How PE firms can stand out as competition ramps up for tech targets

A growing number of private market firms are attracted to the tech landscape as it quickly evolves and software and technology-enabled deals increase. And as the growth intensifies, tech investors can differentiate themselves to remain competitive.

The market is already very crowded. But the smartest and best tech investors competing for good assets can be more thoughtful, more careful, and build on their track record to withstand the bumps and corrections and come out on top.

We are seeing a few things in response to remaining competitive in this technology-enabled world:

1. Companies are getting to scale faster than they used to. It is not unusual to see companies with a 30% growth rate and a 30% profit margin.
2. Companies are getting better at the operational elements of growth, but also market conditions and capital investment supporting and fuelling the combination of growth and margin.
3. The largest asset managers in the industry are now deploying strategies with as many asset-class solutions as possible under one roof, which means they can offer the right capital solution to the right deal at the right time.
4. Funds are specializing in software including the area of cybersecurity.
5. Managers are becoming incredibly sector-focused to attract the best deal people, the best CEOs and therefore the best deals.
6. Some PE firms are intentionally building a reputation around taking a diligence-lite approach, while others are pursuing more complex transactions, such as carve-outs, where the value play is more complicated.

The outlook is positive, but that does not mean the market isn’t going to continue to evolve. In five years, there will probably be fewer firms deploying capital in this space – the large firms will likely continue to become larger and more competitive, while diversification will continue to be a big theme within the broader landscape.

Read more in the PEI Investing in Technology Report (pdf) with Ernst & Young LLP’s Tim Dutterer, EY-Parthenon Head of Private Equity, and Jeff Vogel, Head of the Software Strategy Group.