In this blog, we explore private equity’s affinity for technology and software companies and discuss some benefits of investing in technology and software-focused private equity firms.
Overview of Private Equity Investment in Technology and Software Companies
Technology and software have become increasingly important as the digital world has become a ubiquitous part of life. At the consumer level, technology has changed how people live their day-to-day lives. In the business world, technologies like B2B software have become integral to operations at nearly every level of an organization.
Technology has created profitable investment opportunities that software-focused private equity firms have been able to capitalize on using industry knowledge and sometimes the same emerging technologies they’re investing in.
Trends in Private Equity Investment
Due to the continued emergence and advancement of software, private equity firms are making big investments in the technology sector.
According to Bain & Co, data from Dealogic shows that a third of deals closed by private equity investors in 2021 were tech deals, making up a quarter of the buyout value. Of that, most of the value was in software deals. Considering that back in 2013, this same data showed technology only made up 22% of global buyout deal volume, the increasing investment in technology is notable.
Private Equity Technology Sector: Factors Driving Investment
There are many reasons private equity firms might focus on the technology sector. Here are a few of the most common considerations:
- Recession resiliency
- Predictable revenue
Considering how technology rapidly evolves and companies continuously innovate every day, it may be no surprise that technology can outperform other sectors. For example, B2B SaaS companies feature software solutions and products, which can become essential for retaining clients and customers during an economic downturn. This type of business model allows companies and their investors to forecast revenue more accurately and mitigate risk.
These types of companies have predictable recurring revenue and usually have increased margins due to their scalable nature. As a result, they can expand their workload, customer base, and revenue while limiting operating costs like employee headcount.
Why Invest With Technology and Software-focused Private Equity Firms?
Due to experience researching and engaging within the sector, software-focused private equity firms are more well-versed in this area than generalist private equity firms that don’t have a niche.
Access to Emerging Technologies
One of the significant benefits of investing for tech-focused private equity firms is their access to emerging technologies, which may help them find the best prospects. These technologies are sometimes created by the same companies they’re investing in.
In-depth Industry Knowledge
With experience comes knowledge. Technology and software-focused private equity firms are uniquely positioned to quickly and effectively evaluate tech and software companies because they exclusively invest in that niche.
When it comes to technology, private equity firms understand the risks – and rewards – involved. While short-term investments in technology may be more volatile and certainly carry risk, investing in a company with a four-to-seven-year roadmap could offer lucrative capital appreciation.
Private equity firms analyze and calculate risk daily when modeling opportunities. Similar to those who invest in the public market, here are some reasons why they may feel that the technology sector better hedges against risk:
- Impressive historical performance
- Strong fundamentals
- Global spending on technology
Private equity firms specializing in technology and software can combine industry knowledge with emerging technologies and may find lower-risk avenues for investment and growth. In addition, the private equity firm’s involvement and extended time horizon may provide investors with higher security.
Increased Portfolio Diversification
Building and maintaining a diverse portfolio is important for taking advantage of changes in the market throughout different sectors and hedging inherent risks associated with investing in any one organization within a given sector. Through a tech-focused private equity firm, investors can diversify their portfolio through different industries, even within the tech sector (e.g., hardware, SaaS, AI).
How Software-focused Private Equity Firms Leverage AI and Machine Learning in Deal Sourcing
The technology sector has grown exponentially, creating a highly competitive marketplace for individuals and businesses alike. While some investors may wish to make financial decisions based on personally acquired information, tech and software-focused private equity firms provide several invaluable resources when identifying viable investment opportunities.
Tech-focused private equity firms utilize the latest versions of AI and machine learning to assist them with deal sourcing on platforms like udu. These technologies can identify potential targets in a fraction of the time by performing extensive industry research, evaluating past financials, and recognizing trends.
udu provides private equity firms with a comprehensive look into the market using its custom machine learning system and AI-powered capabilities. Using both qualitative and quantitative data, udu can help private equity firms find proprietary deals in the tech and software industries specifically.Request a demo today to learn how udu is changing the trajectory of private equity investing.