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Remember when Tech valuations seemed to only go up? Those days are behind us, and Private Equity firms are feeling the squeeze. The once-hot Tech Services sector is cooling off, forcing investors to rethink their playbooks. But as they say, when the going gets tough, the tough get creative.
Private Equity (PE) in Tech Services has undergone a dramatic transformation since 2021. The sector has shifted from a high-flying market with astronomical valuations to a more sobering landscape in 2023. PE firms now face multiple challenges: deflated asset values, talent shortages, geopolitical uncertainties, recession fears, and disruptive technologies like Gen AI, creating a complex environment for investors.
So, how are savvy PE firms adapting to this new reality? For starters, they’re getting creative with their deal structures. The “platform play” is gaining traction, with investors building end-to-end capabilities through strategic acquisitions. It’s no longer about simply buying low and selling high; it’s about creating value through synergies and scale.
Take the case of KKCG’s Aricoma Group. They’ve been on a buying spree, snapping up seven differentt Tech Services companies to create Qinshift, a powerhouse with nearly half a billion in revenue. This “string of pearls” approach allows them to enter new markets, plug capability gaps, and achieve economies of scale that wouldn’t be possible with a single acquisition.
Another emerging trend is the growing acquisition appetite for niche system integrators. While the big Cloud providers – AWS, Azure, and GCP – still dominate, we’re seeing a steady uptick in PE-led deals involving companies that specialize in implementing and optimizing specific Enterprise Software platforms like SAP, Salesforce, and Oracle. These companies often come with deep vertical expertise and loyal customer bases, making them attractive targets for PE firms looking to differentiate their portfolios.
Geographic diversification is also playing a bigger role in PE strategies. While North America and Western Europe still account for the lion’s share of deals, there’s growing interest in emerging tech hubs. Places like Bulgaria, Morocco, and Vietnam are popping up on investors’ radar, offering access to skilled talent pools at competitive rates.
Interestingly, some PE firms are turning their attention to public markets with a “public-to-private” strategy. As valuations of publicly traded tech services firms have dipped, investors see opportunities to take these companies private and drive value creation away from the pressures of quarterly earnings reports. For instance, in 2023, BC Partners invested in Kin & Carta to take it private, aiming to merge it with their portfolio firm, Valtech. This move gives them access to complementary competencies, marquee clients, and a stronger presence in the European market.
But perhaps the most significant shift is the renewed focus on operational excellence. The days of financial engineering alone driving returns are over. PE firms are rolling up their sleeves and getting involved in the nitty-gritty of running their portfolio companies. This hands-on approach is essential for navigating the current market turbulence and extracting maximum value from investments.
As we look to the future, it’s clear that success in Tech Services PE will require a delicate balance of patience and agility. The easy wins of yesteryear are gone, replaced by a landscape that demands nuanced strategy and operational finesse. Those firms that can master this new playbook – embracing platform strategies, tapping into emerging markets, and driving real operational improvements – will be best positioned to weather the storm and emerge stronger on the other side.
For shrewd Private Equity investors in Tech Services, the landscape is still rich with opportunity. The challenge now lies not just in finding these opportunities but also in possessing the acumen to realize their potential.
If you’re wondering where to begin in the Private Equity in Tech Services sector, you can download our latest point of view on the Private Equity Landscape, titled “The Road to Value Creation: Navigating the Pandemic Highs to Find a Valuation Equilibrium,” for a comprehensive analysis of current trends and innovative strategies being employed by leading PE firms globally. Additionally, you can reach out to us at info@zinnov.com.
For a look at our 2022 and 2023 Private Equity Reports, you can find them here:
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