Private Equity technology buyouts scale new heights

Software has consistently proved itself to be a significant investment opportunity for private equity. Demonstrating innovative business models, potential for scaling and efficient use of capital, software and technology have expanded exponentially in recent years to become investors’ primary area of focus. Today we’re exploring some of the long-term trends for software and PE investment.

In 2021, the value of technology deals closed by private equity investors reached $284 billion: 31% of the total number of PE deals last year.¹ As Bain reports, 90% of total 2021 tech value was made up of software deals. Technology now represents 30% of the private equity buyout market.

The landscape of technology investment is changing. While focus previously lay with vertical application software invented with the purpose of solving a specific problem (retail inventory management systems, for example), investors are becoming more and more focused on horizontal software (such as marketing and CRM technology) and infrastructure categories. Cloud computing and cybersecurity, both examples of infrastructure categories, have seen a remarkable increase in investor activity, having jumped by 60% and 20% respectively in the relative shares they represent in investor portfolios.

Cloud computing software has seen steady growth in investor attention since its introduction in 1999. As traditional industries begin to appreciate the benefit of cloud-based systems for their businesses, enterprise spending on cloud-based technology continues to grow. The pandemic has only accelerated this growth; when fully-remote working was the only option, reliable and efficient cloud software became crucial for companies looking not only to grow and modernise, but to stay afloat.

Investor interest in cloud computing, for example, represents unique opportunities in the technology industry for products to become irreplaceable. Technology operating models, which are light on capital and have promising growth potential, require investment to be able to scale, but once scaled enjoy high gross profit margins. These deals produce cash, and once a company begins to rely on a computing system, cybersecurity system or some form of marketing tech, such software becomes difficult to replace and, therefore, a mainstay of lucrative areas of industry.

Private equity’s interest in technology stems, in many ways, from tech and software’s future-focused inclination towards innovation that is intrinsic to its business model. Technology requires expertise and focus, but deals in recent history have proven that General Partners, in the most successful cases of technology buyouts, can add value by assisting management build new and improved operating models and business capabilities. Private equity and technology is a successful partnership that looks set to remain on a healthy growth trajectory as new software continues to embed itself into traditional industry business models, despite recent market movements.

¹ https://www.bain.com/insights/topics/global-private-equity-report/

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