Strong investor appetite for the technology sector is set to drive recovery in private equity with the booming area seen as a safe harbour for investments during COVID-19 and forecast to be the major source of deal activity.
In a report to be released on Monday titled The Carry: Private Equity Insights, law firm Herbert Smith Freehills found market uncertainty caused by COVID-19 triggered a dip in deal activity in the second quarter of the year but renewed interest in technology and software could pave the way forward for private equity.
The report records 21 deals completed in the first quarter of the year with the technology sector accounting for 33 per cent. However, there were only six deals in the second quarter of the year because of the “disruptive impact” of COVID-19.
The report highlights investor interest in technology-based businesses in communications, logistics, telehealth, fintech and wellness. It says sponsors are becoming more comfortable with allocating committed capital to software and technology investments and technology was being seen as a “safe haven” for investing during the pandemic.
Herbert Smith Freehills partner Clayton James said since 2019 private equity had been sitting on record levels of unspent cash waiting to be invested. “Now obviously there is a significant amount of committed capital still sitting on the sidelines and so I think that … can be flipped to acquisition opportunities for private equity,” Mr James said in an interview with The Age and The Sydney Morning Herald.
He said there had been predictions for a number of years that technology would be a significant contributor to deal activity but in fact technology was generally not as dominant as expected. However, he said this was set to change with technology the largest single contributor as a sector to deals in the first quarter of the year.
“Tech has started to move from a sector where we thought there’ll be a lot of activity to one where there is a lot of activity,” he said. “We’ve seen an acceleration of digitisation of parts of the economy and I think that one lasting impact that COVID may have is it has driven part of that digitisation agenda that we had suspected may be there and it may have hastened that.”
He pointed to the acquisition of technology company The Citadel Group by private equity firm Pacific Equity Partners last week for $500 million as indicative of the appetite in the sector.
Last year according to the Connect4 database there were nine private equity public acquisitions announced and so far there have been six in 2020, which suggests the number of private equity public mergers and acquisitions transactions for 2020 would be in line with 2019.
Mr James said he anticipated an overall bounce back in activity because the slowdown had been in response to uncertainty in the market rather than a lack of fundamentals.
“There are significant levels of committed capital still being held by private equity, and also probably a bit of a tightness in the private asset market,” he said. “So I think the fundamentals still are in place for continued private equity activity in the public sphere.”
Source: Thanks smh.com