PE Tech Report


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Technology valuations feel chill from public markets

Private asset valuations are adjusting downwards in the technology sector following volatility in the public markets during the first half of 2022.

• Market crash at end of Q1 across major technology stocks has fed through to buyside M&A in the private markets

• Software and cybersecurity are still booming sectors for private equity, and appear more insulated from volatility

• Experienced private equity buyers unlikely to veer from technology strategies as digitisation trends continue

Private asset valuations are adjusting downwards in the technology sector following volatility in the public markets during the first half of 2022.

In a survey during June of more than 50 private equity professionals, almost half of all respondents said they were concerned about recent private equity investments in the sector following recent market upheaval.

“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.

Less competitive tension among M&A bidders ultimately limits the sale price of an asset but the impact may not be as severe as in the public markets, where the tech-heavy Nasdaq 100 index was down more than 26% last month (year-to-date), and the Dow Jones US tech sector had shed the same.

“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 technology investor 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 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.”

In the public markets, the axe has fallen hardest on growth-orientated tech companies.

For experienced private equity managers, interest in sub-sectors such as software and cybersecurity is still evident.

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

The more experienced technology-focused private equity firms are not expected to pull back on their strategies in the sector but final sale pricing may be more vulnerable, as shown by Thoma Bravo’s renegotiated $10.7bn purchase of Anaplan in June.

“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.”

Speaking exclusively to Private Equity Wire in June for an upcoming Insight Report, Thoma Bravo partner Andrew Almeida, said that cybersecurity is relatively insulated from recent market volatility and the “sky is the limit” on deal size in the software sector.

“Even with all the volatility in the markets and whispers of a looming recession, we talk consistently to CIOs and CSOs of larger organizations, mid-size organizations, and not a single one is talking about cutting back their cybersecurity spend.

Key implication | GPs: GPs with a track-record of investing in technology companies will look more closely at how revenues at target companies might be impacted by a recession

 Read ‘The Great Reboot: Why private equity is finally turning to technology’, here.

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