Despite some high-profile falls in tech stock valuations, tech remained a top target for PE firms in 2018. There was a rise of 74% in deal value in software and technology acquisitions, compared to 2017. Indeed, over the past 12 months, 75% of the most active buyers of tech companies worth US$100m or more have been PE firms.
Technology companies continue to be favored by sponsors due to their fast growth rates and the fact that, across all industries, companies must improve their technological capabilities to retain a competitive advantage – meaning the right tech investments today could pay out in the future.
The fintech, health-tech and e-commerce sectors in particular have been attracting significant PE interest in recent years.
Private credit’s rise
Over the past couple of years, PE firms’ fundraising focus has not just been concentrated on buyouts; credit has become an increasingly important vehicle. In an era when stringent capital requirements have curtailed bank lending, private credit funds have increasingly stepped in to provide loans.
Fundraising for private credit vehicles has climbed, with private debt funds raising US$110.2b across 157 separate vehicles in 2018 alone.
Although this is down 12% from 2017, the appetite for fundraising remains strong, with almost 400 private credit vehicles currently seeking more than US$168b in aggregate. In particular, we see investors positioning for late cycle opportunities in the distressed and mezzanine space, which more than doubled its intake of commitments last year.
Looking to the future
In a highly valued, competitive market, PE firms are keenly aware of the need to examine which strategy can best deliver strong returns. As fewer but larger funds dominate the market ever more, firms across the board are looking at different ways to compete.
One trend we expect to see is sponsors leaning towards long-hold funds – longer-term investment vehicles of up to 15 years. This enables PE funds to hold onto profitable companies for longer, giving LPs the ability to deploy large amounts of capital into attractive investments for long periods of time, and for many, to reduce reinvestment risk and better match their assets with their liabilities.
As the sector continues to think about how it should evolve, the shift towards this longer-term buy-and-build strategy versus a short-turnaround acquisition strategy is being seen by PE firms as a good approach to generate superior cash-on-cash returns.
No matter the approach taken, current trends suggest private equity firms will continue to dominate the deal market – and so continue to change both the way companies position themselves and, ultimately, how assets are valued.