PE Tech Report


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Tech volatility is hitting private asset valuations

The pandemic accelerated private equity fundraising and deployment in the technology sector but this year’s tech stock crash is forcing a recalculation among some GPs…

Last year, during a keynote address in Berlin, one of the founders of Thoma Bravo, Orlando Bravo, declared: “Software is not an industry… software is the business of every industry”. 

The pandemic was making technology more ubiquitous, he argued. Today, almost every business is on its way to becoming a technology company or, at the very least, a tech-enabled service company. But the crashing volatility of tech stocks during Q1 this year has forced a re-think among some investors. The sentiment is crossing over to private markets, say sources, limiting bidding in some M&A auctions and threatening to reset valuations at the end of June 2022. 

In a survey fielded in June, of more than 50 private equity professionals, almost half of all respondents said they were concerned about private equity investments made in the technology sector following the revaluation of tech stocks earlier this year. 

“We are seeing, at the moment, many challenging auction processes, because sellers still have certain valuation expectations which cannot be justified by buyers in the current macro-economic climate,” says a London-based private equity lawyer. 

In the public markets, the axe has fallen on growth tech companies. For private equity funds, the impact is less clear but may be evident in recent examples such as Thoma Bravo’s renegotiation to buy the software company Anaplan in June. 

A growing number of GPs have developed core investment strategies in the technology space, and many more increased their exposure to the sector as ‘stay-at-home stocks’ boomed during the pandemic. 

“For tech companies, 2021 saw all-time highs in terms of capital raising from PE/VC investors and also, global listings, both under direct route and SPACs,” said Raja Lahiri, Partner at Grant Thornton Bharat in March. “In 2022, we are already seeing signs of valuations of tech companies moderating.” 

More than half of the firms making up the top 10 best performing private equity firms in the 2021 HEC-DowJones Private Equity Performance ranking have a strong focus on technology investments, with Accel-KKR unseating another tech-focused firm Francisco Partners to take the top spot. 

More recent investors may be reviewing their exposure to certain companies in the sector in anticipation of an expected shift in valuations. 

“I would say that there are some adjustments in valuations in the private market but it’s not in the same proportion [as the public market],” says Jérôme Chevalier, partner and co-founder of Quadrille Capital. 

“And I think that it’s a bit early to tell. Our view is that when we look at the public stocks, there are obviously huge corrections in many segments. And the way we look at things is that we think that the probably excess evaluations that happened in the last two years have been corrected.” 

The more experienced technology-focused private equity firms don’t appear to be pulling back for now, although M&A negotiations are becoming more protracted in some cases. 

“We’re seeing the funds who’ve got the experience and investing in these things have faith in longer term trends,” says a source close to several large private equity funds. “Some of this is just a speed bump, valuations got a little bit out of whack. But if you believe that, fundamentally, things like the convergence of AI, machine learning, and automation, make it very ripe to automate some basic processes then that train is going to continue.” 

In 2022, this train has very much arrived at software and cybersecurity (see interview with Thoma Bravo in this Report). 

In April, weeks after the tech stock crash, three private equity deals in the cybersecurity space announced were worth a combined value of almost $17 billion: Thoma Bravo agreed to take SailPoint Technologies private for approx $6.9 billion; Kaseya said it was paying $6.1 billion for Datto; and KKR agreed to a $3.8 billion deal for Barracuda Networks. 

By May, acquisitions of North American-based cybersecurity firms touched $30 billion and, according to Pitchbook, US PE firms will close at least 400 middle-market software deals in 2022. 

Despite the grim outlook in the public markets for some technology companies, private equity fund managers are also expected to drill down further into the tech sector with a view to attracting the best dealmakers and the best deals. 

“Within software there are as many sub-segments as there are in medicine,” says Chevalier. “It’s a really wide space that it is expected to continue to grow to be robust.” 

And, rather than increasing their exposure to technology as a sector, others will continue to focus on how technology can be used to create value in other sectors or assets. 

Last year Bilge Ogut, partner and head private equity technology at Partners Group explained: “We don’t look at technology to identify the next ‘cool thing’. For instance, although blockchain, digital currencies, artificial intelligence and machine learning are fantastic developments, and we have to keep up to speed with them, our focus is more on how these technologies can be applied to solve real-life problems at scale, with broad adoption and long-term use cases… The space is constantly evolving so you need to be a quick learner and bring together many moving parts.” 

In the meantime, cashflow and balance sheets are being looked at more closely by established fund managers in the tech space. 

“How well financed a company has always been 50 per cent of our investment decision,” says Chevalier, “the rest being obviously, ‘Does the technology work? Is there a market to sell it? And does the management want to really to build a big company?’ We pay a lot of attention to the financial side. And I think that this is important today to make sure that your companies are well financed.”

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