Cherry Bekaert Partner Stacy LaMontagne recently participated on a panel discussion titled No Limits: Investing in Technology’s Path of Disruption at the Kayo’s 2022 Private Equity Summit. Three key takeaways:
LPs and Investors Continue to Back the Next Generation of Technology Investments
The attractive growth prospects of technology companies combined with the predictability and resiliency of the software-as-a-service (SaaS) business model continues to drive investment activities and tech- and tech-driven companies remain the darling of private equity investment. Led by specialized tech-based strategies, new technologies are driving growth and disruption across all sectors of the global economy, inspiring investors to take positions in insurgents and incumbents alike. Yet and still, investors are becoming more sophisticated in building growth into their allocations and moving rapidly to seize the opportunities presented by digital innovation.
Tech M&A Continues High Activity in First Half of 2022, But Down Moderately From 2021
Technology deal activity has remained healthy in the first half of 2022, despite some volatility in tech stocks in the public markets. Fears of interest rate hikes have had a dampening effect on tech company valuations as compared to 2021, with high-growth tech stocks falling out of favor due to increasing interest rates and the reduction of net present value of expected earnings which relies heavily on future profit growth. Some investors are concerned, however, that as public comparables drive down valuations in the private markets, PE information technology (IT) activity would be stunted from market uncertainty and value dislocation between buyers and sellers. Despite those concerns, however, PE’s appetite for IT did not suffer a significant decline in 1H 2022.
Macroeconomic Pressure is Creating Uncertainty in the Technology Investment Space, But the Sector Remains Resilient
As interest rates increase in response to inflationary and other macroeconomic pressures, we could see prolonged valuation declines in the tech sector. However, there is a belief the significant productivity enhancing aspects of technology companies can act as an inflationary hedge because they can successfully pass increased costs on to customers—more so than other segments. The fact is, technology is a fundamental component of the modern economy, and this alone likely buffers any near-term valuation concerns.
