Long a driving force behind mid-size and larger tech M&A deals, recent months have seen a consistent rebound in private equity (PE)’s investments in established tech companies worldwide.
PE Activity Rebounding
The second quarter of 2024 marked a turning point, with PE’s strongest deal-making period in two years. PE firms closed 122 acquisitions valued at an impressive $160 billion. While this still pales in comparison to the high-water mark of Q3-2021—when 232 deals worth $300 billion were completed—it represents the first significant improvement in activity and sentiment since then.
As we enter the traditional autumn deal-making season, across the board we are seeing intensified private equity buyout interest for faster-growing technology-driven targets on both sides of the Atlantic. This renewed focus suggests that the recent uptick is not merely a fleeting anomaly but rather the start of a sustained period of activity trend.
A 30% Surge on the Horizon
Based on the activity we are seeing real-time; we predict a 30% increase in both the value and volume of deals over the 12 months. This is driven not just by live deal experience, but also a series of structural changes over the past two years, creating favourable conditions for PE interest to thrive.
The Nuance of Interest Rates
Rates influence both the direct cost of debt used to fund PE deals, and indirectly the cost of equity used. As rates have risen from effectively zero toward 5%, PE deals have become commensurately more ‘expensive,’ which effectively means returns to PE firms have reduced. With rates now coming down in real-time effectively the annual carrying cost of private equity deals has also declined.
But of course, interest rate rises have other consequences, the main one being pressure downward on private valuations. 2020 and 2021 saw a period of unprecedently high valuations, particularly in technology. Private companies, encouraged by that once-buoyant market, held onto these inflated price tags even as the economic climate, and public valuations, began to deteriorate.
Now, two years removed from that peak, a more realistic outlook has set in across the board. Private targets have reluctantly accepted there is a ‘new normal’ in terms of valuations. This inevitable moderation of expectations, also of course a consequence in part of rising rates, has made PE deals affordable and justifiable again.
Today, PE buyers are engaging with targets whose asking prices, while still ambitious, are no longer unreasonably high, and now moderated by general market fundamentals. This combined with interest rates themselves declining is creating the optimal ‘weather conditions’ for PE deals to get done. More realistic prices, and more attractive cost of money, combine to make larger deals once more attractive enough to close.
The $2.5 Trillion Problem: ‘Dry Powder’
By the end of 2023, PE firms had amassed $2.5 trillion1 of capital available to invest. To put this into perspective, this $2.5 trillion in equity could potentially fund $10 trillion worth of acquisitions. To put that into perspective, it represents roughly one-third of the entire US economy. While such a comparison may not be entirely fair, it illustrates the sheer scale of private equity on the global marketplace.
Dry powder must be invested, and on a relatively defined ‘clock.’ Investors in PE firms generally expect that funds committed will be invested within 2-4 years, and few investors in these firms are willing to accept several years or little or no new deal activity. Having largely sat on the sidelines for 12+ months, many PE firms have little choice but to pursue acquisitions that are now more reasonably priced. Overall, the sheer size of dry powder alone is likely to drive higher growth in activity and potentially, to some extent, in valuations as well, as PE firms bid against each other to win the best available deals.
A Clearer Macroeconomic Picture: Confidence
As various nations including the US navigate electoral cycles, the underlying macroeconomic factors have become relatively clearer and more benign. Inflation, the bugbear of economies worldwide, appears to be gradually coming under control. Interest rates as discussed have stabilized and heading lower. Election focus in the US is partly on bringing down the cost of basic goods for middle-income families. Perhaps most encouragingly, unemployment figures are showing cautious signs of improvement.
While we are still seeing the incredibly unfortunate persistence of armed conflicts in several regions globally, financial markets seem to have largely discounted these geopolitical risks. There is a prevailing sentiment that these localised conflicts are unlikely to cause shocks that would significantly impact the broader economic landscape. As a result, there is growing acceptance that there is a clearer, more positive, and more confident/lower risk future possible against which to plan and execute M&A deals of scale.
