AI to disrupt customer relationship management, while companies offering cloud computing and optimization may be affected by the large amounts of data that AI requires. and computing power. “Some cloud companies will be disrupted by AI,” Kapnick said. “Not everyone can be a winner in this field.”

AI may also facilitate more strategic M&A activity as companies seek to build new capabilities, customer segments, and unique platforms. AI companies are also attracting venture capital as companies seek opportunities to fund their growth phase and fund future M&A goals.

Because of AI’s revolutionary “platform shift,” “we’re going to see even more breakthroughs in technology in the coming years,” says Kapnick. “The amount of spending moving into technology will be unlike anything we’ve seen before in 1996 before the dot-com wave or in 2017 before the big cloud wave. ” In addition to the domino effect of AI, private equity firms are also eyeing vertical software companies with large total addressable markets in areas such as healthcare, media, and industrials.

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