While tech is increasing opportunities and targets in the market, it is also bringing a number of risks less familiar to the PE industry. In a recent Real Deals webinar, industry experts discussed how best to assess tech risks and integrate opportunities into the portfolio.

Listen to the discussion here

Here are some key points from the discussion.

Tech emergence

With IT becoming the backbone of many organisations, the PE industry is seeing tech become a larger force in the market. Technology assessments are increasingly creeping into the viability checks of more PE transactions. Karine Gourley, managing consultant at Intuitus said tech due diligence is becoming front and center in sizing up any deal. “It is about understanding what the vulnerabilities and the opportunities are within each organisation. In each sector, you can see where technology is providing companies with unique advantages.”

Technology is central to a lot of the deals that Silverfleet Capital do. Partner, Ian Oxley, said that pertains both to the technology the company may be built on, as well as the technology integrated into its operations. “The pace of change in technology is accelerating, the virus has brought a lot of it to the fore.”

Tech and ESG compatibility

Ambienta is a sustainability-focused investor. The way the firm looks at markets and investments is always through the environmental impact of its product and services. Giancarlo Beraudo, partner at Ambienta said that that has naturally brought the firm to tech companies. “It is all linked, the moment you deliver efficiency to your customer and reduce production costs, you also deliver an environmental benefit. That might be in consuming less energy or making less waste. If you’re delivering a cost-saving, you’re also likely to be delivering an ESG impact."

Beraudo noted the megatrend of digitisation as a key example. “When you transform a business process from physical meetings and paper being signed, to fully digital and remote, you have convenience, cost reduction and also an environmental benefit; no travel, no waste of fuel, no paper, you save trees.”

Oxley suggested that the virus has only emboldened investor’s interest in tech opportunities linked to climate change. “People are noticing that the air is clean and realising if you harm your environment, it can come back and harm you. People want to see a change in the post-virus world. Companies need to have basic strategies for their carbon footprint.” He claimed that tech companies that are good for both the environment and the economy are going to be the “sweet spot” for the next generation of investors.

Origination

The virus has challenged many firms’ traditional deal sourcing approaches. Beraudo said that it has required some rethinking especially when it comes to tech and SaaS deals. “If you think of generating deals and prospects in a B2B context, it is through trade fairs. This year all of them have been canceled. The way you originate business has had to become more digital. This means more of a presence on the web, you need to engage with customers, in a digital and remote way.”

As highlighted by Oxley, Silverfleet’s sourcing approach to tech deals starts early on. Before identifying targets or tapping into industry networks, Oxley revealed that the firm’s process starts in mapping and analysing tech sectors and different markets' demands. “It goes right back to where we start, we are looking at different technologies and sectors and then seeing where there are opportunities.”

Dedicated tech panels

With the increasing nichification of tech, many firms are bolstering their expertise and strategies with insights and advice from different tech experts.

Oxley said Silverfleet’s in-house tech panel is made up of top tech expert advisors in each of the sectors the firm covers. “They give us insight into the upcoming trends that we need to be aware of. We try to have at least one person who can answer each technology question pertaining to different companies. For other needs, we have a network panel approach, a black book which is available for all of our deal teams and portfolio companies.”

Though Gourley claimed that with increasingly niche tech investment firms will still need experts from outside their companies. “We [at Intuitus] have an extensive consultant network that we utilise and draw on for very specialist expertise. While it may make sense for [PE firms] to have that capability in house, I think there will always be the need to augment that. For specialist deals, I can see an ongoing need for independent advisors.”

Tech on exit

With new emerging markets and technologies, so too comes new risks. Beraudo asserted that technology investments have risk factors on exit that are less familiar to PE investors. “If you think about how you were doing exit preparation years ago, it was a lot around financials, VDD, tax, legal, and insurance. Now tech DD is becoming as important.”

Gourley explained that this reality can lead firms to do ‘ongoing DD’. “We have had an ongoing relationship with a firm, where we have gone in 18 months after the initial process to check up on the DD recommendations we made and how they have progressed.” She asserted that in tech, it makes sense to engage in DD in preparation for a sale. “It is a little bit like selling your house, you are better off understanding where the problems are before the surveyor turns up.”