What will happen to future deal activity in the technology sector?
The UK deal market has continued to thrive. Strong investor appetite has buoyed competition. Right now conditions are ripe – those in sectors that have been well insulated from the impacts of Covid-19 have got cash, so with this much dry powder available in the market there is no shortage of keen buyers, says RSM – provider of audit, tax and consulting services to middle market leaders, globally..
Latest transaction data shows a total of 807 deals were completed by private equity (PE) or corporates in Q1 2022*, although down from the peak in Q1 2021 (1,285), this sits mostly in line with pre-pandemic levels.
The tech sector continues to be a key driver of deal activity, accounting for 19 per cent of deals in Q1 2022. Similarly, when looking at deals completed by RSM across Europe, over 600 transactions were completed in 2021, with 152 (25 per cent) of these deals in the Technology, Media and Telecoms (TMT) sector.
Tech is a prevalent area of investment as it plays a pivotal role in enabling businesses to adapt to the ‘new era’ post-pandemic. The shift to hybrid working has led millions of businesses to invest heavily in tech solutions, including cloud-based solutions and cyber security to enable them to operate as seamlessly as possible.
Investing in cyber security is particularly important, as according to RSM UK’s ‘The Real Economy’ report, over a quarter (27 per cent) of middle market businesses have experienced a cyber attack in the past year, a marked uptick on the previous year’s figure of one in five (20 per cent).
James Wild, partner and national head of M & A at RSM UK, said: “The significant amount of appetite from private equity and strategic buyers in the UK and internationally has meant valuations of businesses remains high.
“Software as a Service (SaaS) businesses are particularly attractive assets due to their robust business model and scalability. Certain sub-sectors such as automotive retail are also being digitalised much quicker than anticipated due to the pandemic, making them a popular target among investors.
“However, capital markets, especially IPOs have slowed in recent months. Uncertainty in the economy due to inflationary pressures and crises in Ukraine and China may start to impact M & A valuations late 2022; however, no major impact has been felt in the middle market as yet.”
RSM says business valuations may be eroded due to uncertainty surrounding their future performance and potential challenges to profitability as a result of existing market conditions. Despite this, it’s likely these will be temporary issues. For example, inflation is predicted to start dropping sharply in Q3 2023. It could be argued that tech companies are in a relatively good position to offset current pressures, as they are less exposed to price increases of traditional commodities when compared to other sectors, such as manufacturing, real estate and retail.
David Blacher, partner and head of media and technology at RSM UK, said: “The biggest challenge tech businesses are grappling with is staffing and resourcing. The shortage of talent has meant the market rate for programmers and IT specialists has skyrocketed recently, whilst offshore IT support in typically cheaper locations is also becoming increasingly expensive.”
Currently, market conditions remain strong due to the sheer volume of available liquidity, making it unlikely there will be a shortage of appetite to transact, according to RSM. This will be positive news for those considering an exit in 2022. But ultimately, a correction in the market is inevitable and deal volumes may slow down later in the year. Nevertheless, there is no doubt that tech will continue to play a key part in the deals market for the foreseeable.
* Deal volume data source: https://pitchbook.com/ PitchBook Data, Inc.; Data has not been reviewed by PitchBook analysts. Due to a lag in reporting, Q1 2022 deal total will increase even further as more deals are announced as we go through 2022.