Blog

Technology-Focused Private Equity Funds

by Simon Li

  • 12 May 2017
  • PE

When technology investment is mentioned in the media, discussion is almost always accompanied by commentary on the role that venture capital firms and corporate giants play in the development of business in the sector.; less well recognized is the role of buyout and growth equity firms in the consolidation and growth of the technology industry.

Historical Fundraising

Since 2006, venture capital firms closed 2,166 funds, raising an aggregate $263bn to invest in technology companies across all stages of the venture capital cycle: from seed to late stage. When a company begins to mature and progress towards profitability or has reached an inflection point, growth equity firms can  facilitate  the portfolio company’s accelerated growth through expanded operations, increased marketing efforts or advising on strategic M&A.

In the same period, growth-focused firms closed 211 vehicles with a mandate to invest in maturing technology companies, securing $57bn in the process. A business becomes a target for those buyout firms looking to obtain controlling positions in established companies as soon as it becomes profitable and produces consistent free cash flow. Over the last decade, buyout firms have raised 95 funds for an aggregate $109bn to invest in the sector.

 

Fundraising Trends

As seen in the chart above, in recent years  capital raised by technology-focused buyout and growth funds has surpassed their historical average:

  • The average amount of technology-focused buyout capital raised from 2006 to 2016 was $7.8bn, while technology-focused growth funds raised an average of $4.3bn each year.
  • From 2013 to 2016, buyout funds secured $13.bn while growth funds operating in the technology sector secured $7.7bn on average.
  • In line with trends in other closed-end alternatives, capital is becoming concentrated among a smaller pool of managers, often raising larger vehicles; this is apparent in the case of technology-focused buyout funds closed in 2017, which have raised a record $22bn from just seven funds closed. However, this may be at the expense of growth funds, which have seen six funds raise approximately $250mn, although with 42 growth funds currently in market (as at May 2017) targeting $23bn, this could change.

Geographic and Sector Focus

Since 2006, the vast majority of technology-focused buyout and growth capital raised was secured by US-based fund managers – 94% and 67%, respectively. However, not all this capital has been deployed domestically: just 60% of buyout capital raised will be exclusively invested in US technology companies.

It is also interesting that software has become a huge area of interest for GPs. Once predominately the domain of venture capital firms, it is now seeing heavy investment from buyout and growth funds. From 2006 to 2012, venture capital funds with at least a partial focus on the software sector raised a combined $44bn, with buyout and growth funds combined securing just $17bn.

In more recent years, buyout and growth funds have significantly expanded the amount of capital focused on the software sector; funds closed since 2013 with at least a partial focus on investing in software businesses have raised a combined $66bn, surpassing the $64bn raised by venture capital funds in the same period.

Some notable firms investing in the space include Silver Lake, which closed Silver Lake Partners V in April 2017 on $15bn, Thoma Bravo and Vista Equity Partners. These firms have raised a combined $54bn in technology-focused buyout funds over the last decade that have at least a partial focus on acquiring software companies.

Outlook

There are many new opportunities in the industry, particularly with the advancement and enhancement of technology in areas such as, virtual reality, autonomous vehicles, machine learning, big data and space exploration. These nascent industries that require private funding are becoming targets for those GPs that are awash with capital as a result of recent fundraising successes.

 

 

 

 

 

Continue browsing industry reports, publications, conferences, blogs and more on Preqin Insights