Private Equity in Tech
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Benefits of Private Equity and Questions to Consider 

M&A activity in the tech industry broke the $1 trillion mark in 2021 for the first time in history, and despite a decrease in the total value of M&A deals in the first quarter of 2022, the pace of M&A deals continued to accelerate. With access to ample capital and sizable returns, private equity (PE) firms are making tech deals at a record-setting pace.

Private Equity in Tech

PE investing can bring a broad spectrum of opportunities in a range of tech sectors – software, SaaS, artificial intelligence, computers, media platforms, and beyond. It is important for tech leaders to align with the right partners to harness these potentials.

If you’re a technology company founder or CEO, chances are good that you receive many messages from PE firms interested in acquiring your business. Among the many emails may be the perfect opportunity to take your company to the next level or achieve an optimal exit — but how can you know which message it is? The answer to that question is, in part, what this guide aims to provide. 

Private Equity Statistics in Tech

According to the BDO 2022 Technology CFO Outlook Survey, 1 in 4 tech firms are pursuing Private Equity (PE) or (Venture Capital) VC investment, a likely reason for the frequent PE outreach. PE managers have also watched valuations increase and expect them to continue on that path, with recent estimates claiming an industry overall value of more than $35 trillion. 

This is good news for tech companies, and most tech execs are looking to capitalize on that strong position. 65% of company CFOs polled for the 2021 BDO Technology CFO survey planned to pursue some form of deal activity in 2022. Technology companies are also more likely to be acquired by PE investors than anyone else. 
Deal flow will likely continue to be high, as PE firms across the globe invested in tech are seeing record returns and are sitting on stores of dry powder. Receiving investment from PE investors can be great news for a technology company. It often boosts revenue, among other benefits, but there are many things to consider before entering into an agreement. PE firms often have goals and focuses that differ from other investors, such as VC firms. 
Knowing how to prepare for a potential PE acquisition, what PE firms are looking for, how to negotiate the optimal deal, and collaborate with the PE firm post-investment is crucial. In this four-part series of articles, we give advice on how you can achieve the best results. 

What Are You Looking For? External Capital via PE or Something Else?

The starting point for deciding whether to pursue a PE deal is looking inward. Your current situation, your strengths, weaknesses, and opportunities — and near-, medium-, and long-term goals — can help you identify if, when, and how much external capital you may need. 
The short answer to whether you need external capital to achieve your goals will most often be yes. Technology companies tend to be rapid-growth enterprises and access to funds will almost invariably be a key driver for growth phases. Depending on your company’s specific situation, you may be looking for capital to grow sales, expand into new markets, invest in R&D, make strategic acquisitions of competitors, a combination of all of the above — or something else entirely. For example, you may be looking to exit the company within a given timeframe. 

Questions to Ask Yourself

When considering PE investment, or identifying strategic and business goals, the starting point is finding answers to questions such as:

  • Are you looking for personal, monetary success (an exit) or to take your company to the next level? 
  • What are your core strengths and weaknesses? 
  • Why should you choose PE investment over other kinds of funding? 
  • How will you use the raised capital? 
  • How can you work with a PE firm to achieve the best possible results? 

The list of questions goes on, and each needs a detailed answer to help you decide whether PE is the best option for raising capital. 

Where Can I Find the Answers to These Questions?

Many of the answers — and definitions of goals — can likely be found in mission statements, three-to-five-year targets, SMART goals, SWOT analysis, and other, similar strategy documents. If the busy day-to-day running of your company means that these documents have not recently been updated, now is the time to update them. 

What Other Options are Available to Me Outside of Private Equity?

PE is far from the only way to raise capital. There are other options that each have advantages and drawbacks. They include:

  • Loans
  • Venture capital
  • Public markets

Depending on your specific situation, these may be better suited to your business strategy and goals. 

What Can a Private Equity Deal Offer Me?

There are many good reasons why almost half of all investments in technology companies come from PE firms — and why those technology companies, including many in the software space, say yes to the investments. 
To decide whether a PE deal is right for you and your company, you need to know what PEs can bring to the table. What their key strengths are and how they can help your business. The list of potential benefits of collaborating with a PE firm includes: 

  • Market expertise:  PE firms often have extensive market expertise and can help you identify new business opportunities, guide sales growth, help define marketing strategies, and find new possibilities for upselling your solutions. Through working with other companies to grow their revenue and profitability, PE firms also have practical experience of what does and what does not work. 
  • Access to new markets:  Many businesses are looking for growth capital to expand into new markets. Having a growth focus, PE firms have keen insights and expertise relating to entering new markets. Furthermore, they can leverage existing, extensive business networks to identify and engage new potential customers. 
  • Funding:  A deal with a PE firm often enables your company to raise more capital than would be the case for deals with most other types of investors. 
  • Business acumen:  PE firms are often experts in the organizational and financial sides of running a business. Their skills and experience may complement those of your current employees as well as the leadership team. It might be helpful to apply PE insight to areas such as process optimization, accounting practices, formulating business strategy, and daily management. 
  • Objective insight:  Technology companies often start as companies run by individuals — for individuals. Said differently, the leadership and employees of a technology company have built it from the ground up through passion and innovation. PE firms can offer an objective and data-driven evaluation of your business and help identify areas for improvement. 
  • Efficiencies:  PE firms will be able to help you identify best practices, make you more efficient and maximize your growth and value. They can also help you execute to reach your full potential. 
  • Higher profitability:  The likely result is that your business will grow and become more profitable. 

What Role Will a PE Firm Take?

Any discussion of a potential PE acquisition will include a discussion of the role of the PE firm, the role of existing target company owners and executives, and how the two will interact. Participants should ask questions, such as: 

  • What level of participation will the PE firm take in the target company’s affairs? How active will the PE firm be? 
  • Will the PE firm seek control over the selection of target company managers and executives? 
  • Will existing owners and executives stay on in their current roles? 
  • Does the PE firm seek to integrate the target company into a wider tech ecosystem (such as under a platform company? 

First, consider that there are several different levels of participation that the PE firm may take. Some PE investors may choose to take an active role in advising and managing company processes or planning. Others may choose to remain relatively passive, allowing existing company executives to continue running the company in the same way, but providing advice as requested and serving as a resource rather than more actively advocating for or pushing through changes. 

Private Equity in Tech

A Platform Company May be in Your Future

PE firms may also seek to roll up multiple acquisitions under a platform company. A platform company is a company acquired by the PE group in a specific industry that serves as the starting point for other acquisitions in that industry. Typically, platforms facilitate interactions between other companies (such as other acquisitions by the PE firm) and customers (such as a payment platform, for example). 

What to Expect in Part 2

In addition to considering what role the private equity firm will take, it is also important to consider where PE firm and management interests align — and where they may differ. Many potential collaboration challenges (described in detail later in this series of articles) arise due to interests not being aligned early in the negotiation process. In fact, initiating the alignment process can begin even before negotiations take place.

Today’s Thought Leaders

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