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5 themes that will shape the tech private equity landscape in 2023

Ruby Sheera

February 23rd, 2023

5 themes that will shape the tech private equity landscape in 2023

2022 was a turbulent year for the tech sector, as macro-economic challenges and the ‘post-pandemic hangover’ caused ripples from public markets right down to startups. Private equity investors also saw a big shift, with deals down by over 50% globally, and valuations also taking a hit. It was quite a contrast to the bumper figures seen in the previous couple of years.

But, despite the headwinds, tech investors remain committed to the long-term growth potential of the sector. Opportunities are still out there to digitise industries, enhance customer experiences, and have a significant societal impact, whether through healthcare, transport or education for example. For numerous sectors, technology is the only way to meet rising customer demands and create growth, and that isn’t going to change – recession, or no recession.

Consequently, tech private equity firms will continue their mission to generate alpha through investment in high-growth businesses. Although for many, that will mean adapting their acquisition strategies to suit the current climate. With that in mind, we believe that five themes will be prevalent in the coming 12 months.  

Corporate Divestments

Divestment of non-core assets by corporates has seen a resurgence in recent months and will continue to do so throughout 2023. As these businesses look to raise liquidity, reduce debt, improve shareholder value, and refocus their strategies in response to headwinds, this brings opportunities for private equity to snap up developed businesses at cheaper prices than they may find elsewhere.

The question for buyers is whether these carved-out companies have leadership teams that can operate in a standalone environment. That means reviewing leaders’ situational as well as domain experience, to understand whether they are equipped to handle an acquisition environment and the fast growth that their new owners will demand. If not, then investors will need to make changes, to build a team with the competencies to execute the value creation plan and deliver outsized growth in the coming years.

Leadership Dynamics enables investors to review the competencies of their existing teams against their value creation plan, as well as plan leadership change and simulate new hires by drawing on data from over 7,000 private equity transactions.

Consolidation & inorganic growth

On the other side of the equation, as technology providers increasingly seek to bundle complementary services to drive cross-sell and upsell opportunities, we will also see a further uptick in bolt-on M&A activity. This strategy suits investors who, reluctant to take out large amounts of debt for platform deals, are keen to focus on the lower end of the market where valuations are more affordable, and the chance for outsized growth is greater. In fact, a McKinsey study found that 60% of corporate development professionals believe that the next 18 to 24 months will offer better opportunities to create value via mergers than the past two years have.  

Many smaller, niche players are currently available at discount prices due to economic pressures, or other issues such as currency fluctuations. Bolt-on deals also work in favour of business founders looking to cash out rather than face restructuring. Macro conditions are also forcing the hand of some venture-backed companies who, unable to raise additional capital, are now looking to sell. 

Success in these bolt-on deals relies on identifying the right targets, through a combination of networking plus the right data and analysis. Has a company recently made any changes that could indicate that they’re ready to sell, for example changing their registered address, reducing the number of shareholders, or hiring a new auditor? Early introductions are key, which means working with trusted partners and drawing on the services of so-called ‘deal hunters’ to get a foot in the door.

Our Digital Index tool puts clients one step ahead by enabling them to rank companies on their likelihood to engage in future transactions. Furthermore, as one of the most networked companies in the space, we’re uniquely placed to scope out potential acquisition targets and make confidential, informal introductions.

Continued Investment & Evolution of Cloud

Cloud services providers such as Microsoft Azure and Amazon Web Services (AWS) are on a mission to capture as much of the IT services market as possible. In 2023 that will mean increasingly transitioning to a higher margin and higher quality portfolio offerings, as a way of encouraging users to bring more of their digital spending into their product suite.

Primarily known for their service desk capabilities, cloud providers are moving into end-to-end transformation, with services and applications spanning back office, cyber security, data analytics, business intelligence, and beyond. Last year we saw AWS launch its DataZone data management service, and Google Cloud Platform announce its new Backup and Disaster Recovery capabilities. Meanwhile, Microsoft has developed specialist industry clouds across financial services, healthcare, retail, and other key sectors. 

These trends will further drive M&A within the cloud services market in 2023, as well as transform the leadership capabilities needed within the space. Alongside pure tech domain expertise, executive teams will need to bring in vertical experience, not to mention the situational competencies that will enable them to establish new capabilities and drive rapid growth.

Sharpening of focus on existing rather than new markets

As markets tighten, companies need to shore up their revenue streams, by ensuring a diverse client base and exposure to recession-resistant markets. In 2023 we will see more tech companies adapt or pivot their operations to attract clients in reliable industries such as the public sector, healthcare, and transportation, where cuts in consumer spending will be felt less keenly. And again, this will mean bolstering the top team with relevant vertical and situational expertise.

In the same vein, companies must prove to clients that their product or service is necessary, rather than a discretionary spend, so it won’t face the chop during cost-cutting. This means doubling down on customer experience to ensure that clients are getting maximum value from a product and that it is helping them to achieve their objectives. Hence, revenue-generating leaders, such as the Chief Revenue Officer, Customer Officer, Marketing Officer, and Product Officer, will become even more important in the year to come.

Innovation will continue apace….

2023 should have plenty in store, as the 5G rollout continues, giving more individuals and businesses access to the superfast network. This will drive progress in other areas, particularly smart cities, infrastructure, and other sectors adopting cloud technologies, such as manufacturing, logistics and supply chains – which have come under intense pressure in recent years.

Meanwhile, sustainability will continue to dominate the technology conversation. We’ll see further progress in battery technology and infrastructure for electric vehicles, while the continued investment in AI will see a significant impact across several end markets. For example, data science capability delivered into the energy market will continue to mature capabilities around pricing forecasts, energy production efficiencies and revolutionise usage across society.

So, while the economic outlook may be mixed, there is still plenty for tech investors to get their teeth into, with reportedly record levels of dry powder to deploy in tech businesses. A combination that makes high-performing leadership teams ever more pivotal.

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