Historically, the fundamental business characteristics of technology have not been a great fit for most private equity investors. But that is changing—and fast. In 2013, while the volume of overall deal activity was down 6% in the U.S., technology-related transactions grew at 14% as private equity investors and their portfolio companies closed on more than 500 technology deals. Compared to the strong tech IPO market we are currently experiencing, this may not come as a surprise. But for private equity investors looking to capitalize on opportunities that lie ahead, we’ve taken a closer look to define specific trends that will drive future technology investment opportunities.
While most of this year’s growth was due in part to technology-enabled business models not traditionally tracked as “IT investments” in industry reports, three other factors contributed to the emerging technology sector. Based on last year’s observable activity, this year’s trends appear persistent to the 2013 deal market, with strong growth across the software, services and hardware segments. Further growth is expected in some horizontal software sub-segments such as HR and data & analytics—along with a significant boost in SaaS-positioned offerings.
For a deeper look at PE investment opportunities in technology, click the image above. | Source: Parthenon Group
After recent analysis conducted by The Parthenon Group’s Technology Practice on deal activity in 2013, the following are four key areas that investors should focus on in 2014:
SaaS Revolution Growing at 171%: Software-as-a-service is the leading theme of B2B software investing overall, with nearly 40% of software businesses today positioned strongly as SaaS solutions. Businesses that come to market with subscription-based pricing, cloud-delivery and faster implementation for customers grow rapidly, with non-SaaS businesses often referencing the transition as a key strategic initiative going forward.
Vertical Software Represents 2/3 of Software Deals, Growing at 38%: Vertical software deals are growing dramatically across sectors, showing particularly strong growth over 2012 and outpacing horizontal software investment in a 20% year-over-year change. Healthcare IT and financial tech were particularly active verticals in 2013 (followed by media and transportation), and continued to grow over the prior year.
Technology-enabled Business Models Growing at 28%: Companies traditionally providing services across vertical sectors have increasingly added technology platforms to enhance and transform their business models. And while the traditional information technology sector posted solid deal growth over 2012, a more holistic view of the tech industry reveals that tech-enabled investments outside of the traditional IT sector were important drivers of deal growth in 2013.
B2B Drives Overall Investment, Growing at 21%: Business-to-business companies continued to account for the majority of technology investments in 2013 and drove overall growth. And within the B2B focus, companies focused on software or services were typically the targets of investment, followed by hardware and infrastructure.
As the year continues to unfold, it is important to note that the broader footprint of technology-enabled business models will increase overall competition. These assets will not just gain interest among technology-specialist investors, but for private equity investors focused on pursuing strong vertical investment theses as well. Understanding both the underlying technology and end-market verticals will matter more than ever.
Parthenon, which serves as an advisor to private equity investors and management teams in the technology sector, expects these trends to persist into 2014. Identifying these key trends is just one part of our entire investment cycle. With technology executive teams, we help improve company performance through customer segmentation and analytics, sales forces strategy, pricing optimization, and growth strategy development. Our unique approach to strategic advisory services has made us a top choice for CEOs and business leaders of Global 1000 corporations, high-potential growth companies and private equity firms.