5 minute read 1 May 2019
Father daughter paying smartphone contactless

How PE firms are uncovering opportunities in intelligent connectivity

By

Andres Saenz

EY Global Private Equity Leader

Trusted advisor to leading private equity professionals and their portfolio companies. Ardent student of consumer behavior. Marathoner. Family man.

5 minute read 1 May 2019

Learn how current market dynamics are shaping PE investment in mobile technologies.

Private equity’s appetite for deals in the Technology, Media and Telecommunications (TMT) space seems almost limitless; investment activity in the sector has accounted for approximately 40% of total deal volume, and one-third of total capital invested by PE in the last five years, making it the top sector for PE investment by far. And while activity is poised to remain elevated, there are a number of important dynamics that are changing the types of investments that firms are making, and will make in the future.

PE has been an important partner in large-scale transformational deals

The last several years have been notable for big ticket transformational acquisitions of undervalued incumbent legacy software firms. With the introduction of cloud-based technologies and the steady rise of mobility, the imperative for many technology companies has been the transformation of the business model from the conventional “technology stack” to more holistic “integrated solutions.”

This transformation process required them to not only be involved with the evolutions of the technology in order to hide all the layers from the end user, but also to transform the organization of the business itself, from the way they organized their R&D and sales teams, to the way they articulated their value proposition and priced their solutions. With such a complex reimagining of the business at hand, PE’s been an important partner in the journey for many companies. And while these large scale transformation deals will continue to be important, new waves of emergent technology are increasing competing for PE’s attention.

Shift in focus from legacy transformational deals to growth deals in disruptive technologies

With themes such as cloud computing and mobility now mainstream, PE firms are focusing on the next wave of disruption – technologies such as AI and machine learning, robotic process automation (RPA), internet of things (IoT), robotics, drones, blockchain, augmented reality and virtual reality to name a few. As evidence, the percentage of PE TMT deal volume in these verticals has almost doubled over the last few years, from about 6% in 2014 to nearly 12% last year in 2018.

An important driver behind the shift is the need to digitally transform their existing portfolio. Indeed, in 2010, just 16% of PE deals in the above spaces were add-on acquisitions to existing portfolio companies. Last year, they were nearly 40%.

Companies often enter PE ownership at widely varying levels of digital sophistication. Many suffer from years of underinvestment prior to their acquisition; digital represents a critical lever for value creation.
Brian Acampora
EY Private Equity Technology Leader

As adoption of digital payments rises among consumers and businesses alike, PE is integrating payment functionality into their portfolios

One segment witnessing strong interest is online payments, which has seen PE firms invest more than US$16b of capital over the last five years. The share of e-commerce relative to total retail sales continues to grow, and mobile plays an increasingly important role. In the US, for example, according to a report by yStats.com, mobile is expected to account for 50% of total e-commerce sales by 2021, up from 33% in 2016. As that consumer and business adaptation and expectation continues to grow, digital payment technologies will become increasingly critical.

In order to integrate payment functionality into their portfolios, PE firms have explored standalone investments across the space, making targeted acquisitions in payment gateways, payment processors and sector-specific payment solutions providers. Last year, for example, Sweden-based EQT acquired Saxo Payment’s Banking Circle, which provides infrastructure for online cross-border payments. EQT’s investment is intended to allow the company to further develop its product offerings and to expand into new geographies.

The space is expected to remain active as there are plenty of significant opportunities for PE firms to vertically integrate many of these players into one-stop, multichannel payment platforms. Moreover, recent EU regulations are driving further consolidation of Europe’s payments industry, offering strong opportunities for cross-border add-on acquisitions.

Looking forward: IoT and edge computing

Looking forward, there are a number of emerging technologies that even though they have yet to see significant volumes of investment activity, represent compelling opportunities for the industry.

One technology that is already gaining traction and causing disruption is IoT. On the radar and seeing increased interest is edge computing, which brings computer data storage closer to the location where it is needed.

 

Global IoT revenue

US$1t

By 2022, global IoT revenue is estimated to surpass US$1t, up from US$646b in 2018, according to IDC.

To date, investment in IoT has been selective, and primarily focused on the enabling infrastructure and more mature segments of the stack such as real estate, smart cities and smart homes, agriculture and logistics. However, as the deployment of 5G technology begins to accelerate, enabling increased deployment of advanced IoT applications will represent significant opportunities for PE investors in emerging segments of the stack such as connected vehicles, connected health and connected industrials. And while currently most investment has focused on opportunities in the developed markets, the rapidly growing Asia-Pacific IoT market will offer opportunities as well. It is estimated that by 2025 the Asia-Pacific region is poised to become the largest IoT market globally, according to GSMA forecasts.

Relatedly, as IoT continues to proliferate, demand for reliable connectivity will increase dramatically, leading to micro-data centers and related technology – specifically, edge computing. . Although presently a highly fragmented market, the segment is expected to grow significantly over the next several years.  For PE, these models can represent an attractive fit in many ways. The long-term, locked in contracts offer a measure of protection against the macro cycle, and many have investment profiles similar to more traditional infra plays such as toll roads and ports. And growth in the sector means PE firms have the potential to deploy large amounts of capital in the space to capture current and future trends.

A number of dynamics are shaping PE’s approach to mobile technologies

The TMT space and mobile technologies in particular will continue to offer compelling opportunities for in the coming years. For PE firms – whether focused on the tech space or not – understanding the industry’s dynamics will be a critical value driver across a growing range of industries.

Summary

While the last several years have been notable for large scale transformational tech deals, PE firms are increasingly looking at opportunities in disruptive technologies, particularly those involving mobile connectivity. Online payments, Internet of Things (IoT) and edge computing all offer compelling opportunities.

About this article

By

Andres Saenz

EY Global Private Equity Leader

Trusted advisor to leading private equity professionals and their portfolio companies. Ardent student of consumer behavior. Marathoner. Family man.