Andy Wright, Partner in Odgers Interim’s Technology Practice, recently hosted a well-attended breakfast event for Technology CEOs and Private Equity (PE) investors, to examine the current market and future outlook for technology companies backed by PE.
Although PE remains a robust asset class, there is no doubt it has been going through a challenging period. In 2023, global PE deal value fell 37% versus the previous year and the tech sector was particularly hard hit as multiples plunged. Economic headwinds have slowed down transactions and caused a logjam to liquidity – by one estimate, there is a $3.2 billion pile of un-exited assets.
It’s all a far cry from the 12 consecutive years of multiples growth within a low interest rate environment that followed the global financial crisis. Yet all is not doom and gloom, with value creation opportunities there for the taking for good businesses and those running them.
In April, Odgers Interim hosted a breakfast event on the topic, ‘The Private Equity Outlook for Technology Companies: 2024 & Beyond’, bringing together over 40 CEOs of PE-backed technology companies and PE investors for a panel discussion in London.
We were fortunate to have three top tier PE investors on our panel – made up of Jonathan Boyes, Partner at Hg focussing on B2B Software; Harry Simpson, Principal at Bain Capital focussing on IT Services, and Adam Joseph, Head of Private Equity Europe at Macquarie Capital Principal Finance – who focusses on investments for mid-market businesses across Europe.
Comparing and contrasting their unique specialisms and perspectives made for a fascinating discussion, in which we focussed first on the current market, and future outlook, for companies and executives in the tech PE arena. We also covered key topics such as value creation, the characteristics of a successful management team, the exit process, and of course the impact of artificial intelligence, all of which we will cover in separate pieces.
Current market – 2023 & 2024 so far
We started off by discussing the past 18 months, which our panel all agreed had been an unusual time.
Jonathan Boyes observed that although 2023 had been a slower market for new PE software deals, 2024 had been a very positive year for Hg. Through 2023, the macroeconomic picture led to uncertainty on how companies could forecast, as well as impacting a lot of PE firms’ sentiment to risk. Those factors are starting to stabilise, and there is an “element of money going back into the market” due to the five-year investment periods on funds driving the need to find good deals to invest in. As a result, Hg had seen a lot of people turning up for deals in 2024.
“I think you’re seeing pretty healthy multiples being paid for the deals that are getting done in the market,” said Jonathan. “But there is probably a bit of a bifurcation between good businesses getting done for good prices, while those companies that are less strong do still struggle. The smaller end of the market has already been quite active throughout this year, and now there is a bit more of a return to larger deals getting done.” He dismissed the idea that you can get a good business on the cheap, as some have surmised.
Adam Joseph said that Macquarie Capital Principal Finance had taken advantage of opportunities throughout the uncertainty, and had been very active. Investing on behalf of Macquarie’s balance sheet, they can take a flexible approach to investment, for instance with partnership capital – which has become more prevalent in the more challenging climate, with higher interest rates.
“A lot of people are now finding that they are capped out on the amount of leverage they can take, and sometimes there’s still really good opportunities they want to take advantage of,” said Adam. “If you’re the sponsor, the owner, or any other shareholder, it may not feel be the optimum time to sell. With partnership capital, you can continue doing your M&A strategy or other investing, or even take some cash out to repay investors and give yourself more runway.”
Adam talked about some of the deals they were able to complete, including the public-to-private acquisition of Byggfakta, and the merger of Wavenet with Daisy Corporate Services, (both completed shortly after our breakfast). He also demonstrated some of the flexibility they had taken with control deals, for instance investing in a company at an earlier stage than usual, giving them time to organically grow that business. Agreeing with Jonathan, he observed that good companies were still going for good prices, and that the slowdown in deal volume had encouraged them to think creatively.
Bain’s Harry Simpson assessed that PE firms needed three things to complete deals – some alignment between buyers and sellers, an ability to forecast operating performance, and a functioning debt market. In 2023 none of these factors were present, and this impacted his focal area of IT services more than B2B software. Many of the market challenges had a deeper impact on services, for instance wage inflation, which is difficult to pass through to the customer. He felt that the “hubris” of valuations in 2021 was a period that had become a distant memory, however we did now have a functioning debt market – particularly significant at the larger end.
How will Bain play this? For a start, by avoiding the temptation to go for every opportunity that arises after a period of inactivity. “What we are trying to do is remain really focused on our core competencies, which is finding strong businesses in good markets where there is an opportunity to improve performance.”
Future outlook – 2024 & beyond
Our panel were united in predicting a stronger market in the next 18-24 months, with all factors pointing towards an uptick in deal volume.
“Unless there is some sort of very large macro shock, all the push is towards an increase in deal volumes, simply because of the length of time people have held, and also the pressure from LPs for returning cash,” summarised Adam. He saw us heading into a period where sellers could get decent prices – maybe not quite what they would have had at the peak – but good enough to sell and move on. There was, unsurprisingly, still an element of caution in Adam’s outlook, that there could still be “the odd bump in the road,” with interest rates not coming down as fast as hoped, or international factors – for instance from the US, where inflation isn’t under control as much as here, in the UK.
Hg and Bain agreed that things were trending in the right direction. Bain’s Harry described a lot of work going on behind the scenes, and is optimistic that there will be an upsurge in activity in Q4 this year and Q1 2025. Hg’s Jonathan brought the CEOs in the room back to the simple equation that if they are building good businesses, in markets with a good long-term outlook and visibility on how that business can scale over a longer period (10+ years), with an adequate growth rate (double digit) in that market, then inevitably a decent number of PE investors will be interested – irrespective of market challenges.
Q&A and closing note
We finished the session with some Q&A from our audience of CEOs, which brought a healthy contrast from the investor’s perspective on our panel. We had a well-positioned question from an exited founder, who posited that in a CEO, companies needed someone who understands things that a CFO doesn’t – and therefore how does an investor incorporate this into their approach, and what they look for. Our panel agreed that on their side of the fence, they often have to think more like a CFO with a “numerically cold focus on P&L and cashflows” but that in their considerable experience, they also had their fair share of exposure to what the founder described as “alchemy moments”. They all agreed that there were some attributes that a CEO brought that a CFO or investor could sometimes miss – perhaps around the longer-term vision, or the way they market and talk about the business. An investor had to understand this element – which is clearly more difficult to quantity, and one suggested could only come from experience, seeing it in action, and sometimes taking risks and seeing the payback from those bigger bets.
Our room full of investors and CEOs agreed on the closing note – that the fusion of these bigger visionary and strategic “alchemy moments” from a CEO, and the more scientific focus on financial metrics from an investor / CFO, was the ultimate holy grail of a team driving towards a successful outcome in Private Equity.