United States

Private equity funds focus on tech sector as disruption looms


U.S. middle market private equity (PE) investors are increasingly investing in tech companies, suggesting managers are rethinking their investment thesis. Through May 31, 2018, 16 of the 46 new fund launches, representing $6.7 billion, or 30.1 percent of all assets deployed, were PE funds with tech investment strategies. These strategies included application software, IT services, hardware, office electronics and consumer electronics, among others.

This recent trend demystifies the adage that only large PE managers possess the scale and resources to effectively invest in tech. This may demonstrate that the middle market is using innovation as a way to propel investment returns.  So what is driving this trend?

One explanation may be that middle market managers are sensing market disruption in their respective ecosystems. With the emergence of artificial intelligence and automation in nearly all industries, PE investors leaders recognize the inevitability that tech will transform business. Traditional PE strategies target investments that have not yet optimized performance, with managers focused on driving earnings and optimizing costs. This approach appears to be a thing of the past. Instead, the digital age has introduced a new wave of tech that doubles down on earnings expansion and innovation investment, creating a shift in measuring value for tech-minded managers. The U.S. tech capex index increased to approximately 18.5, resulting in earning per share growth for tech companies to approximately 53.1. This trend in tech spending opens up more opportunities for middle market growth to those who embrace the digital age through mobile solutions, cloud computing, data analytics or social networking.