Public Market Concentration: A Boon for Take-Private Deals
A key feature of the current PE landscape is the increasing prevalence of take-private deals, where an investor acquires a public company and delists it from the stock exchange. This trend is driven, in large part, by the growing concentration of valuations in public markets around a small cohort of dominant firms. NASDAQ, for instance, is increasingly driven by a handful of tech giants, leaving smaller—though still high-quality—public companies to languish with modest valuations and low trading volumes. A similar phenomenon is unfolding on the London Stock Exchange, where several companies have opted to leave the public markets in favour of private ownership, often backed by private equity.
For every Meta or Nvidia there are dozens of companies like Squarespace, Darktrace, or Nuvei that are big enough to be attractive and resilient, but too small to capture enough investor attention and backing to achieve premium valuations as public companies. Today, unless a company can achieve the market value of, say, an ARM, Spotify, or Meta, it often struggles to achieve a premium valuation or build a loyal following among public market investors. This is true for businesses even as large as Intel, recently mooted as the largest potential public company deal in tech M&A history, at ca $100 billion. If the stock market doesn’t work for Intel, then it is clear how it might not work for hundreds of smaller growth companies.
So, for these smaller public companies, the prospect of going private through a sale to a PE firm offers an attractive alternative. Such a move provides their shareholders with immediate and full liquidity, while giving the target the opportunity to expand more aggressively away from public scrutiny, before considering a public listing or strategic sale later.
AI Offers the Potential to Radically Improve Margins
PE acquisitions succeed because targets become more, sometimes much more, profitable under PE ownership. Perhaps the classic playbook for this is Vista Equity, which has specialized in turning decent-margin targets into industry-leading profitable companies. AI offers the potential to transform target margins faster, and more significantly than even before. However, realising these gains requires significant and sustained investment in AI technologies and infrastructure— a process that is far easier to undertake away from the pressure of quarterly earnings reports.
This dynamic is particularly noticeable in software, where businesses often operate with very high gross margins, and even small changes in operating costs can shift 20% profit margins to 30-40% rapidly. Consider a hypothetical Software as a Service (SaaS) company generating $100 million in annual revenue. With gross margins typically exceeding 80%, any radical transformation of operating costs through AI could potentially add $20m a year in EBITDA—and those gains alone can shift an M&A deal from attractive to exceptional.
PE Has Proven Its Ability to Create Value
Over the past few decades, leading growth-oriented private equity firms have amassed an impressive track record of value creation. Investors such as Vista Equity, Thoma Bravo, Hg Capital, and Clearlake have consistently demonstrated their ability to accelerate the growth of their portfolio companies, fund strategic acquisitions, and build far more valuable companies over the course of 5-7 years of ownership.
This proven ability lies at the heart of these firms’ success in raising such substantial amounts of capital. Moreover, it has established private equity as a category of buyer that must be seriously considered in any mid-size or larger growth company exit.
Recent high-profile deals serve as testament to this trend. The sale of M-Files to Bregal and Haveli, Thoma Bravo’s $5 billion take-private acquisition of the UK’s Darktrace, and Permira’s $7 billion take-private of Squarespace all underscore the continued confidence in private equity firms’ ability to nurture and develop technology companies successfully.
The Road Ahead: PE Set to Drive Tech M&A
In periods like today, we have seen PE firms account for 50%+ of all tech M&A deal value. Given the current ‘weather conditions’ of lower valuations and lower cost of funding for deals, we see potential for PE firms to become the driver for tech M&A worldwide over the next 12 months. For every Qualcomm/Intel deal, we expect 3-5 PE deals of significant, but perhaps smaller targets, both public and private. We also expect this to happen on both sides of the Atlantic; without serious IPO activity, de-listings are set to continue from the LSE in London and NASDAQ and NYSE in the US. Moderating interest rates and the pressure of dry powder combined with the allure of AI-driven efficiencies and private equity’s proven track record all point towards a period of intense deal-making activity.
For technology companies, particularly those in the mid-market, this trend presents both opportunities and challenges. On one hand, the increased interest from PE buyers offers a serious alternative when considering exit options. Over time however, this will inevitably intensify competition amongst PE firms and potentially drive-up valuations in certain segments of the market, making this a persistent trend beyond the next 12 months.
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