US Tech PE powers to new heights

Capital is flooding into the US technology space as buyout firms go head-to-head with strategics in M&A and VCs in later-stage investments

Private equity (PE) activity in the US tech space is on a tear. Following a record-breaking 2017 in which 547 PE deals were completed, the first half of 2018 is claiming its own record. A total of 289 tech deals valued at US$43.3 billion were announced in H1 2018, marking the highest half-year volume to date, and a 70.9% increase in deal value compared with H1 2017.

A majority of US tech M&A now involves private equity. In 2016, buyout funds constituted 47.5% of all US tech M&A, rising to 52.9% in 2017. At the end of H1 2018, a full 64.3% of such deals were made by PE shops, as strategics have become less prominent on a relative basis. 

Software leads the way

A rush to capitalize on the sellers' market has inevitably spelled cash returns for PE sponsors, particularly in the software space. The data support this trend of software-related activity. Of the US$43.3 billion in PE tech activity recorded for the period, 72% (US$31.2 billion) of that was accounted for by software exits alone. 

Of the 289 announced PE deals of H1, 237 constituted software acquisitions and sales. Buyout investors have long been attracted to the subsector because of its subscription models—such companies benefit from predictable, recurring cash flows that are ideally suited to leveraged buyouts as they can pay down debt efficiently. 

Fundraising snowballs

Since 2017, the market has been flooded with tech capital. After a mammoth US$15 billion fundraise from Silver Lake Partners, at its close the largest-ever tech-focused PE fund, Vista Equity Partners raised US$12 billion for its own vehicle. Shortly thereafter both were eclipsed by Softbank's US$98 billion Vision Fund. 

Both Softbank and Vista are rumored to already be contemplating follow-up funds to meet investor demand. This not only means that investment activity is likely to remain high for the foreseeable future, but also that this wall of capital will support a subsequent exit churn three to five years from now. 

Blurred lines

While it is clear that tech will be a primary focus for private investors, what is less obvious is the distinction between the VC and buyout firms that will be behind these deals. 

KKR and TPG Capital, two of the largest and longest-standing PE shops in the business, have been training their sights on less mature tech assets in recent years, with the former raising US$711 million for its KKR Next Generation Technology Growth Fund in December 2016 and the latter believed to be seeking US$1.5 billion for its TPG Tech Adjacencies fund to acquire the equity owned by employees, founders and early investors before companies go public. 

VCs have their eye on the prize

At the same time, VC investors are eyeing bigger prizes. Sequoia Capital is understood to be amassing an US$8 billion mega-growth fund, not to mention a further US$4 billion for other strategies. This coincides not only with the Vision Fund muscling in on Sequoia and other VC firms' territory, but a broader trend of VCs moving further along the growth curve. 

An estimate from Crunchbase shows that, globally, late-stage technology investing has been taking a larger share of the pie in each successive quarter: In Q2 2018, post-series C funding amounted to 64% of all venture backing, compared with 42% in Q2 2017, as tech companies stay private for longer and require capital to grow.

 Even if the line between PE and VC continues to blur, one thing is clear: The surplus of capital in the system means that US tech deal activity is unlikely to show any signs of subsiding any time soon. 

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