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In Tech, Digital, Media And Marketing, 2021 Will Be A Big Year For Private Equity-Backed M&A

Given the events of last year, it is hardly surprising that in the technology, digital, media and marketing sectors, deal volume for mergers and acquisitions fell sharply in 2020. COVID-19 rocked buyer confidence, created issues around valuations and financing (because a forecast of trading was so difficult), and forced consumers to change their behaviour as they adapted to the ‘new normal’.

This is reflected in the numbers. There was a total of 1,091 transactions recorded in these sectors. That represents a drop of 19 percent compared to the year before, and a total well below the average of 1,241 deals a year that we recorded over the previous five years.

But the picture painted by these figures alone is incomplete. For one thing, 2020 already faced the challenge of meeting the expectations set by 2019, an outlier due to the number of mega-deals—defined as deals over $10 billion—struck over the course of that year. For another, M&A activity in 2020 was still much higher than might have been expected when the coronavirus first appeared and began its spread across the world. And this activity was driven in large part by private equity firms, which made up the top 10 most active buyers in tech, digital, media and marketing.

Private equity investors, then, were (and are) as resilient as ever. In fact, they made up 37 percent of all buyers in 2020. This may be a smaller percentage than in 2019, when they made up 42 percent of all buyers. But when we consider that PE investors made up just 22 percent of buyers in 2018, and even less—13 percent—in 2017, what we find is that far from having an ‘off’ year, PE investors remained bullish, despite the difficulties caused by the pandemic.

This PE activity points in part to the strength of data- and tech-driven business models, and their concomitant attractiveness to financial investors. One of the incontrovertible facts of the pandemic is that it did not just accelerate an existing trend towards digitalisation, but inspired an entirely new wave of digitalisation in industries traditionally resistant to change. Tech over the course of last year became synonymous with remote and agile working, increased productivity, seamless professional collaboration and strong employee engagement. Indeed, it became the only means for businesses to function effectively over the course of lockdown, and post-pandemic, we can expect many recent changes—for instance, the replacement of long-distance, short-stay business travel with video calls—to stick.

For many tech companies, the secret to maximising success in 2021 and beyond will be finding a dedicated private equity partner to help to take the business forward. Indeed, as the Director of LDC put it in a guest post in our report, private equity partnership ‘will be key to unlocking growth for tech firms in 2021’. And, as the global tech sector continues to expand, business owners may be aiming to meet potential PE partners halfway by making themselves available. Where in the past, the most desirable tech companies wished to remain independent from private equity, the events of last year have force many of them to be open to PE investment. Private equity has also become an increasingly attractive road towards exit or partial exit.

It is true that the absolute number of PE deals fell 29 percent in 2020. But this has merely served to whet the appetite of PE firms globally, who are itching to respond to the inertia of 2020 by hunting down deal opportunities and chances to back strong management teams with growth capital. The global private equity war chest contains some $1.7 trillion, and the low deal count of 2020 will spur PE firms to direct their investment funds energetically this year, driving up valuations through competition for the limited number of quality acquisition opportunities. 

It is worth remembering that during the financial crisis of 2008 and 2009, private equity funds made some of their greatest returns by continuing to invest. We can be quietly confident that, as restrictions lift and some semblance of normalcy returns, we will see something similar over the next 12 months.

Chris Sahota is Founder and CEO of Ciesco


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