PE MARKET FIT

Jonathan Simnett: It works for private equity’s interest and the UK/ EU tech sector’s interest. There’s been some changes in tech, which suits the aims of GPs. In terms of risk profile, most software firms in tech now have recurring revenue streams, making it particularly attractive. For UK tech, there is constrained growth because of the lack of ‘land grab levels’ of funding. There’s a real need to accelerate the growth of scale ups, to re-engineer them, and add extra value. Especially for creating the kind of world class firms you see coming out of the west coast of America. The founders need to start to move to the next stage. There’s a host of opportunities for PE firms to deliver funding for expansion at speed.

Darran Green: As a generalist firm, tech is not a core theme of ours, but in the current year, given the backdrop of uncertainty, there is more focus than there would be in the ordinary course of business. We are very much focused on the quality of revenue. In the current period of uncertainty, we can hang our hats on a solid forecast for the coming year, because a lot of the revenue is contracted and recurring. The challenge actually lies in delivery, understanding that that comes from having the right people in place, systems throughout product development and the right balance sheet to deliver growth.

TECH NICHES

David Barbour: There are a few places that have become incredibly attractive. Areas we are focusing on are regtech, pharmatech and insurance tech. Generally speaking, there are these pockets of the economy, which have managed to keep tech and digitisation out for quite a long time. Ultimately, everywhere is going to be opened up, all business processes can be made more efficient with software, which saves cost and is often really easy to implement.

DEAL SOURCING

Brian Parker: From a corporate finance angle, deals lead to more deals. We’ve been in business for over 20 years now and have completed 250 deals. You build up a lot of contacts, not only in the people you meet in closing those deals, but also through the ones that you didn’t quite get, as well as the under bidders. For us it has developed into a broad network of chairs, bankers, lawyers and technology. Often people we have actually been around many times, we’ve got a couple of instances where we’ve raised money and sold a business and those technology entrepreneurs have kicked on and come back to do it with us again. Ideally, there is a recurrence in the pipeline. The reality is a series of one off transactions with some crossover. Being a specialist, you build up a lot of intellectual capital along the way. 

DUE DILIGENCE

David Barbour: There is an increasing focus on tech DD and understanding what tech companies' ‘technology debt’ is. ‘Technology debt’ has become the biggest price mover between first bid and final offer. Perhaps there’s a business plan saying the company is going to 3x revenues. But maybe the software isn’t scalable, it needs rewriting, maybe it’s in the wrong language, maybe you are going to have to go to a bunch of your customers and say; “you know all those rinky dink features you’ve got, you’re going to have to give up 50 per cent of those”, because we’re going to standardise this product, otherwise we can’t scale it. That is where you can really get caught up and that can cost quite a lot of money. It can mean the evaluation moving 10-30 per cent based on some of these judgments.

Jonathan Simnett: Running tech firms is not the same as running groups of restaurants, which has been a favourite for PE. For instance tech experts, who most of the differential value in the company is centred around, are not always the best people to be looking after the interests of their business. Hence the importance of a balanced management team and PE firms that really get tech. They have to understand the culture of tech businesses and how to keep those highly valuable employees in place. This can be about much more than just striking the perfect earnout deal. It’s all about keeping a culture in which people can flourish.

LP APPETITE

Darran Green: Turning to the mind of LPs, there is a willingness to look closely at software and technology. It is certainly on LPs' agendas, but there is caution. The better LPs that have been in the market for a long time, lived through booms and busts understand that evaluations can get particularly ridiculous and the nature of some tech management teams’ expectations. However, the rate of change in investors looking towards technology has been accelerated by Covid-19 and been brought forward in LPs' minds.

EXITS

Brian Parker: Some firms are getting 10x revenues on exit, for certain types of tech businesses. Digital transformation is a key area with marketing and cloud services business at the moment. It has been getting a fair bit of traction, it’s a very buoyant space. The biggest change in the exit market in the last decade has been the amount of overseas acquirers of UK companies. The last seven of our last ten exits were to overseas acquirers. In the entire UK tech market, around 50 per cent of deals in the first half of this year were from overseas purchasers. The stirling being relatively cheap is a factor, and the fact that the UK/EU continues to be a highly innovative source of successful tech companies.

David Barbour: US buyers are coming here [to the UK], they are buying companies on lower multiples than they would pay in the US. They are getting great tech bolt-ons and we are getting higher multiples than we’d get from a UK firm. Though we’re getting a lower multiple than they would normally pay in the US, everyone comes out feeling pretty good.