You can't talk about tech M&A these days without talking about Private Equity. The impact that PE firms have on the M&A environment has grown dramatically over the last decade, now accounting for over 30 percent of all M&A activity. Perhaps more impressive, the value of PE deals is skyrocketing. According to an Ernst & Young (EY) report, M&A investments by PE firms hit a record $1.2T in 2021, up 96% from 2020. Those investments were spurred in large part by a mountain of capital that PE firms accumulated during the pandemic. According to Corum CEO Bruce Milne, companies have nearly $5T in dry powder to do deals and roughly three-quarters of that is in the hands of PE firms.

Megadeals and bolt-ons lead the way

PE firms made over 8,500 deals in 2021, with the most active players including TA Associates, HG Capital Vista Equity Partners, Francisco Partners, Thoma Bravo, APAX Partners, Insight Partners, KKR, Providence Equity Partners, and Clearlake Capital Group. Highlighting that activity were megadeals that totaled $157B in value. For example, Thoma Bravo completed two megadeals during 2021, picking up cybersecurity and compliance company Proofpoint for $12.3B and real estate software provider RealPage for $10.2B. And in the largest PE deal of the year, EHR and practice management software provider Athena Health was jointly acquired by Bain Capital and Hellman & Friedman for $17B. 

PEs also did a lot of bolt-on deals, with the leading PE acquirers making more than five times as many bolt-on acquisitions than platform acquisitions in 2021. This indicates a growing trend by PE firms to acquire smaller companies for strategic benefit.

PE Insights

Recognizing the burgeoning impact that PE firms have on the M&A market, Corum recently invited three executives of PE firms to participate in a panel discussion and share their insights regarding the tech M&A market. The invitees were Patrick Eble, Vice President at Alpine Investors, Jeremy Holland, Managing Partner at the Riverside Company and Vinay Kashyap, Partner at Mainsail Partners.

An interesting question posed to the panelists regarded tech trends. Every year Corum compiles a list of the Top 10 Disruptive Tech Trends driving deals in tech M&A. The panelists were asked which of those disruptive trends excites them the most. Eble pointed to composite commerce, that is, the marriage of Internet-based online transactions and offline (such as in-store) transactions. The COVID-19 pandemic spurred the growth of composite commerce, and that growth continues as customers depend increasingly on the Internet for purchases. Eble noted, "Over the last year, there was a wave of adoption in the e-commerce enablement ecosystem as traditional brick and mortar companies sought online platforms for the first time as the overall market expanded rapidly in terms of the growth of online purchasing habits by consumers."

Eble said there were two key pieces of composite commerce pushing things forward : payments and logistics. He pointed out that companies are increasingly considering integrating or acquiring online payment tools to improve customer experiences and capture additional economics. He also felt that the logistics segment was primed for technology disruption, given how the global supply chain has failed to keep up with the pace of consumer purchasing habits.

The Blue Collar Software trend most excited Kashyap. That trend is one where traditional blue collar industries such as construction, agriculture, transportation, and manufacturing are being transformed through the use of sophisticated software tools and cutting-edge technologies such as artificial intelligence (AI), the Internet of Things (IoT), and the Cloud. Kashyap said Mainsail invests heavily in this segment. He noted, "We're investing in core cloud business management software that's enabling an increase in productivity and profitability, a mission-critical blue collar service that drives the real economy."

Kashyap also foresaw continued labor shortages and wage issues generating increased demand for cloud software solutions that drive productivity and help blue collar industries make intelligent business decisions.

Holland mirrored Kashyap's excitement about blue collar software, specifically what he called the "white space opportunity" of blue collar industries leapfrogging from paper and spreadsheets to a modern software system, and the strong and measurable ROI that software systems can provide in this sector. Holland cited B2B SAS applications as an area that excited him too. He said he was particularly interested in B2B applications that are vertical and mission critical for their customers.

He also saw growth potential for this area as B2B applications expand beyond their core constituency to solve similar problems for other markets.

What PEs look for

PEs don't only think about disruptive trends when they target companies as good investments. Eble said he gets excited by companies that clearly outshine their competitors. He said, "I look at companies that have a unique value prop that allows them to stand above others in an increasingly competitive technology ecosystem. This really manifests itself in several metrics, like growth rate retention and LTV (lifetime value) to CAC (customer acquisition cost). But ultimately, it boils down to the ability for a company to both find customers efficiently and to solve their pain points."

The individual entrepreneur is the important focus for Kashyap. "What gets me most excited when evaluating an investment opportunity in a software company, it's all about the entrepreneur and the journey that they're on to change the industry they're in for the better."

Some clouds on the horizon

Although PE activity in the tech M&A market continues to be high, EY sees some clouds on the horizon that may change things. According to their report, PE firms will enter a far different operating environment in 2022 due to rising interest rates, heightened inflation, hawkish monetary policies, and continued supply chain issues. In particular, they see rising interest rates as potentially prompting a rebalancing in PE investor portfolios.

The changing operating climate also has implications for companies thinking about an M&A, according to Milne, who noted, "We're 12 years into a seven-year bull cycle. Confidence is a concern. You don't want to miss what is an extraordinary window today to sell your business, while we're still near record valuations, because when markets turn, prices drop rapidly, and terms worsen."