Tech: the place to invest?
Read time: 7 mins
Paul Russell, Corporate Finance Partner, and Derek Neil, Corporate Finance Partner take a look at why and how tech businesses thrived during the pandemic and what the landscape looks like for 2021.
The impact of the pandemic has been seismic; it is a global event that touched us all. Now, as we navigate 2021 and the personal, societal and economic impact of the pandemic, we can see that the tech sector demonstrated not just resilience, but growth during 2020.
Throughout the pandemic, tech allowed work, play, learning, shopping, dating, and staying in touch with friends and family to continue in a way that would have been impossible five years ago. And this acceleration of the digital transformation has put tech front-and-centre for many businesses.
We take a look at back at 2020 and what we can expect from tech in 2021.
M&A showed resilience
Although 2020 deal volumes were down on 2019, it is not surprising that tech mergers and acquisitions (M&A) have been resilient. But what has been happening and, more importantly, are we in a bubble akin to the dotcom bubble of the late 1990s?
NASDAQ Composite Index: Index Value Jan 20 to Mar 20
Early in the pandemic, business leaders focussed on the wellbeing of their people and securing the future of their businesses. This, combined with huge uncertainty, meant that M&A almost stopped and, over a few weeks, stock markets around the world fell.
NASDAQ Composite Index: Index Value Apr 20 to Feb 21
But by June 2020, the NASDAQ had recovered to pre-pandemic levels and we saw M&A activity returning. It was clear that tech businesses were not just resilient, they were thriving – delivering mission critical services and facilitating a rapid, mass digital transformation. And with huge amounts of liquidity in the market – there is more than $1 trillion of private equity ‘dry powder’ looking for a home – tech was the place to invest.
By Q3 2020 deal volumes were returning, with private equity and private equity backed trade buyers returning to the market and driving a rise in valuations.
This was particularly so in the £20m to £75m value range where, due to the dynamics of supply and demand, PE was paying similar multiples to £75m+ deal sizes, where size traditionally commanded a premium.
Source: [BDO analysis]
Are we in another bubble?
Will all this activity change in 2021? In our experience, deal pricing is certainly robust and good quality assets are hotly contested. Also some stock market commentators are talking about certain shares being overvalued. Nevertheless, it does not feel like the dotcom bubble; businesses have more substance and the fundamental drivers seen in the latter half of 2020 do not look likely to change, even when we start to come out of lockdown and life becomes more normal.
Acceleration of legacy operating models being displaced
Many aspects of tech have been hot areas for investment for years, as they displace legacy operating models – but this is accelerating. A survey by the CBI suggested that, on average, businesses expect their office space to reduce by 18% compared to 2019. And the shift to more flexible working looks like it will stick which, when combined with the dry powder chasing these assets, means it is unlikely we will see a reduction in prices.
IT managed services and unified comms is helping businesses with their digital transformations, and the critical nature and resilience of the channel has been proven. These businesses have largely recovered to pre-COVID run rates and the buy-and-build opportunities are clear.
In Fintech, adtech and edtech, compliance and automation are driving opportunities for new entrants to compete with, or enhance, inefficient legacy systems and ways of working. .
Other trends to watch
- In SaaS, quoted and private multiples have spiked given the resilient revenue model, as well as the scalability and growth potential through further penetration.
- Cyber security is a hot topic thanks to remote working and the rapid adoption of technology solutions to power this. The cost of non-compliance is rising, which has forced cyber security higher up the CEO’s agenda.
- ESG (Environmental, Social and Governance). With more than a third of the world’s managed assets (over $30 trillion) now flowing into ESG and ‘impact investments’, we expect ESG to increasingly be a critical deal issue.
Whether it’s the impact of the business itself or the solutions to the ESG problems it might provide, as a trend it cannot be ignored.
Find out more
For more tech and media insight and advice, contact our teams at [email protected].
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