Is there space for more?
Technology has been a key growth driver in the world economy, enabling what is often referred to as the Fourth Industrial Revolution. The four largest technology companies – Apple, Amazon, Google/Alphabet, Microsoft, have all reached market caps of over $1 trillion in the last two years, according to a report by The New York Times.
And there is still plenty of potential for investors to join in this growth trajectory. A poll at SuperReturn International 2020 showed that nearly half of the private equity sector delegates who voted see technology growing up to 20% by the end of this year.
Not only the major players are still expanding, but there are also a lot of opportunities in niches and in the mid-market.
Robert F. Smith, the Founder, Chairman and CEO of Vista Equity Partners, highlighted the enterprise software sector as one of the segments with strong potential. He sees two key dynamics at play.
The first is increased productivity from implementing software.
“Businesses operate typically without systems, with some sort of pattern of overshoot and under-correct and all that net, and that's a dynamic of how businesses operate. When you implement a computer-based system, you can actually operate them more efficiently. And so, all that area under the curve actually becomes productivity. This is then driven back into the operation,” Smith explained.
He added that the payback for the software produced by the 68 technology companies in his portfolio is typically under five months, and results from improved workflows and related efficiencies.
The other dynamic Smith pointed out is the vast distribution of computing power.
“30-40 years ago, computing power was basically owned by governments, large institutions and universities, and you used to actually have to go and rent the computing power for periods of time, at $1,000-an-hour type of rates.”
The move to a Cloud environment – with commoditised access through ubiquitous connectivity – has brought costs down dramatically and given the software industry new impetus to create software on the back of this infrastructure.
Smith continued: “We all get excited about this thing called SaaS. But at the end of the day, what we're really doing is providing a solution set to our customers that we are constantly upgrading - in a form that constantly creates more efficiency for them. And so, you have those customers for not quarters or years, but for decades.”
This ‘stickiness’ can be enhanced even more by creating new solutions which are highly tailored to the needs of these customers.
Joe Osnoss, Managing Partner and Managing Director at Silver Lake, also looked back on the changes in the technology investment sector. He highlighted that tech investments were very much the realm of the venture capital community.
“The venture people were really smart in technology. They're viewed as being part of the technology community. But they were making high numbers of small investments in very speculative companies, hoping that one or two would hit it big - and some of them did,” he reminisced.
On the other side was the ‘old economy’: “And they would say: We do everything but technology! It's risky. It doesn't make any money. It's a fad.”
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In the early years, there weren’t many technology businesses that were suitable for private equity investments.
“Now, everybody seems to want to define themselves as a tech company. And so, while new people have entered into tech private equity investing, the addressable market has probably grown even further,” Ossnoss added.
Identifying suitable investment targets against a growing number of companies defining themselves as tech or tech-led businesses can be a challenge.
“There's a lot of that ‘flavour of the month’ where a company will come in and say: “We're the Uber of water,” Joe Ossnoss explained.
To separate the wheat from the chaff, experience and recognising patterns is key, as is the internal collaboration with other sectoral experts.
Osnoss cites Cast & Crew as an example of a technology-enabled investment opportunity, on the outside a payroll and insurance provider for the film industry in Hollywood. “But when you looked on set, the people were using that software just like they would use SAP, Workday or Oracle to manage all of their expenses and their accounting for the local film shoot that they were doing.”
The company ticked all the boxes in terms of recurring revenues, ‘stickiness’, data analytics, cloud and mobile connectivity, and scope for transformation and growth that qualified it for a PE investment target.
Clearly, for those interested in technology investments, having deep sectoral knowledge is important if they want to invest anywhere outside of core technology, in areas such as technology-enabled service or enterprise software, and many new, emerging opportunities.