The deal activity among Private Equity investors in the Technology Services space witnessed an all-time high in 2021, primarily due to unmatched levels of dry powder, low cost of debt, and intense competition. Though this momentum sustained till the second half of 2022, the total deals in the year 2022 saw a dip of 30%, when compared to 2021. This dip was primarily driven by the uncertainties prevailing around the macro-economic environment, the Russia-Ukraine conflict, and the rising interest rates.
The deal momentum between 2020 and 2022 was largely attributable to the pandemic-induced digital spending for enterprises, which drive growth for a majority of the Tech Services companies. However, in 2023, many factors are impacting end markets – such as evolving geopolitical scenarios, inflationary/recessionary pressures, and a softer demand outlook. This has led to the reprioritization of technology spending. But, the overall Technology Services spend is still expected to remain high, mainly due to an increased reliance on digital platforms and new-age technologies to achieve productivity goals, reduce waste, and serve customers profitably. Add-on deals dominated the investment space in 2022, with an aggressive platform-based deal-making approach leading the way.
The Technology Services landscape is evolving at unprecedented rates as enterprises double down on their digital transformation initiatives, engagement models undergo changes, and talent becomes harder to find. So, offshore/nearshore locations have emerged as attractive locations for investments, thanks to the ever-increasing need for globalization to access top-notch talent.
With the spend pockets evolving and newer niche players arriving on the scene with specific differentiators, they are carving out newer niches to play in. Also, the Strategics are aggressively establishing themselves as ‘end-to-end’ Digital Services players, which has paved the way for small, niche services players to attract attention from both Strategics and PE investors alike.
How will the remaining quarters in 2023 pan out for Technology Services firms? Given the high cost of debt, what strategies will dealmakers leverage to structure deals? How will they deploy the accrued dry powder? Get answers to these questions and more, in our latest report, ‘Private Equity Investments in Technology Services – Strategic Review,’ which will equip investors with the right data and insights to guide capital deployment in 2023.